Time challenges - focusing on pre-trade risk checks

14 september 2011

International Securities Services: Q3 2011 • SIBOS TORONTO • SEPTEMBER 19 - 23

Up to now, post-trade risk checks have been the concern of market participants but in the light of recent events in the worldwide financial markets, more and more of them have come to the conclusion that integrating and implementing pre-trade risk solutions is also an absolute must.

Basically, pre-trade risk control solutions have been created to help market participants in anticipating risk and to provide additional insight into the implications of trading decisions ‘on the fly’. Thus, these solutions can be useful for both HFT-traders and for all other market participants in making trading decisions. Due to the historical peculiarities in the development of the Russian financial markets, pre-trade risk control is an embedded feature of the broker’s trading platforms and although these peculiarities refer mainly to the past, some of them remain relevant today. They are: usage of 100% pre-paid and pre-delivery exchange trading modes, retail clients’ orientation and strict market regulations.

ARQA Technologies, as a leading Russian IT developer in creating and developing compre-hensive solutions and technologies for working in financial markets, is directly involved in addressing these issues. The company has gained wide expertise in developing, building and implementing pre-trade risk control solutions and would like to share it with the European community. The largest part of pre-trade risk control functionality has been developed within the framework of the QUIK project. Being a profound front-office system meeting the brokers’ functionality requirements, the QUIK server can be set and used as a DMA platform with a built-in full-functional pre-trade risk control system. In particular, QUIK pre-trade risk control functionality supports such features as a cash trading (100% collateral); a margin trading (the dynamic evaluation of collateral); a portfolio margin for equities, futures and options; prop-trading limits (for long, short, net positions and the volume of operations); the unified account for T+O and T+N markets; netting for local equities and ADRs.

Starting from the QUIK platform itself, we then explore how the QUIK server risk calculation functionality can be used when direct access to the exchange trading systems is being organized. In order to provide direct access to both the RTS and MICEX Russian exchanges, on the basis of FIX protocol, FIX2Market solutions have been developed: FIX2MICEX for accessing MICEX and FIX2Plaza2 for accessing FORTS. These solutions can help to build low-latency trading infrastructures. In this case the QUIK server can be used as a risk server for calculating and monitoring risk pre-trade. ARQA Technologies has recently completed a joint project with MICEX for providing direct sponsored access to the MICEX trading system with pre-trade control of operations (MICEXPreTrade). In this solution the QUIK server can be used again as a risk server in online pre-trade mode, interacting with MICEXPreTrade module and not interrupting the flow of transactions. The company is ready to fulfill similar projects for other exchanges, using their proprietary protocols or FIX protocol.

Another solution from a QUIK line - FIXPre-Trade module - can be built in any FIX-infrastructure and, together with a QUIK server, provides online pre-trade risk control. This module provides the control of clients’ funds sufficiency at the time of sending and replacing orders. In this case the standard tools of automatic orders control can not be applied, because transactions are sent to the trading system directly from a broker’s program platform.

In addition to the above pre-trade control features, the QUIK server also provides online post-trade control of operations such as sending margin calls and sms alerts to the users, preparing and sending different types of reports, e.g. OTC-execution reports, etc. QUIK as a risk server allows evaluating and representing the integrated multi-venues broker’s position - it allows for carrying out more quick and precise risk calculations.

In addition to QUIK pre- and post-trade features, in the case of OTC trades or that of a group of companies mutually connected and trading at different marketplaces, a middle-office midQORT can be used. midQORT provides for accumulating an integrated position (including OTC operations), monitoring of risks at spot and derivatives markets, online control of limits on all groups of market participants (traders, counterparties or a certain account), getting financial results in connection with traders, industries and counterparties. QUIK and midQORT platforms are mutually integrated by default on an online platform.

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