02.22.2013
By Terry Flanagan

Risk Checks Go Beyond Pre-Trade

Risk management has taken on a different approach as capital markets firms move beyond mandatory risk checks that need to take place prior to a trade to assessing risk throughout the trade lifecycle

“We are seeing a resurgence in the focus on risk, and that resurgence is different from 12 to 18 months ago when the focus was on pre-trade riskwhich is our forte—but over the past year large sell-side banks are now looking at risk not just on pre-trade but also at-trade and post-trade,” said Michael Chin, chief executive of risk management provider Mantara.

“They are looking to solution providers such as Mantara to take a much more holistic view of their risk across all trading activities.”

Michael Chin, CEO, Mantara

Michael Chin, chief executive, Mantara

Mantara is set to launch an at-trade risk management platform, “so that sell-side clients can assess risk from these disparate sets of order flows,” said Chin said.

“Banks have multiple entry points where they are receiving order flow electronically, whether algorithmic flow, HFT flow, traditional DMA flow or prop trading flow, and until now there has been nothing that can consolidate those into a single aggregate view of risk.”

Mantara can provide that “in a form that’s non-disruptive to workflow”, said Chin. “It needs to have zero latency impact, but still be capable of capturing information that’s relevant to risk calculations which they’re currently unable to do because they have multiple platforms that don’t speak to each other.”

Exchanges have reformed rules for breaking trades, instituted single stock circuit breakers and limit up/limit down mechanisms, and updated market-wide circuit breakers.

They are also developing tools to help broker-dealers manage their obligations under the Market Access Rule, known as 15c3-5. An exchange-led industry working group is implementing “peak net notional exposure” levels, or kill switches, that would automatically trigger a cessation of trading when an individual firm exceeded pre-determined risk thresholds.

The working group is considering various approaches to both self-regulatory organization level and broker-dealer level requirements, as well as a means for coordinating cross-market checks needed to combat the effects of market fragmentation and interconnectedness,” said Eric Noll, executive vice-president of transaction services at exchange group operator Nasdaq OMX at a congressional hearing in December.

Canadian securities dealers are under pressure to implement pre-trade risk checks as a regulatory deadline approaches. The regulatory framework, called National Instrument 23-103, will require market participants who enter orders electronically to maintain policies, procedures and controls to manage the risks associated with electronic trading.

NI 23-103, which is to go into effect on March 1, imposes requirements on marketplaces for availability of order and trade information, marketplace controls relating to electronic trading, marketplace thresholds and erroneous trades.

TMX Group, Canada’s top exchange operator, is implementing a new service, TMX Pre-Trade Risk Management Solution, which provides provide clients with connectivity and technology needed for high-performance pre-trade risk-filtered access to all Canadian equity marketplaces.

The TMX fully-managed hosted service, which is to be deployed across its Toronto Stock Exchange, TSX Venture Exchange and TMX Select, uses risk management technology supplied by Mantara, whose core brand, Expressway, is used by major banks and institutions to detect and eliminate faulty trades.

“The TMX solution is going into production and will be live on March 1, the date that the regulations on risk controls go into effect,” said Chin. “We are working closely with TMX and their clients to begin the onboarding process for a significant number of clients that have adopted that solution.”

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