Risk Management: In the Eye of the Storm
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Keep Out, At Your Own Risk
December 15, 2010
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.
The gateway can be supple, as well. The system, for instance, allows brokers to block intermarket sweep orders that are designed to “sweep” the best orders with the best prices from all National Market System venues – and document why they have routed orders to places that might not have the immediately obvious best price. Or, block the sending of market orders at the close at all, if fines are incurred for a cancellation of the order.
Custom checks, like those that support trading in multiple currencies, are developed and spread as needed for individual and then all customers.
These kinds of nuances are support for the argument for using an existing gateway because … it exists. In the case of this Risk Management Gateway, because it’s been around for more than a decade, increasing the number of risk filters that are available. And cutting down any causes of delay between order management systems, risk filters and the matching engines that ultimately execute on the instructions.