Risk Update: Mind the (Weekend) gap

Jeff Wilkins

14th April 2020

The recent rise in market volatility has left all brokers susceptible to being taken advantage of by predatory traders but this is particularly true for startups and smaller brokers. While the opportunities for traders to attempt to exploit brokers have always existed, current market conditions have exacerbated the risk with strategies ranging from weekend gap loading to depth of book and spread arbitrage.

Mind the Gap

The strategy most commonly being deployed by traders at this time is predatory activity on weekend gap pricing. This involves clients opening large positions before market close to try and take advantage of brokers on any potential weekend price gaps while markets are closed. The typical strategy is a trader loading up a long position with one broker and a short with another, normally in indices or commodities.

The current volatility will almost ensure some level of gap in various asset classes and if, or rather when, a gap occurs, one of the accounts goes into a negative balance and the other becomes very profitable. Given that it is next to impossible to recoup a negative balance from a retail client, so the net result is a windfall for the trader. Brokers who are required by regulators to offer negative balance protection face further complications, although this is normally paired with lower leverage so the effect on their P&L is, whilst often still painful, less impactful.

At IS Risk Analytics, we keep a watchful eye over the industry and work to protect brokers from all types of predatory trading. We assist firms with customized recommendations on how to proactively handle situations such as weekend gap abuse. In addition, we offer a complex toolkit to monitor for this type of activity in real-time.

Predatory trading can be devastating to brokers of all sizes, but with the proper strategies and solutions afforded by the team at IS Risk Analytics, the risks associated with such trading can be reduced.

Predatory traders are constantly adapting new strategies or finding new homes for their toxic trading styles. In order to mitigate these strategies, a broker’s risk management strategy must be equally adaptable and robust.

The risk team at ISRA is constantly developing new tools, reports, and strategies for all types of brokers to combat both old and new predatory trading strategies and they work with many of the household names in the brokerage world to help them manage their risk, clients and exposures. The importance of a highly trained and seasoned risk management team has long been apparent, but during peak volatility, it can become essential to ensure a broker’s long-term viability.

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