As funds and institutions move forward with more agile, market-appropriate strategies, risk adjustment must occur in real time. That can only be accomplished through smarter platforms that incorporate manual trading decisions with automated data collection, analysis, and views to ensure compliance with external mandates and internal activities.

“Assuming that you’re able to capture all of your data instantaneously, and assuming that as do we at Liquid you are capturing client data in real time using FIX drops and fiber cross-connects to other brokers and EMS platforms, then you can deploy a host of pre-trade controls that can directly limit and prevent certain conditions from arising, such as P&L or leverage thresholds, delta-weighted positions and exposures that you have a mandate to prevent,” said Ben Chesir, managing director at Liquid Holdings.

A position-aware risk management platform that properly aggregates all intra-day trading activity will provide portfolio managers with the ability to quickly, and cost-effectively model and react to exposures – expanding on best practices and staying within investment mandates, according to Ben Chesir.

Regulations mandate that certain funds provide transparency into key portfolio health metrics. Systemically Important Financial Firms (SIFIs) as designated by the Financial Stability Board or as targeted by Dodd-Frank, SEC, FASB and Basel III must also continuously model their capital requirements against risk-weighted assets and produce acceptable leverage ratios to stay in compliance.

A position-aware system takes into account broker feeds and updates, which are typically limited to trades executed or cleared by that broker. A fund using multiple primes or executing brokerages will need to aggregate data from all points of execution, matching and clearing. “Breakdowns in data feeds, errors, and latency are all events that can place portfolio activities in jeopardy,” Chesir said.

With proper controls in place, certain trades can be prevented or an account can be placed in liquidation if warranted. However, this assumes complete real-time views of all relevant data. “If my system only has a subset of data, there still is that ability for something to go wrong on the part of the portfolio that isn’t captured,” said Chesir. “It’s about being able to make sure that all your data is being aggregated and having a host of risk controls to prevent certain activities in whatever asset class you’re trading. You want to be alerted to such situations and be proactive in addressing them.”

Front-office risk and compliance is important not only to fund managers but to allocators and institutional investors.

“They want to know that a manager has controls in place in pre-trade risk and compliance, as well as post-trade,” said Branden Jones, global head of marketing at Liquid Holdings. “They want one environment that goes across risk, performance, and P&L. Whether you’re an emerging or established manager, it means having 100 percent visibility into the portfolio.”

It’s not uncommon for a fund of funds to mandate that all of its fund managers standardize on a single trading so that if they do need to take actions intraday, they have that capability in real-time. “Not so long ago, it would mean pulling the trader off the trading pit or chasing the manager,” said Chesir. “Front-office risk management is not just about controlling exposure, it’s also about giving the end investor the comfort that there is risk reporting, not just once a month or quarter, but in real time.”