Risk Management: In the Eye of the Storm
Biggest Innovators on Wall Street in 2010 | CASE STUDY: Goldman Sachs Electronic Trading | After VaR: Q&A with Ron Papanek | Europe's Challenge | NSX Cuts In | Keep Out, At Your Own Risk
CASE STUDY: Goldman Sachs Electronic Trading
Risk Religion: Separating Church from State at Goldman Sachs
December 15, 2010
Every Wednesday, the chief operating officer and senior members of Goldman Sachs Electronic Trading’s operating team meet at 30 Hudson Street, Jersey City, two hours before markets open.
This is their weekly forum for managing risk for GSET, which offers institutions digital tools for managing and executing trades as well as direct access to key exchanges in the United States, Europe and Asia.
At the meeting are customer service and marketing representatives, risk management experts, systems managers, product developers. In front of them is an ongoing dashboard of risk issues. Immediately dealt with are any red flags. Then, priorities are set. Then, the process starts all over again.
Because, at Goldman, there is no such thing as a single line of defense against misguided orders, well-intentioned or not.
“How we control order flow, manage our regulatory responsibilities and manage credit limits is layered in multiple places,’’ said Rishi Nangalia, managing director and head of the RediPlus Execution Management System for Goldman Sachs.
LAYER ONE: Protecting Oneself
The first set of risk checks in electronic trading conducted by Goldman Sachs on behalf of the 2,000 clients it serves, worldwide, don’t deal directly with their needs. They are directed at Goldman Sachs, to meet its responsibilities to regulators, to make sure it is not hammered by events that could have been foreseen – and to reconcile the twin urges of “church” and “state,’’ in Nangalia’s term.
The “state” is the revenue-driving constituency of the company. Its “coverage reps,” known elsewhere as customer service reps or account reps. Also in this group are marketing, sales and other troops dedicated to managing the client.
Their impulse: Satisfy the customer. The customer is always right. But the code that backs them up is not always right.
Enter the “church.” This houses the risk specialists, regulatory officers and operations personnel who are geared to making sure the company is not harmed by any activities undertaken by the company on behalf of its customers.
Which is not always predictable.
“Computer software can always have bugs so we have to create the church and state separation” to make sure that no risks that result go unaddressed, in trying to improve the bottom line, said Nangalia.
This means almost line-by-line inspection of how transactions take place, electronically.
“A process cannot send more than X number of orders a second,’’ said Nangalia. This is “to prevent some process from misbehaving or some algorithm from misbehaving and overwhelming the market with orders.”
Even a set of steps as seemingly simple as generating child orders for completing a large transaction needs continuous revision.
This procedure involves one process that analyzes the order and sends it on to another process that takes in market data and decides the best set of destinations to send parts of the order to. Then, that result gets send to a process that translates and transmits the order -- or child orders -- to the pre-determined exchanges.