Trading and investing are both extremely tech-driven activities. Nowadays, various software solutions offer support for the process and ensure satisfactory results. Such deep integration with technology represents endless benefits to the brokers, allowing them to spend less time on tasks thanks to automation, process larger volumes without hiring a big team, run comprehensive reports in a matter of minutes, and many more. The software solutions can also serve as a risk management tool.
If we think about it, every infrastructure component plays its role in keeping the risks under control. However, the liquidity bridge has a more significant impact as one of the key elements of the environment. It can protect brokers from all types of risks, ranging from the most obvious, such as technological and regulatory, to reputational and economical. In today’s article, we will share some of the ways that a liquidity bridge, as a core solution of any brokerage, can minimise or mitigate the threats that a business is facing.
Liquidity bridge versus broker risks
Let’s look into the various aspects of liquidity bridge solutions and how they affect the levels of risk that brokers face within different risk types.c
Architecture of the Liquidity bridge
A proper bridge solution is stable and powerful. It does what it says on the box and performs in accordance with the latest industry standards. The way it is achieved is often through architecture and the logic of the software. In today’s environment, most bridges promise the same set of features and benefits, and it is really down to how the software is built that makes the difference. A thought-through technology helps brokers fight technological risks, such as outages, overloading, slowed performance, and glitches. Even small-scale brokers deal with loads of data going back and forth in milliseconds, and it is often up to the bridge to ensure the speed and performance is suitable for today’s requirements.
Functionality of the Liquidity Bridge
The built-in functionality of the bridge can address multiple risk categories, such as:
- Regulatory risks
Brokers are required to report to regulators. The extent and complexity of reporting differ based on where the broker is registered. However, some basic reporting is necessary for all brokers to stay compliant. The reporting process can become tricky and costly, especially if there are no reporting capabilities available via the bridge directly or if extracting the data from the system is a complex process. So, in terms of regulatory risks, a liquidity bridge can reduce them by making data structuring and exporting easy. And by providing at least basic reporting as a built-in functionality, it allows brokers to run reports at any point in time without having to hire consultants or reserving half of the day to do that. In addition to simplifying the reporting, the bridge reduces regulatory risks with its stable, predictable performance. There are many rules protecting traders that brokers must follow, and a smart technology that doesn’t fail or cause delays helps avoid violating those rules.
- Technological risks
The strong performance of the bridge supports a positive trader experience. Delays and glitches, even rare ones, can result in missed opportunities for traders and create a negative image for the broker. So again, we are going back to how the solution is built and configured. Some products will have additional ‘insurance’ tools, such as, for example, Backup LP functionality with Trade Processor, a liquidity bridge by Tools for Brokers. Backup LP enables automatic switching to a secondary Liquidity Provider (LP) should the primary one go down. Once the primary LP is back up and running, the system reverts to it. As a result, brokers avoid a disruption caused by reasons they have no control over. To determine if the bridge meets brokers’ demands, it is always good to run thorough tests in high-stress environments to see how the software performs under pressure. One of the risks that we often forget about is the risk of missed opportunities. A good software solution is flexible, scalable, and supportive of the broker’s growth. An example of how a bridge solution manages the risk of missed opportunities through technology is the availability of APIs that enable the integration of third-party tools. While technology providers nowadays strive to cover all needs and requirements of brokers, the reality is that often independent third-party tools can complement and add to the broker’s experience. And when new plugins and applications come out, it can take technology providers months to release similar solutions (that is, if they decide to go ahead and develop it altogether). So naturally, partnering with a bridging solution that allows for integrations will reduce the risk of missed opportunities.
The next point that we would like to make might sound contradictory to the one about API integration. However, they work together and not against each other. And this next point is that a Liquidity Bridge with an ecosystem of solutions to support it has the potential to reduce technological risks for brokers.
What is an ecosystem of solutions? It is a group of products that are fully integrated and compatible with the Liquidity Bridge and cover supplemental needs of brokers. For example, it can be a money management solution or a monitoring and reporting product. Having such solutions readily available means that brokers can extend their services to traders and improve internal operations in a short period of time.
This will help ensure they are not missing out on clients and opportunities. They will be able to be confident that additional software pieces will work smoothly within the existing infrastructure without causing conflicts and crashes as might happen with external solutions. With an ecosystem in place, brokers can be more spontaneous while keeping their risks low.
Reputational risks
One of the not-so-obvious risk management factors is the pool of Liquidity Providers that the bridge is connected to. Choice of LPs is another part of the trading chain that will directly impact a trader’s experience with the broker. Ideally, bridging software will have access to a selection of LPs to ensure that orders will be executed and there is enough availability to process even the large orders.
- Economic risks
Economic risks affect both brokers and traders. A Liquidity Bridge should be equipped with tools to mitigate all of them.
Order execution system
The order execution system within the bridge can greatly influence the levels of order-associated risks. The main risk with order processing is failing to get the best pricing possible for the trader.
When best pricing is provided, traders earn with their transactions and are stimulated to trade even more. Brokers, in turn, get to enjoy higher volumes.
There are several aspects that go into risk management through the order execution process:
- A bridging solution that offers multiple order execution modes gives brokers the flexibility to find the best pricing and have a custom approach to different clients.
- Having a pool of LPs further supports the flexibility of the process and ensures each order can be executed.
- When traders place large orders, they are often more challenging to execute with satisfactory pricing. A Liquidity Bridge can support brokers by providing technology that addresses that risk. In Trade Processor, a Continuous Execution feature essentially splits large orders into smaller ones and executes them over time. As a result, the trader receives better pricing than if the large order was simply executed all at once.
- Some of the risks, e.g., exposure and swap costs, are avoided by implementing automation.
A bridging solution that offers multiple order execution modes gives brokers the flexibility to find the best pricing and have a custom approach to different clients.
Internal reporting, if available, represents another way of combating the economic risks that brokers experience. Internal reports are not required to be submitted to regulators and, therefore, are often put on the back burner. Reviewing reports regularly can have a drastic effect on the brokerage’s performance.
Some of the things that internal reports can do for brokers:
- Help spot trends early (both positive and negative).
- Have a deeper understanding of traders’ typical strategies and behaviour patterns.
- Track in real-time how a brokerage is doing financially.
- Analyse the progress against quarterly and annual goals.
- Spot inefficiencies in business processes.
Final thoughts
While technology plays a significant role in risk management for brokers, there is only so much it can do. When brainstorming for a risk management strategy, brokers should firstly focus on their general business health.
There is no single formula to how this should be done; however, a good starting point would be to:
- Simplify, automate, and streamline all business processes.
- Invest in the right people who share your values and work ethic.
- Venture out into new markets.
- Take a risk and introduce new services for your clients.
- Keep an eye on the trends and changes in the industry.
- Keep up with the competition (but in a healthy way).
And finally, the most important tip for brokers looking to strengthen their risk resilience is never to stop improving, and treat it as a game rather than a crisis.
