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What are the common risks checked at the time a trade is executed from the system ?

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 gitimaya padhi, AVP - HSBC Securities

 Sunday, August 18, 2013

What are the common risks checked at the time a trade is executed from the system ?


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5 comments on article "What are the common risks checked at the time a trade is executed from the system ?"

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 Daniel Boutrin, Fixed Income and Credit Quantitative & Qualitative Research at Banque de France

 Wednesday, August 21, 2013



0. AFTER you launch the execution

1. Network Line cut ( Worst case scenario )

2. TCP/IP parasite ( Delayed or Parasited, called Lag )

3. ECM error but checksum good ( Second worst case scenario ), your message has been jammed but doesn't result into an error -> wrong order message validated

4. Exchange response handler sending new format of ACK and you ignore it ( Third worst case scenario )

5. Delayed/parassited/Lag ACK reception

6. Crash DISK or DISK space full

7. DOS, DDRDOS, DRDOS ( computer hijacked by network packet , huge freeze )

8. Receiving a top priority security patch throughout windows update rebooting your PC

8. Linux/Windows ( receiving a highly security patch for java reinstalling JRE )

9. Cross ORDER infinite loop ( Crash Business Scenario , the only event that will end your doing )


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 Ted Graham, CEO

 Thursday, August 22, 2013



Common checks before an algo trading system sends a new order:

1) Maximum Order Size

2) Maximum Number of Active orders (maybe by the side of the new order)

3) Max exposure (again, maybe by side)


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 Valerii Salov, Director, Quant Risk Management at CME Group

 Thursday, August 22, 2013



This is a very reasonable list touching lower implementation level, where one could only argue if certain interprocesses and network communications are done with less reliable but faster UDP implementations or add poorly optimized Linux kernels as a factor. However, if the notion of a system in the question also includes an on-line systems for retail traders, then some of them have the so-called order verification features and alternative fast execution features without verification. This simply implies consideration of intermediaries (if any) between the system and exchange. Also, the question is formulated so that it does not exclude the manual order entry executed from a system. If so, then ordinary events related to human being factors (phone calls, pizza man at the door, natural needs) can become interruptive and create risks at most inappropriate moments.Also, even for a completely automated trading signals generation, forming, and execution of orders the bugs in the software triggering and forming the orders can become a risky factor. A quite recent example is from the last year August 1, 2012: Knight Capital loss of $460 million. Build the system from very tolerant software components (this is only easy to say, especially, because implementation of tolerance often is achieved at the price of speed).


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 gitimaya padhi, AVP - HSBC Securities

 Monday, August 26, 2013



Thanks for the replies guys. How about margin and exposure calculations for the out going trade. What part of OMS does it and how?


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 Valerii Salov, Director, Quant Risk Management at CME Group

 Tuesday, August 27, 2013



I am familiar with futures. They are highly regulated exchange traded contracts. Trading a contract requires an initial margin. This amount depends on a broker and significantly changes for intraday and traders keeping positions longer. For intraday traders opening and closing positions within a session the initial margin can be smaller. Once on a position, lower margin requirement such as maintenance margin or requirement is applied. Traditional view is that this is 75% of the initial margin. However, it depends on the volatility and reaches more than 90% for some contracts. Below I’ll give examples using the slash sign and all in U.S. dollars meaning initial/ maintenance margin. The maintenance margin must be computed as a sum on all open positions (contracts) of different types and independently on the buy or sell side of the position.

Buys and sells on futures are symmetrical in terms of commissions, exchange and clearing fees, and other trading rules including the margins. The same quantities are applied for going long or short or offsetting a position.

To give an idea, the typical margins for an intraday trader currently can be E-mini (ES) 962.50/875, Treasury Bonds (US/ZB) 3,300/3000, Corn (C/ZC) 1,012.50/750, Soybean (S/ZS) 2,025/1,500, Crude Oil (CL) 2,541/2,310, Gold (GC) 9,680/8,800. While a mini version of a contract can be available, it does not make sense to assume that margin ratios are the same as contract sizes. The full S&P 500 (SP) contract is five times larger than E-mini. However, the margins for it are $9,625/8,750. Clearly, that 5 * 962.50 = $4,812.50 < $9,625.00. The margin requirements change in time depending on a market, volatility, price level.

The initial margin for futures is significantly lower than the contract size expressed in U.S. dollars. For instance, the Corn December 2013 CZ13 can be quoted as 486.25. This means 4 dollars, 86 cents, and one quarter of a cent per bushel. The contract size is 5,000 bushels. This mean $1,012.50 needed to buy or sell one contract will control 5,000 * 4.8625 = $24312.50 value. If the price will drop one so-called tick 0.25 to 486.00, then a short position will gain (486.25 – 486.00) * $50.00 = $12.50. A long position will lose the same amount. Yesterday, the contract has gained +30.50 points. This is $1,525.00. Today it has lost 14.25 points. This is $712.50 per contract before commissions and clearing fees. For the price of ESU13 (E-mini September 2013) trading now on Globex the price at 17:29:24 was 1628. The size of the E-mini contract is $50 * 1,628.00 = $81,400.00. It needs just $962.50 to trade. Again, this is just margin. If the contract gains, then it stays with you. It is your money. From this point of view you do not pay anything to initiate a position except comissions and fees. For the latter contract they can be less than $10 for a retail trader or much less for an institution or large tarde size.

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TRADING FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS
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