Clever risk management move by FXCM is a double-whammy!

The past twelve months have been something of a roller-coaster ride for North American electronic trading giant FXCM Inc (NYSE:FXCM) which operated a totally agency execution model which attracted vast numbers of retail customers, only to catch a massive cold on January 15 due to exposure to negative client balances as a result of extreme market volatility ensuing from the Swiss National Bank’s removal of the 1.20 peg on EURCHF.

This entire episode caused companies whose ethos majored on the A-book agency execution method to rethink their entire modus operandi.

Almost a year on, FXCM has taken a step toward diverisfying its risk profile, demonstrated by yesterday’s announcement by the company that has developed and launched a high frequency market making system for indices which are tradable as contracts for difference (CFDs).

FXCM has implemented this system as part of a functional expansion of its back-end technology, allowing the company to manage index order flow and positions, prices and risk with greater accuracy.

Risk management is cleary a high priority here, as FXCM will be able to hedge positions taken by clients who scalp aggressively, trade news events and use automated strategies against positions taken in the futures market.

In addition to creating a method of managing risk by stacking certain positions against others, FXCM has brought in a competitive measure by following the current industry trend of taking CFD trading and expanding its potential audience globally.

Market making tech via CFD product a clever way to keep pace with competition

CFDs were traditionally a very Anglo-centric instrument and have long been the preserve of British spread betting companies which offer the CFDs via a dedicated, often proprietary platform to British traders. By introducing this market making solution based on CFDs, FXCM looks set to retain its competitive read-across with GAIN Capital, which purchased City Index in October last year with the specific intention of offering CFDs to a global audience.

With regard to the launch of the new market making technology, Drew Niv, CEO of FXCM made a commercial statement:

“The new offering provides all traders, especially scalpers and news traders, with their ideal trading environment for indices. This will provide the most unique Index trading offering in the industry and immediately benefit clients.”