FIA issues order handling recommendations for executing brokers

Source: Futures Industry Association

The Futures Industry Association today issued order handling risk management recommendations for executing brokers.

The report documents both current practice and emerging technologies in order to respond to regulatory concerns about algorithmic trading. The recommendations were developed by experts from executing firms and represent the latest in a series of recommendations developed by FIA members for trading firms, brokers and exchanges.

"The executing broker has an important role to play in monitoring and controlling market access," said FIA President John Damgard. "The recommendations are designed to clearly differentiate the role of the execution-only broker and set an industry standard for handling orders generated by automated execution tools."

The document distinguishes the role of the executing broker from the role of the full-service broker. Since an execution-only broker is not in a position to evaluate the creditworthiness of the client, it focuses primarily on controls that prevent unintended trading, while the full-service broker sets and manages credit limits.

The recommendations cover algorithms provided to clients by the executing broker as well as algorithms developed by the client or a third party and executed using the broker's trading platform. The first set of recommendations covers pre-trade controls for the executing broker to implement for its trading platform such as order size limits, position limits, cancel-on-disconnect and kill switch. These controls are designed to reduce the risk of inadvertent order entry, unintentional triggering of a client algorithm, or an improperly configured client algorithm.

The second set of recommendations covers controls that should be used with automated execution tools provided to clients. These recommendations cover three areas where controls should be implemented: controls before the execution tool, within the execution tool, and after the execution tool. For example, order size limits should be established before the execution tool. Controls embedded in the execution tool include market impact checks, dynamic price checks and market halt parameters. "Last-look" reasonability checks should be implemented after the execution tool.

The document also includes recommendations for client post-trade reconciliation, validation of client access and oversight of client activity, client conformance testing, physical and electronic security and business continuity.

Today the FIA Principal Traders Group and the FIA European Principal Traders Association issued a separate paper with a set of recommendations related to software development and change management at trading firms. Both papers are posted on the FIA website and are part of a series of reports and recommendations aimed at improving risk management practices in the exchange-traded markets, including "Recommendations for Risk Controls for Trading Firms" (November 2010) and "Market Access Risk Management Recommendations" (April 2010)

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