SMART HEDGER PLUGIN

SMART HEDGER PLUGIN

SMART HEDGER PLUGIN

A PLUG-IN FOR AUTOMATICALLY MANAGING RISK IN MT4 SERVER

This fully automated tool allows the MetaTrader broker to systematically cover the sum-total of the un-hedged risk-adding customer positions and minimize the risk of loss to the broker. Our smart hedging algorithm manages your total risk without any dealer intervention. Save time and cost of manual dealer control over your overall position, and maximize your profit using smart cover logic!

SMART HEDGER LOGIC OVERVIEW

  • Smart Hedger is designed for hedging ‘toxic’ clients (for example, successful scalpers, or trend-followers)
  • We provide automated tools for identification of such clients (upcoming)
  • Hedging is carried out by the targeted opening of the offsetting broker positions on the Liquidity Provider side, which offset the loss caused by the client positions
  • Smart Hedger continually monitors the overall broker position and the market conditions
  • Smart Hedger instructs MetaTrader Server to open Cover positions in the Liquidity Provider account (hedges) based on two requirements:
    1. Risk reduction partAdvanced mathematical modeling is used to accurately forecast possible losses of the broker due to client positions (this quantity is referred to as Value at Risk, or VaR)If overall VaR of the position exceeds custom-set limit, Smart Hedger makes smart Cover trades to reduce the risk. Each broker can set loss limits suitable for his or her own operating conditionsWe consider the transaction cost of opening the Cover trades, so as to minimize the spread-crossing cost to the broker
    2. Cut-loss part
      Smart Hedger monitors instantaneous mark-to-market PnL of the overall broker position in each currency
      In the unlikely case that currency PnL is negative Smart Hedger finds the optimal currency pair to produce a Cover trade

      This Cover trade plays a role of the hedge against any further adverse moves in the currency price

TECHNICAL DETAILS OF SMART HEDGER

The following diagram shows the basic workflow of the Smart Hedger integrated in the MT4 Server:

  1. Smart Hedger is a plugin to server-side MT4 which has the following forms of communication with MT4:
    • It receives all price updates from LP
    • It receives all client open-close trades, as well as limit orders
    • It is periodically polled by MT4 server – “what should my next hedging action be”?
    • It provides an answer, and MT4 opens these trades into it’s own ‘Cover’ account
    • Hedger is immediately notified of any Cover trades
      SMART HEDGER PLUGINSince both customer positions and Cover positions contribute to the Broker PnLTotal Broker PnL =   Sum of (all client account PnLs) + Cover PnL
  1. Smart Hedger seeks to maximize Total Broker PnL via smart (but minimal) Hedging in the Cover account
  2. AutoDealer is used to auto-confirm client orders that fall within tolerance level of the current LP price
  3. Safety features:
    • Smart Hedger doesn’t ‘trade’ – it provides recommendations to MT4
    • If Smart Hedger fails (no heartbeats) recovery procedure begins:
      • MT4 switches to its usual position management approach
      • Secondary Smart Hedger receives a ‘snapshot’ of all relevant data up-to-now
      • When trader is ready he switches back to Smart Hedger
    • Post-mortem debug is possible

STUDY SMART HEDGER PERFORMANCE

IN TRADING SIMULATIONS

We study the expected performance of the Smart Hedger by simulating customer orders generated against real historical currency price market data. To accumulate stable statistics, we use over 3 months of historical market data.

To simulate bid/ask prices shown to the customers we take historical bid/ask prices show by our Liquidity Provider and add a spread of 0.5 pips to them*.

We simulated Hypothetical Customer Orders, assuming that the majority of the customers guess the market moves correctly (successful Trend Followers or Scalpers), thus earning positive PnL.

* In principle a broker can increase his or her PnL by further widening the spreads, but this may lead to lower customer trading activity

Characteristics of the simulation:

  1. Total of 500 lots traded each day (open trades)
  2. All toxic clients  – one of the two following cases:
  3. Each client trade has a high chance of generating a positive PnL for the client
  4. Broker adds 0.5 pips to LP spreads

Table below shows average daily client order volumes (open trades) and spreads shown to clients by the broker:

CURRENCY PAIRVOLUME (MM, BASE CURRENCY)SPREAD (PIPS)
EURUSD21.51.3
GBPUSD61.5
USDJPY5.51.3
AUDUSD51.7
EURJPY2.51.3
USDCAD2.52.8
EURGBP21.4
USDCHF1.52
NZDUSD13.3
EURCHF11.7
GBPJPY0.51.4
EURAUD0.51.5
GBPAUD0.51.6
EURCAD0.52.1
GBPCHF0.51.8

Example 1: Trend Followers

We use historical market data to generate customer buy orders that catch the up-trend of the market prices or sell orders that catch the down-trend (successful trend-following behavior)

Assumptions of the Simulations:

Average Customer PnL/trade15 pips
Average Percentage of customers Winning95%
Average Profit of Winning Trade$ 2,000
Average Loss of Losing Trade-$ 500
Average Position Duration2 hrs
Average Position Size1 lot
Number of Simulations1000

Results Summary (average daily results for all simulated days of trading)

Average Total Smart Hedger PnL$ 7,000
Total Customer PnL Range-$20,000 to -$35,000
Max Smart Hedger PnL Drawdown-$ 700
Average STP PnL$ 5,700
Average Cover Traded Volume (vs LP)$ 65 mm
Average STP Traded Volume$ 125 mm

Result: For Trend-Following customers Smart Hedger increases broker PnL by 20% and decreases volumes traded versus LP by ~50%

Sample one trading day activity for the Trend-Followers

Compare Smart Hedger versus STP hedging:

Smart Hedger PnL @ Close$ 9,033
Customer PnL @ Close-$ 33,700
Max Smart Hedger PnL Drawdown-$ 900
STP Heding Method PnL$ 6,430
Smart Hedger Cover Traded Volume (vs LP)$ 70 mm
STP Hedging Method Traded Volume (vs LP)$ 128.7 mm

Broker loses money on his customer orders (top graph, reg), but Cover account PnL compensates for the losses on the Customer Orders (top graph, black).

The Total PnL for the brokers using Smart Hedger equals (Cover Account PnL + Customer Accounts PnL) (bottom graph, black). Smart Hedger returns 30% more profits than the STP method (bottom graph, blue).

SMART HEDGER PLUGIN

Smart Hedger allows broker to reduce trading volume in the Cover account due to customer order netting.

Example graph: EUR 1 day exposure without netting

Green – total Customer EUR exposure for buy orders (above zero) and for sell orders (below zero). Blue – total EUR exposure of the Cover account.

SMART HEDGER PLUGIN

Example graph: EUR 1 day, after netting

Green – net total Customer EUR exposure. Blue – total EUR exposure of the Cover account. Cover account exposure is almost a mirror image of the net Customer exposure.

SMART HEDGER PLUGIN

We use historical market data to select customer trades that generate small profits over short periods of time (successful scalping behavior).

Assumptions of the Simulations:

Average Customer PnL/trade2 pips
Average Percentage of customers Winning80%
Average Profit of Winning Trade$ 25
Average Loss of Losing Trade-$ 10
Average Position Duration1 min
Average Position Size1 lot
Number of Simulations1000

Results Summary (average daily results for all simulated days of trading)

Average Total Smart Hedger PnL$ 6,100
Total Customer PnL Range-$5,000 to -$8,000
Max Smart Hedger PnL Drawdown-$ 500
Average STP PnL$ 5,900
Average Cover Traded Volume (vs LP)$ 69 mm
Average STP Traded Volume$ 135 mm

Result: For Scalping customers Smart Hedger increases broker PnL by 10% and decreases volumes traded versus LP by ~50%

Sample one trading day activity for Scalpers

Compare Smart Hedger versus STP hedging:

Smart Hedger PnL @ Close$ 6,300
Customer PnL @ Close-$ 5,600
Max Smart Hedger PnL Drawdown-$ 450
STP Hedging Method PnL$ 5,820
Smart Hedger Cover Traded Volume (vs LP)$ 68 mm
STP Hedging Method Traded Volume (vs LP)$ 138 mm

Broker loses money on his customer orders (top graph, reg), but Cover account PnL compensates for the losses on the Customer Orders (top graph, black).

The Total PnL for the brokers using Smart Hedger equals (Cover Account PnL + Customer Accounts PnL) (bottom graph, black). Smart Hedger returns 10% more profits than the STP method (bottom graph, blue).

SMART HEDGER PLUGIN

ADVANTAGES OF SMART HEDGER

OVER THE STP METHOD

METRICSMART HEDGERSTP
Profitability10 to 20% higher than STP (*)Tied to extra spread over LP spread
Speed of Client Order ExecutionInstantaneousfrom 500ms to 1 sec
Volume of Trades vs LPDecreases by up to 50% compared to STP (*)
Broker RiskBroker sets acceptable Risk LevelZero
SpreadVariable spread, which is on average lower than STP spread (**)Pre-set extra spread over LP
Customized Hedging Methodology for Different Client GroupsCustom Heding setup for:

  • Trend-Followers
  • Scalpers
  • Mean-reverters
Not available
Client Flow ForecastingAvailable, to optimize held inventory to upcoming customer orders (**)Not available
Short-Term Price Movement ForecastupcomingNot available
Performance Analytics Metrics
  • Broker Risk Level
  • Broker PnL History by Currency / Client
  • Toxic Client Identification / Classification
Not available

(*) – according to simulations
(**) – upcoming feature

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