In dealing with large and small brokers all over the world, Jeff and his team come across the same issues, the same mindset and the same misconceptions with almost every risk team. They have spent many years helping brokers avoid the pitfalls. In no particular order, Jeff highlights the most common misconceptions below:
1. Brokers know the market better than the average retail trader
We know most brokers generate their revenue through their customers’ inability to successfully trade and make money. However, be aware that a broker’s team is no better at trading. Making market calls based on a ‘feeling’ has consistently proved to underperform a sound risk management plan.
2. If a client loses money they are always better left un-hedged
This common blanket statement fails to recognise the rate at which the client is losing money. In some cases, it would be more profitable to the broker had they hedged the ‘losing’ account. Client profitability must be looked at in comparison to volume. In many cases, locking in a mark-up can be more lucrative.
3. Increasing trading volume has a linear relationship with a broker’s revenue
In an increasingly homogeneous marketplace the ways to attract new clients have become very competitive. This leads brokers to offer bonus programmes and sign commercial agreements to attract new volume, assuming the revenue will follow. Be mindful that an increase in volume does not always correlate with an increase in revenue.
4. Your Liquidity Provider has direct lines with a Prime Brokerage
There have been more cases than we care to remember of LP’s making false claims about themselves. Do you really know how your LP operates? There are only a handful of actual Prime of Primes in our industry who have direct relationships with Tier 1 Prime Brokers. The majority of LP’s are merely acting as middle-men.
5. Capturing 100% of the client drop is the most revenue you can make
We hear conversations about what percentage of the ‘client drop’ is captured daily and it is always presented by the broker as the percentage of what they could have made. Our team knows from experience that profitability isn’t capped at the total client drop.
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