Operational and Non-Market Risk

Gap risk

A gap occurs when a market reopens at a price materially different from its previous close, so that no trading takes place at the intervening prices. Gaps arise over weekends, at the reopening of an exchange after an earnings release, and following an unscheduled announcement by a central bank or government. A stop-loss is an instruction to close the position at the first available price once the stop level is reached; when the market reopens beyond that level, the position is closed at the reopening price, and the loss can exceed the intended amount by a substantial margin.

The practical consequence is that holding a leveraged position through a period in which the market is closed, or through a scheduled event known to produce large moves, should be a deliberate decision informed by the potential size of the gap rather than a default. Where a position is held through such a period, its size should reflect the possibility of a loss larger than the stop distance implies.

Slippage and liquidity

Slippage is the difference between the price at which an order is requested and the price at which it is executed. It occurs when there is insufficient liquidity at the requested price, so that the order is filled at the next available level. Under market execution, which is the standard at Onys Kapital, an order is filled at the prevailing market price, and in fast-moving conditions that price may differ from the one displayed at the moment the order was submitted.

Slippage is most severe in exactly the conditions in which a stop-loss is most needed: around scheduled releases, at session transitions and during periods of general market stress. The principal mitigation is to trade liquid instruments during liquid hours, since a deep market absorbs orders with minimal price displacement. A secondary mitigation is to avoid entering or holding positions immediately around high-impact releases, as described in Lesson 19.

Technology failure

A leveraged position combined with a loss of the means to manage it is a serious operational exposure. Internet connections fail, hardware fails, power is interrupted and platforms occasionally become unresponsive. None of these events is predictable in timing, and each can coincide with an adverse price movement. The mitigation is to ensure that the position is protected independently of the trader's connection and that alternative means of access are available.

The first safeguard is that every stop-loss is placed on the broker's server as a pending order rather than held as an intention to close manually; a server-side stop is executed whether or not the trader is connected. The second is that the MetaTrader 5 mobile application is installed and tested on a phone before it is required, providing a route to the platform independent of the primary device. The third is that the contact details for client support are stored where they can be reached without the primary device.

• Every stop-loss is placed on the server, never held as a mental level.
• The mobile platform is installed and tested before it is needed.
• Support contact details are stored in a location accessible without the primary device.
• No position is held at a size that would be unmanageable in the event of a loss of connection.

Correlated exposure

Positions that appear separate may share a common driver, so that the risk of the account is concentrated in a single factor rather than distributed across several. Five positions in currency pairs that each involve the United States dollar constitute, in substance, a single large position in the dollar, and a dollar-driven move will affect all five in the same direction at the same time. The same applies to positions across indices that respond to the same interest-rate expectations, or to positions in gold and in the Swiss franc during a period of financial stress.

The mitigation is to assess exposure at the level of the account rather than at the level of the individual trade. Before a new position is opened, the trader should identify the factor to which it responds and the extent to which existing positions already respond to that factor. Where several positions share a driver, their combined risk should be limited to the amount that would be permitted for a single position in that factor.

Counterparty risk

A contract for difference is a bilateral agreement between the client and the broker. The client's profit on a position is an obligation of the broker, and the client's deposited funds are held with the broker. The regulatory status of the broker, the segregation of client money from the firm's own funds and the financial stability of the firm therefore form part of the trader's risk profile, irrespective of whether the trader considers them.

Onys Kapital Ltd is a Securities Dealer Licensee regulated by the Financial Services Authority of Seychelles under licence SD128, and the due diligence procedure described in Lesson 25 applies. Counterparty risk is further reduced by maintaining on the account only the capital required for the intended activity, by withdrawing profits periodically rather than accumulating them indefinitely, and by keeping the trader's own records of positions and balances so that any discrepancy can be identified promptly.