Brokerage businesses have a heavy load to carry, given they are dependent on several entities to provide a seamless and secure financial process for traders. This article highlights how brokers can minimize their risk-taking through different strategies.
Forex Risk Management Models in a Nutshell
An A-book broker strategy transmits every trade to the interbank, meaning the broker is an intermediary. In this scenario, brokers generate profit through mark-ups and commissions. Thus they become profitable and converge into a more accessible avenue to obtain broker licenses without bypassing any regulatory constraints.
In contrast, B-book brokers are market makers (MM) who also represent liquidity providers for their clients. Thus, B-book brokers have a bigger financial responsibility for traders’ funds. That is why B-book brokers are relatively rare, given traders’ profits are the broker’s loss and vice versa as they stir concerns about conflicting interests. In addition, MM’s have to subside to regulatory measures and require a large deposit as collateral.
The hybrid model, for that matter, offers brokers the flexibility to decide which trade goes through MM and which is processed internally. However, this brings into discussion a toxic flow, which represents profitable traders diverted to liquidity providers. In response, brokers can implement tools that balance out good and non-profitable traders’ attributions and mitigate high exposure of toxic flows to liquidity providers.
Major Brokerage Risks
The monetary relation between liquidity providers and brokers is unequal, given providers have financial control over the assets. For example, providers can increase the spread, hindering clients’ profits. Also, complete dependence on one provider translates into brokers’ unwanted financial and technical risks. Therefore, Soft-FX offers liquidity aggregation solutions for businesses to improve their services efficiency.
Service providers outsource their development because not all of them have the financial possibilities to financially support specialists. Therefore, clients become dependent on service providers, because changing providers is a complex process given part of the development has been outsourced. As a result, the sales pitch of every service provider should be thoroughly scanned to prevent signing an inconclusive and misleading contract. Soft-FX can provide solutions that can meet every high-end technological need.
The goal of every client is to generate profit, and businesses should consider the most profitable and risk-free way to attract traders is.
The Hybrid model, detailed above, offers the best of both worlds because it diverts trades depending on their risk value and potential ROI.
Brokerage risks are a complex topic that isn’t always available for everyone to know. However, finding the balance between profitability and risk management is potentially why some brokers succeed while others fail in the first months.