Pre-trade risk – a unified approach for various trading infrastructures

Vladimir Kurlyandchik

Director of business development arqa.ru

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Sources of financial errors

Key factors to succeed

understanding the client’s trading model

mathematical tools of risk management

taking into account peculiarities of particular markets

understanding of various infrastructure options

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Risk server requirements

control by broker

multi venues

various risk control models

multi asset, multi currency and portfolios with different settlement conditions

fast and scalable

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Risk serverControl by broker

Trading VenueClient

Risk Server

Broker’s Infrastructure

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Risk serverMulti venues

arbitrage

netting obligations

higher volumes

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Risk serverVarious risk control models

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Risk serverAssets, currencies, settlement conditions

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Risk serverFast and scalable

consecutive calculation

number of clients

number of transactions

drop-copy processing

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Risk calculation approachesGenuine pre-trade

Pre-trade control

Risk Server

Trading Venue

Client

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Risk Server

Risk calculation approachesFast pre-trade

yes / no

Pre-trade Control Module Trading Venue

Client

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Latency defines approach

Risk Server

Trading Venue

Client

Risk Server

Trading Venue

ClientPre-trade Control

Module Pre-trade control

2-3 ms risk server at co-location

≤5 ms risk server inbroker’s data center

Market data latency

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Pre-trade & Algo

Trading Venue Pre-trade Control Module

Risk Server

yes

Algo Engine

+

no

Clients

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Pre-trade & OMS

FIXPreTrade

Trading Venue

yes / no

Risk Server

FIX

Broker’s OMS

FIX FIX

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Risk awareness of clients

monitoring risks

what-if calculator

closing positions

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Case study:Retail

150 000 clients’ accounts

400 000 positions in cash and equities

40 000 positions in derivatives

0.9 - 5 ms pre-trade check latency

0.4 ms position adjustment after trade

~10 mln processed transactions per day

~1.5 mln processed trades per day

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Case study:Genuine for HFT

15 mln transactions per day

30% of all transactions at Stock market of Moscow exchange

450 transactions per second - average speed

800 transactions per second - peak speed

≤5.6 ms average transaction latency

2-3 ms risk server overhead

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Trading Venues

Buy-sideRisk Server

Case study:Buy-side

Broker B

Broker A

Risk Server

Risk Server

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FIX2Market

FIX

Trading VenueClient

Co-location

HFT Engine yes / no

Risk Server

Exchange protocol

Market data and

client operations

Case study:Fast pre-trade for HFT

≤30 mcs checks pertransaction

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Workstation

HFT Engine

yes / no

Risk Server

Market data and

client operations

Exchange co-location

Trading Venue

MICEX bridge

Exchange API

Case study:Collaboration with exchange

Moscow Exchange

3 mcs checks pertransaction

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Three actionable takeaways

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1.Effective risk control starts with a trading pattern, employs mathematic models and appropriate infrastructure options while taking into account

market peculiarities.

2.A fast and scalable risk server must be controlled by the broker. The server applies various risk control models simultaneously to cope with multiple instruments and portfolios with different settlement conditions at many trading venues.

3.The choice between full pre-trade and fast pre-trade is dictated by the latency requirement of a particular trading technique (algo, OMS,

retail, buy side, HFT).There are options to implement risk controls for maximum benefits.

Thank You!

Questions?

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