Risk Update: NFP – Are you ready?
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...
As the US 2020 US Presidential race draws to a close on Tuesday, with polls opening on the morning of November 3rd, ISRA takes a look at the market conditions around the election, and discusses how brokers can better prepare their businesses, and protect themselves from market shocks.
This year a record number of people have already cast their ballots by post and election experts suggest that this could mean that the result may not be declared on election night but may take several days - or even weeks – to emerge.
We have historically seen huge volatility over US elections but this time around the socioeconomic conditions caused by COVID-19, alongside President trump’s often energetic social media presence, may cause unprecedented market moves.
This could also be exacerbated by the possibility there may not be conclusive results on election day.
In 2016 the VIX was already high leading up to the election, with volatility collapsing once the result had been announced, and we expect a similar reaction this year – albeit that the announcement of a definitive result may take some time so any potential spike will likely be longer and larger.
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Most of the major USD crosses had spikes in the implied 1M vol the night of the election with cable looking less obvious, though much of this would have been due to Brexit at the time.
The most pronounced volatility change was seen in USDJPY as shown below, with a huge increase over the election night.
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Important risks brokers need to consider are as follows:
The market moves in 2016 are likely to pale in comparison to those expected next week and here at ISRA we want to ensure that trading desks are prepared for the upcoming conditions.
- Infrastructure Risk: This can often go overlooked by firms. 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 volatility. Desks also need to monitor closely for abusive behavior.
- Liquidity risk: have brokers adequately funded their LP accounts - a stop-out caused by inadequate funding in these market conditions could be fatal. It is also important to check if there are, or if there have been, leverage changes by their providers.
- 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.
How ISRA can help
With over $1 USD Trillion of volume overseen each month and having the unique position of supporting and advising many of the world’s largest FX And CFD brokers, IS Risk Analytics has unparalleled insights into the operations of these firms. We advise on best-practices in the industry in order to ensure that firms are protected from market shocks and are able to continue operating safely irrespective of the underlying market conditions.
Contact the team today to discuss your setup.
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