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
“The data structures we use in the risk management system are geared towards very short windows of time being spent on risk checks,’’ said Romanelli.
The risk checks, in this gateway’s approach, are stored in active memory, for instance, so they are live throughout the trading day and adjustable as needed. “The way we store risk checks in memory is something that we’ve done to optimize” efficacy and speed at the same time, said Tuskey.
The gateway also is set up to “know” all the risk checks ahead of time that match a particular client, Tuskey said. That means the system can then do a lookup for those checks quickly and run through them “at the machine speed.”
The system can also set itself apart by how it checks long strings of information, such as a list of stocks that a particular company that a broker is sponsoring is restricted from trading in. The gateway uses technology that can recognize long strings of characters, even if it relies on only a few to figure each out. This is akin to the T9 system and other predictive technologies used in cellphones to turn a minimum of typing into full messages.
All in all, the maximum delay, Tuskey and Romanelli say, at this point is under 100 millionths of a second and headed lower. Even at current rates, the time taken for risk checks “is incredibly small compared to overall latency” in trading systems, Boytim contends.
But it’s hard to compare exactly where to measure the trips. For Tuskey, the natural demarcation point is the time it takes for a message to hit the network interface card at the entry point of a risk gateway to the time the message hits the network interface card of a venue’s order-matching engine. No universal definition or standard, however, has been established.
TWO TESTS
Two incidents in the past year illustrate the hazards, however, of expecting a risk gateway to manage risk, on its own.
The first is the May 6 Flash Crash, where the value of the Dow Jones Industrial Average fell hundreds of points in a matter of minutes, in a series of events that took six months to start to untangle.
That series of events was triggered, the SEC and the Commodity Futures Trading Commission said, by a program launched by a “large fundamental trader” to sell a total of 75,000 E-Mini contracts valued at $4.1 billion. The automated algorithm was programmed to sell E-minis at a rate set to “9 percent of the trading volume calculated over the previous minute, but without regard to price or time. “
As a result, “the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes,’’ the regulators said.
In this case, the Risk Management Gateway might have prevented the selloff at market-disrupting rates. But it just as easily might not have.
Because the gateway only follows instructions set by the broker or other party using it. If a broker sets limits on trade size, prices to be paid and the like, the gateway will execute the controls. If left open, they’re left open.
