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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

Keep Out, At Your Own Risk

December 15, 2010
By Tom Steinert-Threlkeld

But the rate card won’t be the lowest on the market. The National Stock Exchange, a 115-year-old operation once known as the Cincinnati Stock Exchange, is in the process of introducing an “Exchange in a Box” service that connects market participants to 10 market centers in New Jersey for $1,000 a month (see “NSX Cuts In,” page 7). Its chief information officer, Saro Jahani, is working on introducing an SEC-compliant set of pre-trade controls that he is considering rolling into the service, at no additional charge.

But, for most brokers, operating on a large scale, the amounts involved are not show-stoppers. “The price just isn’t a stress point,’’ said Bruce Boytim, vice president of Transaction Solutions at NYSE Technologies.

Users can send messages to the Mahwah gateway using a variety of forms of NYSE Euronext’s Secure Financial Transaction Infrastructure (SFTI) From outside the Mahwah data center, wide area network connections using Internet Protocol communications or a ‘virtual private network’ connection using a box placed at a remote site are offered. Inside the building, a local network version of SFTI employed.

“If they can provide this at reasonable cost, they’ll probably be fine,’’ said Aite Group’s Lee. “Because it’s easy for the brokers that are already in the [SFTI] network to use this.’’

FTEN or NSX may offer lower cost options. But apples-to-apples comparison are necessary, Lee said.

For instance, while the RMG provides the closest possible connection to NYSE Euronext matching engines, that is not the sole province of its risk controls. Orders, cancellations and replacements sent to it will pass through risk filters on the way to as many as 50 different trading venues in North America.


No set of risk filters will prevent all possible catastrophes. But here’s what you get with the NYSE gateway:

• Fat-finger checks. These apply to individual orders, where a typo can be destructive. This allows brokers to set, in advance, rejections of orders that exceed a defined value or a defined quantity; rejections of orders involving specific symbols or sides of a trade; or a price, when it’s outside a specified range.

• Regulatory checks. These, for instance, prevent the submission, amending or canceling of market or limit orders “at the close” within a specified time period; reject orders for symbols that are on a restricted list; and reject short-sale orders, if the stock involved is not on a pre-determined “easy to borrow” list.

• Overall checks, on a day’s worth of risk. These can reject orders that top a preset aggregate quantity of shares to be traded or preset threshold in a particular stock; or, similarly, exceed a threshold in the overall value to trade in a day in all transactions or in transactions involving a given stock or the like.

Alerts and rejections get sent directly to the trading party, without broker intervention.

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