With booming Forex market in China, a number of local broker sprang up. KVB, Futu Securities, Formax and some other local broker have obtained their regulatory licenses in New Zealand, Hong Kong, UK and so on. Most of their clients are domestic investors, as these local teams have advantages over foreign brokers. According to statistics, there are more than100,000 employees in Forex industry. Most of them acted as agents or employees of overseas brokers like FXCM and Gain Capital in the past. Domestic investors have a misunderstanding that overseas brokers are more orthodox.
However, a lot of tragedies tell us that it is extremely difficult to seek justice when you deal with a dishonest overseas broker. With a number of financial technology companies entering China, one-stop Forex platform service has incredibly lowered the border for broker to establish the Business. But compared to those brokers with mature compliance and risk control system in Europe and America, most of local brokers often encountered poor management or even been forced to shutdown due to lack of awareness of risk management.
Risk 1: Clients profit too much under Market-Maker Mode
While Forex trading is in OTC market in which banks and brokers mainly operate their business as market-maker mode, So many people assume that since 90% of investors will lose money, brokers will certainly make the huge profit. However, the fact is that those remaining 10% of total investors are usually considered as final Winner who beat the brokers and take the money away. To run a financial institution is not gambling, even mature companies like FXCM, Boston Technologies are not immune in the face of a critical market risk. With the permission of overseas supervisor, the market-maker mode is able to provide liquidity to the market as well as create a better trading experience to the investors. However, this is not the only option for a broker.
Countermeasure: Establish a diversified risk control system. For instance, “Dealer Work Risk Hedging System” provides a position monitor panel to monitor clients’ positions summarized by the system in real time so as to hedge risk positions to multiple liquidity providers while supporting STP straight-through transaction processing mode: by using MT4 bridge technology, all orders from particular investors can be delivered automatically to liquidity provider side for handling, while brokers make profit by earning spreads only to extremely reduce the risk of market volatility.
Risk 2: Brokers’ management flaw, Investors’ trading profit
Currently the vast majority of brokers are using MT4 trading platform on the market . The software has up to hundreds of setting functions and each of parameter may relate to whether the system is functioning properly. Any careless operation will bring investors bad trading experience or even lead to system vulnerability. For instance, The backend administrators might forget to do the setting when shift of time zone is required between Summer Time and Winter Time and might result in early opening of market, thus investors can take advantage of the vulnerability to make profit easily.
Countermeasure: Take professional system management training and optimize system management process. LEAN WORK currently provides MT4 Lean System Management Training service and 24-7 system operation and maintenance service for Forex brokers. Therefore, it would not only help brokers to set up standard operating procedures on the system level to avoid unnecessary problems and risks, but also detect any issue in advance and troubleshoot the problem ASAP by 24-7 machine + human labor system monitoring in real time.
Risk 3: Can’t endure slippage from banks or liquidity providers
The biggest difference between MT4 platform and real inter-bank Forex market is that the closing price and transaction volume of the inter-bank deal are agreed by both parties and order is unable to be traded at the Tier-1 price which you can see on the market when there is insufficient market liquidity. However, MT4 platform is different due to no existence of Market Depth concept which means, on MT4 platform, if there is no volume limitation, a contract with any value can be traded as long as the price is matched. Even with a volume limitation, there is still no liquidity limitation when multiple investors place large-size orders at the same time. Obviously it is unfair for brokers, especially when a broker needs to hedge positions to the liquidity provider side —- on the one hand, Clients can close the deals at Tier-1 price without any volume limitation. on the other hand, when market sharply changed during the specific period of time like announcement of USA non-agricultural employment index, almost all brokers will encounter a huge slippage for insufficient liquidity when sending the orders to inter-bank deal system. In other words, brokers always hope to buy low and sell high but any broker would loss money and not able to stay long in the market if encounter such situation like Bid price is actually lower than Ask price quite frequently.
Countermeasure: Dealer Work Risk Hedging System can cover the shortage of MT4 system regarding to processing of orders. A broker may require Dealer Work system to process all orders according to existing price and volume from liquidity provider under certain inter-bank Forex market rules. Same as Stock brokers’ approach, the whole environment is fair to both parties : When brokers loss money due to negative slippage, neither do investors and vice versa.
Risk 4: Hostile attack to system leads to losing the trade or losing the data
The activities of hackers are becoming rampant these days, and basically has formed a complete industrial chain. Their favorite way is to blackmail brokers by attacking broker’s servers with DDOS. The server would be paralyzed when being attached by hacker and result in termination of all transactions. If the broker can not take measure initiatively or pay protection money to the hacker, so long as the attacks do not stop, the transaction can not be recovered and will cause disastrous loss. Come to the worst, Hacker might directly hack into the server and delete all data thoroughly which might remind you the similar case happened to Ctrip months ago. The broker won’t able to do anything but announce bankruptcy if all deleted data is unrecoverable.
Countermeasure: Select a top financial-grade level data center with well-equipped firewall and Anti-DDOS network protection facilities. LEAN WORK launched a leasing and hosting transaction server service named as “Cloud Work”. Small data centers only have limited ability to respond to large-scale attack and network failure. However, even one second of failure matters for financial transaction and it is necessary to be equipped with top IT infrastructure. Cloud Work choose Equinix, a top financial level data center extensively applied by Global Exchanges and Banks worldwide. Equinix HK1 computer room can provide the best trading experience to Asian Investors, and is equipped with most comprehensive network security facilities to ensure the fast speed , stable connection as well as the capability to recover from the attack in the shortest time. with the most perfect network security facilities to ensure fast and stable network connection and ability of recovery after attack as soon as possible.
Risk 5: No Plan B for Quote or Hedge Route
Facts have proved that there is no liquidity provider is completely reliable, even banks often release the wrong price at market opening time as well. Quoting errors or stagnation affects brokers in a negative way which might cause complaint from clients or even heavy loss from investors. Consequently, The Broker might face bankruptcy due to large-sum compensation.
Countermeasure: Dealer Work Risk Hedging System can dock with multiple liquidity providers at the same time while sending quote to broker’s MT4 platform. A broker is able to switch freely among many quote sources as long as signing with a number of liquidity providers. when any of these sources is unavailable due to failure, The other can start up immediately so as to avoid the risk when a single quote source cannot be recovered from failure within a short period. Besides quotation failure, broker may encounter circumstances of the transaction interfaces broken when operate with STP mode in which all hedging orders cannot be closed in the market. So the benefit to dock with multiple liquidity providers at the time same is to have a permanent redundancy.
Risk 6: Unfair treatment by Liquidity Provider, Losing Blood Slowly to Death
Financial markets always exist unfairness. when investors blindly doubt and complaint whether broker is playing dirty tricks in the background, Brokers often encounter some unfair treatment as well. For instance, liquidity provider may enlarge spread suddenly or erase your positive slippage by arithmetic adjustment. Furthermore, liquidity providers might reject your order or postpone closure when market is against them.
Countermeasure: Fortunately, with high advanced IT technology, all tracks can be recorded and traced by the system. Dealer Work Risk Hedging System has a most broker-friendly function: associating orders from MT4 with records of closed orders in liquidity provider’s system. In the past, it is difficult for brokers to trace the matching conditions of a single order in liquidity provider’s system thus brokers are not able to determine the exact treatment for clients’ orders from MT4 platform. With order association inquiry function, system is able to record every order in detail and inquire any suspicious order by easily entering the order number in system. In addition, Dealer Work also provides extensive reporting statistics function, including average spread, number of failures, average duration of closure delay, and probability of positive slippage, negative slippage and non slippage of each liquidity provider. All these features enhance the transparency of transaction and create a more equitable trading environment for both parties.