Why Forex Dealing Desk & Risk Management is Not as Easy as it Sounds – 3 Important Considerations
Those new to the FX industry often underestimate the challenges involved in effectively running and managing a client book of business.
During conversations with clients that are interested in launching their own forex brokerages, we always make sure to bring up the subject of risk management. To our surprise, we’ve found that FX & CFD risk management considerations are either overlooked entirely or taken as an afterthought. It’s a common assumption that dealing desk management is a simple matter of assigning client groups and walking away, a line of thinking we gladly challenge.
Consider 3 reasons why you shouldn’t neglect the subject of dealing desk management when building your own forex brokerage:
1) Forex Risk Analysis & Management is a Skill
It’s important to note that banks and other financial institutions always offer entry level positions for their risk management departments. The reason is that the process of risk management is not something that can be learned in a couple of weeks or even months for that matter. Bear in mind that if a bank or hedge fund were to throw a a large book of business at an amateur, the chances of success would be slim to none.
In short, it takes time to truly master the necessary skills required to effectively run a large book of risk. Since hedge funds, banks, and other large institutions carefully select the senior dealers that will ultimately handle their risk, a broker should not think differently, especially when it’s their own capital on the line.
2) The Market Impacts Brokers and Traders Alike
Secondly, it’s not just traders but also brokers managing risk that are subject to the whims of the market. In cases of extreme market volatility – a situation not uncommon to the FX market – there are times when liquidity can simply disappear altogether. An amateur risk manager encountering such a situation for the first time will face a very difficult scenario that requires lightning speed thinking.
By incorrectly hedging exposure or ignoring it altogether, the brokerage could easily face a massive loss in revenue. Bear in mind that this is just one of the many scenarios an amateur risk manager may encounter: news announcements are known in advance yet political turmoil, unannounced policy changes by central banks, and natural disasters are just a few examples of surprises that often significantly impact the market.
3) Those Who’ve Tried Admit That It Wasn’t Easy
Finally, we’ve spoken to partners and clients who have tried managing risk with their limited market experience. The feedback we receive is always the same: it was much more difficult than they initially thought. The reason this feedback has been consistent over the years is that successful risk management involves far more than simply following a playbook of A&B group management as outlined previously. Similar to trading itself, risk management is a skill that requires time and patience to truly master.
Atomiq Consulting specializes in risk consultation services for both established brokers as well as entrepreneurs in the process of launching their own forex brokerage. With decades of forex industry experience, we offer a professional service that is flexible to meet the needs of both new and established brokers alike.
To learn more about our outsourced dealing desk & risk management solutions, don’t hesitate to contact us today!
