Stop Loss

If we are playing for money, the question arises on how you should cope with counteparty risk. Amongst friends this is clearly not an issue, but if we are trying to simulate trading conditions then we should introduce either margin calling or stop loss.

If we use a spreadsheet to track all settled trades, then it is easy to track PL during the course of the trading sessions. So one approach is for the person acting as the settlement agent does margin calls to all participants so that if they have run out of money, they will be forced to reduce their positions.

This approach seems the most optimal, but can be high maintenance if it involved movement of banknotes. Therefore if a judicator is available who can run the Clearhouse, then they can monitor PL and send out instructions to the exchange members (MM, IB and LT) to cut their positions by half during the following session.

HF can be included in this process for simplicity, however a more accurate event is that they are given, say £2000 in capital and once their PL has broken through this amount, the IBs will have to create an accord to unwind the trades a a level that leaves the HF with zero cash. This creation is what happens when an OTC counterparty defaults to multiple dealers. The MM should make a special trading session to facilitate unwinding of exposure.

Given that the LT are trading on their own account, they have limited capacity and should have a lesser amount of capital compared to the HF, say £1000. If a local is within 5 points of going bust, then the judicator must instruct the MM to take over the positions for a fee of 5 points and bankrupt the LT. At that point, the LT should try and make money by shining shoes, bringing coffee, or get captial funding from a HF.