How inventory got its bad rap
Traditionally, enterprises viewed inventory as a way for a company to store value, and as a safety feature to ride out market fluctuations. It was perceived to be a good thing. That view has changed dramatically with the advent of information technology that made just-in-time (JIT) delivery possible. As I will explain, reducing inventory also reduces market risk. In FX, just-in-time delivery of currency rates holds the promise for FX brokers to eliminate a major headache that has been a source of major risk taking in the past: Internalization of deal flow. I think JIT will fundamentally improve the risk structure of a broker. Given the reduced risk, brokers will begin to divert their energy to marketing and sales with the eventual goal to lower their prices to the optimal level to maximize market share and overall profits, not marginal profitability.
Why holding inventory equals holding market risk
The simple truth is that inventory is costing you money in more ways than one. Obviously, it is tying up capital because there are costs associated with you acquiring products and holding them. It might be less intuitive that you also just bought yourself market risk, i.e. you are now on the hook for your product to sell as predicted. If it doesn’t, you will have to discount it later just to get rid of it. Because companies know all this, their initial go-to-market price needs to be higher to account for said risk, in addition to covering costs and a profit margin. Continue reading ‘Just-in-time’ — Just in time for FX Brokers?