Published March 23rd 2024
By Shadi Swais
A small tip for forex brokers, closing your client's winning accounts is not risk management.
In the last two decades, tens of thousands of brokerage firms have emerged. However, more than 95% of these startups folded within their inaugural year, and those that endured that initial phase often caved within the first five years of operation. What's behind this trend? It certainly isn't the market's fault, given the trillions of dollars exchanged daily and the market's steady expansion.
Typically, brokerage founders exert immense effort and invest millions of dollars in establishing their firms, only to watch them fumble.
Brokerage firms must take risks to turn a profit; it's as straightforward as that. Consequently, they must embrace risk in this line of work. However, the crucial question lies in determining the appropriate level of risk exposure, timing, and employing the right tools to consistently manage risk policies.
The primary culprit behind the demise of brokerage firms is often inadequate management of their exposure. Some willingly neglect proper risk management due to greed, while others lack the know-how or employ incompetent risk managers to oversee their firm's market risk.
First and foremost, we must underscore the significance of Human Resources. It's imperative to have the right personnel across all levels of the organization, from the board of directors to the office staff. Ensuring they are well-trained and equipped with tools for growth is paramount, particularly in adapting to the rapidly evolving technological and regulatory landscapes within the industry.
Next, Proper Capitalization is indispensable. Every brokerage firm must possess adequate capital not only to sustain day-to-day operations but also to serve as a buffer against market volatility. The prescribed initial share capital mandated by regulators repeatedly falls short of addressing the risk management needs of brokerage firms. Regulators worldwide should reconsider this requirement, as insufficient capitalization can leave smaller firms vulnerable in the market.
Technology is another critical factor. Each brokerage firm must leverage or develop cutting-edge technology to streamline operations. This includes trading systems, bridging systems, CRMs, and ancillary supporting systems, all complemented by the proper technical expertise for their utilization.
Moreover, maintaining Liquidity Accounts is vital. Establishing relationships with reputable liquidity providers across various market classes and products, including cryptocurrency, ensures the ability to cater to diverse trader needs.
Lastly, a professional Market Analyst Team is indispensable. This team should possess the expertise to perceive the medium and long-term market trends for the most commonly traded products within the brokerage firm's portfolio.
Other aspects within an organization are intertwined with risk management, including the establishment of appropriate policies, processes, and procedures supported by internal audit and control mechanisms. However, this is not the subject matter of this article.
In essence, market risk is the risk arising from changes in the markets to which an organization has exposure. Risk management is the process of identifying and measuring risk and ensuring that the risks being taken are consistent with the desired risks.
Risk management is complex and demanding, involving countless technical complexities, market assessments, and pivotal decision-making processes. Yet With robust risk management policies in place, supported by adequate capital reserves, reinforced by cutting-edge technology, fortified by liquidity accounts with tangible equity, complemented by a professional analyst team, and empowered by competent human resources, it becomes apparent that one has constructed a brokerage firm molded to last.
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