Risk Update: NFP – Are you ready?

Jeff Wilkins

7th May 2020

Nonfarm Friday is a day that used to be quite exciting for trading desks and traders alike, although the last couple years have been somewhat sleepy. After hovering in a tight range for an extended period of time, US Nonfarm Payroll figures dropped by 700,000 in the April release.

NFP 2005 to 2020This has been the first decline since September 2010 and is close to the numbers seen during the 2009 financial crisis. While the 700k figure is massive, it will almost assuredly pale in comparison to the figures that will be released this coming Friday.

Last month’s payroll report only captured the beginning of Covid-19’s impact on the economy and estimates for Friday’s release exceed 20 million jobs lost and unemployment jumping north of 15%. If this is the case, it would represent by far the largest one month drop on record.
NFP 2019-2020With Wednesday’s ADP private payroll figures  in line with the nonfarm estimates, coming in at an unprecedented loss of 20.2 million jobs, this is looking increasingly likely.

Certain markets seem somewhat numb to the unprecedented figures, which is a signal a that V shaped recovery is expected but whilst the optimism is certainly nice to see, the grim reality is that the current pandemic, no matter the outcome, will leave a scar on the economy.

The muted reaction to last month’s NFP cannot go on forever and trading desks need to be prepared for the reaction to the release on Friday.

Important risks a trading desk need to consider are as follows:

  • Negative Balance Risk: Brokers should either have an internal report, or an external party monitoring their trader’s negative balance scenarios. Traders can unknowingly put themselves in harm’s way or, as has been even more evident lately, as seen in our, ‘Risk Update: Mind the (Weekend) gap’ they can game this to their advantage.
  • Infrastructure Risk: This can often go overlooked by brokers. Every single broker should be speaking with their hosting and bridge providers about support, capacity, and monitoring. We see other tech providers continuing to cut corners in order to reduce their own infrastructure costs, without regard for the harm they could potentially cause a broker.
  • Market Risk: For obvious reasons, trading desks need to know their positional risk and make sure they are comfortable with the potential unprecedented volatility. Desks also need to monitor closely for abusive behavior.

This is not meant to be a doom and gloom scare piece for trading desks. There is just no better time than the present to make sure trading desks have full control of the risks created by the current environment as there is likely to be some fireworks at 8:30am EST on Friday.