Don’t Manage Risk in a Vacuum

Imagine the situation… you are sitting on the trading desk reviewing activity for the day and you come across a pocket of traders who were able to arbitrage your feed systematically. It has been a few hours since the transactions took place. The traders have already transferred the profits to linked accounts which have since withdrawn the funds. Now you must explain how this happened to your Head of Risk and CEO, who will undoubtedly not be pleased to hear the news.

Unbeknownst to you, that same pocket of traders showed up at three brokers in Australia, two in London and three in Cyprus, all within a few minutes of each other, all using the same strategy. However, not all eight of these brokers were affected by the arbitrage traders; some brokers even handled the situation in a profitable manner. The difference between you and the successful brokers is simple. The successful brokers used sophisticated risk analytics, and the activity was picked up and mitigated in real time.

Many brokers operate in a vacuum. The visibility of a risk manager is limited to the data in front of them and their experience managing their book. Don’t discount this experience. Internal risk managers have an intimate understanding of information outside of the numbers, which can be invaluable to the overall decision-making process. There is, however, a massive disservice committed by not exploring an outside perspective.

Jeff Wilkins, Managing Director of IS Risk Analytics, noted: “Independent brokers do not have the visibility to manage risk in the way we do. You would not expect even the most experienced pilot to land an airplane without assistance from an air control tower. They need to rely on the air control tower for guidance in order to safely land. Our clients all have great risk managers but they benefit from our guidance because we see things through an industry-wide lens.”

“There is a misconception that IS Risk Analytics is meant to replace a broker’s risk management team. While we can provide bespoke risk management services as required, in most cases, we operate as an additional set of eyes with a much broader perspective in the market. With roughly 1 trillion monthly traded volumes currently under management and growing, there is rarely something our risk team hasn’t seen.”

The concept of a third party risk management company in the retail FX space is hardly something new, however there are no other companies in the space with the pedigree and longevity of IS Risk Analytics. A third party risk advisor can often bring a valuable perspective to a brokerage and strengthen the entire team across the board. It is worth exploring this concept if you have not already.