WHAT FINK MIGHT DO WITH BGI - FTSE

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RISK MANAGEMENT IN HIGH-FREQUENCY TRADING 28 In the Markets What you see is what you risk HIGH-FREQUENCY TRADING these days is a serious market tool and risk management in trading is now more important than ever. Managing risk is not just about preventing loss; it is also about making money. It is about knowing, across traders, desks and asset classes, what the entire firm’s exposure is, at any point in time. It is also being able to do something about it (automatically) in real time. With the confidence to sense and respond immediately, it is about trading responsibly and without fear. With both trade generation and execution growing ever faster and more automated, an awareness of risk is also growing. There has been an increase in the requirement for the real-time risk management aspects of algorithmic trading as people learn to use algorithms to capitalise on opportunities faster than they Photograph © Irina Petrenko/Fotolia.com, supplied August 2009. The past 12 months have changed the game for how risk is viewed and managed. Such has been the extreme level of volatility at times that only the most highly equipped firms have felt safe they can avoid sudden losses. In the face of such extreme conditions, the parameters for “conventional” risk management, understandably, have also had to change. Companies need much better access to information in real time if they are to stand a chance of coping under a new financial landscape. Dan Hubscher of Progress Apama looks at real-time risk management in the context of high-frequency trading and aggressive algos. otherwise could manually. In the past, some firms have been relatively relaxed about the risks, arguing that if they had one bad trading day, the profits from the rest of the year would make up for it. In this recessionary climate, that attitude has changed significantly. Now everybody is interested in what their level of exposure is at any given point in time, all the time, and what the safeguards are. This is a major focus. Many are finding that as trading velocity increases, it is no longer acceptable to assess risk at the end of the day. In these straightened times, highfrequency trading is an essential tool for traders seeking liquidity. Moreover, the growth in electronic communication networks (ECNs), FIX adoption, direct market access (DMA) and the increase in electronic trading tools have created a fertile environment for the exponential growth of the highfrequency trading community. High-frequency players have undoubtedly increased volume on markets. The effect of such trading strategies is improved market quality, but market participants have also had to increase their IT spend and improve in-house systems to cope with rising trading volume. While these are necessary advancements and mark a natural evolutionary step within capital markets, the key trend is to turn real-time risk management from the exception to the norm. Pre-trade checks are one way of offering this real-time risk protection. Broker-dealers often wrestle with how to offer it, particularly within the context of providing DMA. Generally you see it in the form of a sponsored-access service through which the broker lends its clients its identification to access securities exchanges directly. While realising the benefits of giving its clients direct access, brokers are keenly aware of the risks associated with this practice. Ultimately, many have taken the view— most notably and recently Goldman Sachs—that there is a need for pretrade checks before orders are placed. Real-time view Futures clearing firms equally demand a view of the risk stemming from proprietary trading desks’ order flow to access futures markets via DMA. This requires a real-time view on the desks’ positions and the ability to place and enforce limits on that order flow. This practice is becoming increasing popular (particularly in the current climate of high-frequency trading) as a safeguard against technology failures, oversized orders and other situations where there is a potential for systematic market impact. Drop-copies from the exchanges are no longer seen as an acceptable or quick enough method. S E P T E M B E R 2 0 0 9 • F T S E G L O B A L M A R K E T S
In response to numerous requests from our loyal delegate base, we have scheduled IMN’s Fourteenth Annual European Beneficial Owners’ Securities Lending Summit for 22-23 September 2009 in London as a matter of convenience. In September 2008, as credit markets seized-up and global markets plunged, IMN’s Thirteenth Annual European Beneficial Owners’ Securities Lending Summit forged ahead. Despite the unprecedented market conditions, leading European Securities Lending decision-makers made it a priority to attend the event, and were rewarded with real-time content and discussion about the profound issues confronting Beneficial Owners and the industry. As always, the Summit agenda is being developed after extensive consultation with industry leaders and with significant input by leading Beneficial Owners. Programme Session Highlights: Now Unique Opportunity For Beneficial Owners To Meet Privately; Two Special Closed-Door Roundtable Sessions For Beneficial Owners Only Platinum Plus Sponsor: Bronze Sponsors: Gold Sponsor: Silver Sponsors: To Register Or To Obtain More Information, Please Visit www.imn.org/euroseclending_ftse ejacobowitz@imn.org
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