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The Rise Of The Flash Crash: Risk Control Failures

2 minute read

January’s yen-driven crash cost Japanese FX brokers $8.6m after wiping out stop-loss orders. Just like the SNB crisis in 2015 many brokers faced a perfect storm of large naked positions and inability to control their risk onboarding or clear their risk effectively.

 

Japan’s next extended holiday on 11 February 2019 is another vulnerable period where a lack of liquidity can easily cause more larger moves. When the ‘Asian witching hour’ is combined with an extended holiday in Japan, large market moves multiplied by large stop positions spell danger for brokers without the right technology.

“These critical events expose weaknesses that need to be addressed before it’s too late.”

Alexander Ridgers, our director of Analytics explains the key strategies our technology uses to safeguard and optimise our client’s businesses in these challenging times:

 

  • Advanced automated risk management is highly necessary to extract consistent B-Book level yields, whilst simultaneously running a low risk, low VaR environment.

  • Utilise advanced hedging techniques to keep costs low whilst lowering risk.

  • Define risk levels, removing the need for manual hedging.

  • Engage pricing safety measures such as volatility widening, liquidity throttling, sweep signalling and benchmark widening acknowledge market conditions to protect during extreme events.

  • Set a maximum NOP and broker anything risk increasing when this is hit with smart order routing.

  • Engage protective measures: Benchmark widening and price throttling to protect against latency arbitrage and unnecessarily hit stop orders and Wide Spread Suppression (again for protection against hitting stops).

 

Japanese Extended Holidays To Watch Out For In 2019

May 6, July 15,  Aug. 12, Sept. 16,  Sept. 23,  Oct. 14,  Nov. 4

 

 

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