Even With Concerns, Financial Industry Moves Full Speed Ahead

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Even With Concerns, Financial Industry Moves Full Speed Ahead
By, Jessica Titlebaum


Before electronic trading took the industry by storm, humans played a larger role in the path of a trade and were able to catch mistakes. In an automated environment, where should errors be caught?

The FPL Americas Quarterly Meeting brought together Chicago’s financial technology community to discuss risk controls in the current market structure. The panel discussion moderated by MarketsWiki’s John J. Lothian, featured Laurence Latimer, senior vice president and managing director at SunGard; Leslie Sutphen, finishing up her role as managing director at Newedge; and Timo Pentner, managing director at RTS Realtime Systems.

“RTS sees a three layer approach to risk controls including the trading front end, the back end and what the exchanges are doing,” Pentner said.

He explained that the trading front end or algorithmic engine should have the ability to turn off algorithms if they go wild. The back end looks at all orders and has the ability to consolidate risk over the entire server. The exchanges provide market protections like circuit breakers or volatility controls.

Sutphen added that trading platforms should ‘act as brokers’ and validate orders, confirm trades at an appropriate size and make sure transactions are reasonable. She also added that no one should mistake credit controls for risk controls.

On a related note, RTS’s Pentner said that one of the next steps would be to calculate cash positions.

“We should find out how much money traders have, how much money firms have and how much margin they are using,” he said.

As the markets developed into more complicated structures, one of the things Lothian said the industry lost was the element of self-policing.

“There used to be fear in a trader’s face when something went wrong,” he said. “Humans will let people out of trades because they want them in the pits to trade another day, but electronic markets can’t do that.”

Laurence Latimer of SunGard said that if we could get cooperation from the exchanges, there could be a tool that would give traders a holistic view of their positions and when appropriate, bring the fear back.

Speed and rationality were other hot topics discussed by the panelists. It appears that even though the markets are trading faster, smarter and better, we have traded back office risk for front-end risk.

Pentner explained that the need for speed was met at the expense of risk parameters.

“The focus was on lower latency so risk parameters were eased,” he said.

Now that we have gone from milliseconds to even microseconds, he believes the next step will be to include more sophisticated risk controls.

Trades that happen faster than the blink of an eye raise another concern; do the markets need a time out?

Latimer pointed out that Brazil used to take trading breaks during the World Cup but could not afford to do that if the rest of the world was still working during that time.

“If Brazil doesn’t take breaks during the World Cup anymore, we can’t bring the world back from moving full speed ahead,” he said.