Uncertainty plays a key role in active trading. A breaking news item, surprise economic fundamental, or geopolitical event may send markets reeling at a moment's notice. Whether one is trading equities, futures, or forex, it is wise to be aware of how unexpected events can impact profitability.
However, what happens when an unexpected event prompts a disconnect from the market? While uncommon, systemic failures can make trade execution impossible and act as catalysts for financial loss. Remaining calm and quickly rectifying an untimely market disconnect is a critical part of successfully navigating a trade-related emergency.
The Digital Market Infrastructure
The modern incarnation of the financial markets has relegated the vast majority of trading activity to the online environment. Business is conducted remotely via a software platform instead of on trading floors and in open outcry auction "pits." This technological evolution has enhanced the liquidity and depth of currency, futures and equities markets exponentially.
In fact, the following asset classes have exploded in popularity (in terms of volume and capitalisation) since the dawn of the digital era during the late 20th century. Accordingly, the massive size of each marketplace is attributable, at least in part, to the digital format:
- Equities: According to the World Bank Group, the global stock market increased its capitalisation from US$45.09 trillion in 2000 to US$99.78 trillion in 2017.
- Futures And Options: Total traded volumes of futures and options contracts grew from 8.866 billion in 2004 to 30.28 billion contracts in 2018.
- Forex: During the 20-year period from 1995 to 2015, the average daily turnover on the forex grew from US$1.2 trillion to more than US$5 trillion.
The increased size and reduced barriers of entry have afforded active traders many advantages, primarily trade-related efficiency. In return for the enhanced breadth, traders are now required to possess four distinct elements in order to conduct business on these markets. In the event that any one of the four fail, order placement and open position management become unsustainable. The following are the inputs that are essential to active trading in the contemporary marketplace:
- Computer Hardware: Some form of computing power, desktop or mobile, is necessary for sending and receiving market data. Regular maintenance and updates can help reduce the chance of undue system latency or outright failure.
- Internet Connectivity: Securing a robust internet connection, hard-line or wireless, is a prerequisite for anyone attempting to engage the marketplace. The performance of routine ping tests helps to ensure that the connection is operating properly.
- Software Trading Platform: The software trading platform is the trader's window to the marketplace. It is a means of interpreting market data and it acts as a path for order entry. Downloading the current software version and any available updates will help to eliminate the chance for malfunction.
- Exchange Connectivity: A viable connection to the market or exchange, via direct access or through a brokerage intermediary, is essential to conducting trade. Again, running ping tests with broker/exchange servers is an ideal way to make sure this connection is solid.
It's crucial that market participants are diligent in the upkeep of these four facets of the trade-related infrastructure. They're all necessary aspects of preserving robust market access.
If any of these areas of the trade-related infrastructure fails, a trader is effectively cut off from the marketplace. Open positions, active orders and any capital at risk is left unattended. It goes without saying, but adhering to a regular maintenance protocol and performing spot checks can save money in the long term.
How To Be Prepared For The Unexpected
Aside from running ping tests and updating your hardware and software to enhance your performance, it's challenging to address an unexpected system failure in real-time. In fact, many issues causing system outages fall completely outside of the trader's control. The following are a few emergency situations unavoidable to market participants:
- Internet Outages: Internet outages can come out of the blue and are not limited to the local geography of the remote trader. An untimely crash of internet service provider hardware residing between the trader and exchange can cause data bottlenecks or worse. Rare events such as a solar flares, political embargoes, cyber warfare, and even severed fiber optics can shut down regional internet service.
- Exchange/Market Failure: Cases of "glitches" or server failures originating at the exchange have been documented, negatively affecting participants. The collapse of NASDAQ technology during Facebook's initial public offering and the 2012 crash of communications at the Tokyo Stock Exchange are two modern examples.
While there is little traders can do to avoid regional internet outages and exchange glitches, the vast majority of trade-related emergencies are easily remedied. Unless an extraordinary event is driving a broad-based internet or power outage or exchange crash, taking the following precautions can help rectify 99% of trade-related emergencies:
- Alternate Internet Connection: Securing a secondary internet connection is one way to maintain contact with the market. Wireless options and dedicated hard lines are two avenues by which to accomplish this task.
- Auxiliary Power Supply: The loss of power can bring active trading to a grinding halt. Aside from access to a mobile device, having an auxiliary power supply such as a charged battery or generator can help navigate an untimely power grid failure.
- Trade Desk Phone Number: In the event that any part of the remote trading infrastructure fails, a simple call to the broker's trade desk is an ideal solution. Direct phone access to the trade desk is valuable in closing out open positions or pulling active orders from the market quickly.
- Access To A Direct News Feed: During times of chaos, reference to a live news feed is a good way to stay abreast of extraordinary circumstances in real time.
- Protective Stops: One way to limit the negative impact of an unexpected event on profitability is to implement stop losses on all open positions. By having a stop loss order residing at the market/exchange, the financial liability of an unfortunate move in asset pricing is limited.
Overcoming adversity in times of crisis relies on staying calm and being prepared for as many scenarios as possible. These are all simple ways to ensure that any potential disruptions could have a limited impact on your trading activities.
Perhaps the most valuable skill that successful traders possess is the ability to deal with the unexpected decisively in live market conditions. From a spike in pricing volatility to a sudden power outage, surprises have the potential to destroy profitability. Nonetheless, through maintaining the trading infrastructure, using stop losses and having safeguards in place, the negative impacts of an emergency may be largely mitigated.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…