Covering the extraneous risk


The calculation of risk is fundamental to all trades. As Christian Gollier pointed out in his seminal The Economics of Risk and Time, when everything else is stripped away risk remains as the key criteria on which any decision is rests. Risk is the balancing factor against which potential gains are assessed; it is the fulcrum that determines the decision or not to actually trade in the first place.

Within the forex sector the notion of risk is more complex than that of the man or woman on the street. Any risk represents a potential opportunity and so the consideration of risk stands – as Gollier suggests – as a multifaceted, highly complex psychological as well as economic consideration.

Extraneous risk

There are, however, risks that fall outside the consideration of the market per se, and that offer no positive upside – other than for a minority criminal fraternity. From a trader’s point of view these represent what we could call extraneous risks. For obvious reasons questions of cyber security do not feature overly prominently on the websites or the marketing materials of the main trading platforms. There is enough to concentrate on as it is, without the prospect that your data might be disappearing into the dark net because of some vulnerability in the site’s security program.

"Mod_security and Mod_evasive for Apache" (CC BY 2.0) by xmodulo
“Mod_security and Mod_evasive for Apache” (CC BY 2.0) by xmodulo

A silently glaring example

The case of Yahoo’s quiet response to its hacking in late 2014, which only came to light after a tight-lipped two-year hiatus, illustrates just how poisonous the idea of a security breach can be. Five hundred million Yahoo users might be entitled to wonder whether their security has been diminished as a direct result of the hack. They might also be entitled to wonder to what extent they have been put at risk as a result of Yahoo’s attempt to protect their reputation (not to mention their sale with the proposed $4.8 billion deal with Verison) by means of a policy of strategic silence.

Multiple vulnerabilities

The ingenuity of the hackers is matched only by the diligence with which the burgeoning data security industry are developing ever more robust security solutions. Indeed, web application vulnerabilities have evolved to target both front- and back-end databases: SQL injection, cross-site scripting, remote file inclusion and cross-site request forgery are merely the most recent threats to have been identified and countered – at least for those engaging in up-to-date security packages.

As individual users we can boost our own security by checking the urls of the sites we visit. Anything prefixed https or that shows a green address bar will tell you at a glance that it’s been certified as safe. But for the professionals, an ever-growing list of highly technical solutions is required to maintain the operability of their networks and services.

There are inherent risks in forex trading, and as Gollier amongst others has pointed out, those can come in a variety of forms depending on the context of any given trade. But it should never be forgotten that the technology that underpins those markets comes with its own inherent downside. Extraneous security threats and the arsenal of online security required to counter them are not something that any of us should ever fail to consider.

Cover Image: “USD / CNY” (CC BY 2.0) by markhillary