Managing Risk in Real-time Markets

Author(s):
Adam Sussman
Date:
February 9, 2005
Research Type:
Vision Note
Rights:
Executive Summary

The rapid-fire pace of the financial markets, combined with the nearly open market access and ubiquity of information has the entire financial world recognizing the need for speed. Indeed, the combination of faster markets, global trading and tighter regulatory controls means that the integrity of the system—its lifeblood—is constrained by its slowest component. The vital applications that manage credit limits and calculate market risk exist further downstream in the chain of processing events, so it is critical that all the required information is transmitted across the infrastructure as quickly as possible. Ultimately, brokerage firms are exposed to increasing operational and counterparty risk with every additional tick of the clock required to calculate credit limits and market risk.

By many accounts, the dynamic markets and rocketing capabilities of technology represent great opportunity. As computing power becomes cheaper and knowledge about quantitative trading grows, major U.S. equity exchanges are projecting 100% growth rates year over year. Indeed, there is no end in sight to the increase in market velocity, but firms will no longer be able to simply throw more computing power at the problem. There needs to be a better model for passing trade information downstream in order for brokerage firms to stay in the game.

Regulators too, understand this brave new world and are implementing strict rules to ensure that firms are not just sweeping risk under the rug. These new regulations dictate quick and efficient communication across the firm: risk models needs to be standardized and documented; significant events that occur during the trading day must be reported up the chain of command as soon as possible.

Brokerage firms still have a long way to go to address the speed of the systems that feed applications designed to limit risk, such as the margin calculation “engine”, the golden copy and compliance and regulatory modules. As electronic trading continues to accelerate the velocity of the markets, the trading world becomes smaller, firms trade around the clock, multi-asset class funds become the norm and legislation responds to all these changes with increased reporting requirements, the dissemination of executions across the enterprise will become critical, regardless of what risk models are adopted. Imprecise risk models may lull us into a false sense of security about our firm’s risk, but delayed portfolio management and accounting systems make the most precise risk models hopelessly useless.

An information architecture that is designed to push data across a network and allows components to subscribe to the types of data required for its piece of functionality will enable the most transaction-intensive firms to monitor and measure intraday market and counterparty risk timely and efficiently. Information is a core requirement for risk management. It shouldn’t be pulled like teeth.

Pushing transaction data and other critical information across the enterprise will enhance all areas of the business. It will enable real-time margin calculations so that prime brokers no longer have to decide between limiting their client’s trading and taking on unwanted risk. A real-time golden copy will no longer be as rare as a rainbow, and firms will finally be able to implement firm-wide intraday risk monitoring tools. Finally, prime brokers with streaming distributed architecture will be one step ahead of the regulators. As more time-sensitive regulations are implemented, “push” architecture might as well be legislated.

Areas of Interest
  • FinTech
USD $1,000.00
You are not logged in for access or purchasing of products.
Please login above or contact TABB Group Sales for subscriptions or additional products.

Related Reports

More from the Author(s)

US Institutional Equity Trading 2014: Bellwethers of the Buy Side
Date:
Jan 30 2014
Author(s):
Adam Sussman, Sayena Mostowfi, Valerie Bogard
Research Type:
Interview Based Study
Private Equity Reporting: Transforming Data into Intelligence
Date:
Jan 23 2014
Author(s):
Adam Sussman
Research Type:
Focus Note