Risk Management: In the Eye of the Storm
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Keep Out, At Your Own Risk
Why NYSE Euronext Wants to Make A Business Out of Rejecting Trades
December 15, 2010
Getting into the NYSE Euronext data center in Mahwah, N.J., is something of a physical feat.
Earth berms and ironwork fences surround the 400,000-square-foot facility. Its entrance is not at the address it uses or even on the same street. At its guard station, any vehicle entering must wait for the lowering of multiple, successive raised steel plates before it can proceed through the gateway.
Once onto the campus, there is only one set of doors into the facility. There are no windows or other openings.
And if you want to gain access to one of NYSE Euronext’s stock exchanges with orders that have gone through proper pre-trade checks with the lowest possible trip time, there is only one front door.
It’s a set of six computing cabinets that house the exchange operator’s Risk Management Gateway, that allows broker-dealers and their customers to get direct access to NYSE markets but pass their orders through risk filters first. This allows broker-dealers to control the amount and size of trading activity pursued by participants they sponsor.
The gateway sits in the same 20,000-square-foot computing “pod” in the Mahwah data center as NYSE’s matching engines for the equities markets of the New York Stock Exchange and NYSE Amex, now, and NYSE Arca, soon. No other risk filters sit in between these cabinets and those engines.
“Other risk management systems are not allowed in here,’’ said Kyle Tuskey, managing director for the Transaction Solutions business of NYSE Technologies, from the hallway outside the main two pods, where the NYSE exchanges are located. “We have an advantage in that area.”
The advantage may be only the length of the hallway, to a third pod where any customer can locate and can install any risk-control software it likes or has developed itself. But, in markets where microseconds matter, even that can be a competitive advantage as NYSE Euronext looks for new sources of revenue and profit from technologies spun out from its exchange expertise and operating knowledge. In transaction terms, every thousand feet of distance away from a matching engine adds one more millionth of a second to transit time.
Until Nov. 3, saving time on managing risks was not an issue. Until then, broker-dealers who sponsored direct trading by their customers did not have to worry about any delays introduced in high-speed strategies from filtering orders in advance for the chance that something might go awry and leave the dealer holding the bag. The checks could be performed after the trade. But Nov. 3 changed that. That’s the day the Securities and Exchange Commission banned so-called “naked access,’’ adopting a rule that required brokers and dealers to put in place controls to help prevent erroneous orders, ensure compliance with regulations and enforce pre-set credit or capital requirements.