QUIKest pre-trade solution – risk control for broker-dealers and management companies

About a year ago, ARQA Technologies started to introduce the broad possibilities of pre-trade checks developed within its trading platform QUIK to clients abroad. Numerous Russian and CIS clients, as well as Russian subsidiaries of international houses, have been using the tools of risk control developed for the QUIK platform for quite some time now.

Functional description – and some history

QUIK is a risk-control solution that works across currencies, instruments and jurisdictions. It keeps multi-level positions in real time. The versatile system uses a variety of approaches: it may be customised to suit particular needs.

QUIK’s development reflects the history of the Russian financial markets. Since the mid-1990s, trading in the emerging Russian marketd demanded that brokers be particularly prudent. Brokers had to make sure that clients had deposited required resources before trading. These resources had to be watched closely, so that negative account balances would be avoided. Because they are relatively new, the Russian markets have only ever used electronic trading only: position-keeping has always taken place inside trading platforms. Another key feature of trading in Russia has been strict market regulation and the need for compliance control. QUIK’s development has reflected these issues.

For example, QUIK handles margin trading with a dynamic evaluation of collateral and preset credit parameters. It allows for extension of loans, within fixed restrictions for cash instruments and securities, Alternatively, it marks the client’s portfolio to market and makes sure that margins remain within acceptable parameters.

Another tool is a modified SPAN-approach for dynamic mark-to-market portfolio evaluation. A maximum probable change of portfolio is calculated, on the basis of the correlations of the returns from its various components.

For trading in spot and derivatives markets, QUIK is able to consider various settlement dates within one unified cash account.

All the tools may be used individually or collectively. . Combinations of risk filters may be set for all clients, for groups of clients or on a case-by-case basis.

Of course all risk calculations rely on timely market data which comes directly to the system. QUIK is fed data from trading venues where it has direct access. These include MICEX-RTS stock and currency markets, FORTS, RTS Standard, WSE, UX, MOSENEX, SPIMEX. Data comes from foreign exchanges via SunGard Global Network.

Fast pre-trade control

Our software developers saw that their solutions could be used for fast pre-trade control. The idea was born during an international conference, where one of the discussions was about High Frequency Trading and the fast pre-trade checks it required. The key question for our people was: why not employ a separate module to make a fairly straightforward check? The sole decision would be to let through or block an order on the basis of previously processed data that had been supplied automatically by the QUIK server. The module therefore ensures that the client’s account has sufficient resources before orders are submitted (or replaced). The module wastes no time because it is not engaged in keeping the client’s position. Nor does it freeze money that is needed for outstanding trade orders. At the crucial moment, the necessary parameters of the client’s position (including outstanding orders) have already been computed by the separate server. All previously executed trades have been accounted for and relevant market parameters have been adjusted by QUIK. Whenever required, the assessment may also include portfolio analyses. This scheme may, therefore, be described as a pre-trade check based on post-trade data.

This may well be an alternative approach to the two commonly used methods of pre-trade risk control. These methods are a very fast approach of using preset limits (“fat fingers”), and a complex analysis and statistical modelling process that consumes much more time. Indeed, the QUIK-based system combines the best of the two approaches: it provides both meticulous assessment of current positions including portfolio analysis models and a simple but sufficient fast pre-trade check of orders.

How it works

New orders are forwarded to a trading venue as long as the client has a positive balance in his/her account. Meanwhile, the assessment of his position is updated: his/her outstanding orders are accounted for, because real time data from that trading venue and other relevant market data are continuously fed into the QUIK server from the trading system.

The module of pre-trade control intercepts an order message inside the technological infrastructure of a broker handling the transaction. If the transaction is allowed by the module, it is forwarded for execution to a trading venue. If not, it is rejected and the trader is promptly informed with appropriate explanations.

This approach may be recommended when pre-trade control is applied to low-latency infrastructures or used for HFT clients. It may also be used to manage risks in external systems where direct integration with a principal risk server is not possible.

The checks by the separate module may involve more than just validation of a transaction at a moment in time. Additional checks may also include restricted securities lists or limits on volumes. Settings may be adjusted to stop an order for an account, as a precautionary measure, when there is still some reserve of buying power in the account. Another setting of the module may limit a number of orders per second which are allowed to pass through it. Such adjustments guarantee sufficient protection without noticeable slowdown of transaction flow.

Some applications

Practical applications of QUIK’s pre-trade control mechanism have been extensively tested by a large number of ARQA clients in situations of direct sponsored access.

FIX2Market is a low latency solution that lets a broker make a direct connection between the client’s trading platforms and the exchange.

The FIX2Market family of interfaces developed by ARQA Technologies includes FIX2CETS (for Currency market MICEX-RTS), FIX2MICEX (for Stock market MICEX-RTS) and FIX2Plaza2 (for FORTS and RTS Standard).

A very popular solution is FIXPreTrade, the module which is built into the broker’s technological infrastructure based on FIX protocol. It may be regarded as a FIX proxy-service integrated into the broker’s infrastructure.

The MICEXPreTrade module is a result of a joint project with the exchange and represents a solution for trading at MICEX-RTS. This module is integrated with MICEX Bridge (incorporated within the exchange’s own protocol).

The challenge of vast possibilities of pre-trade control developed in QUIK, and the necessity to use them for low latency infrastructures, is solved by using a separate module to control current order flow. The fast pre-trade solution relies on intricate risk control assessment calculations, which are performed simultaneously by a powerful risk server. The order check itself adds a fractional delay to order placement.

 Download brochure...