FIX Protocol Ltd (FPL), the non-profit, industry standards organisation at the heart of the global electronic trading community, today published updated recommended pre-trade and intra-day risk control guidelines.
These recommendations have been designed to provide brokers with practical guidelines that can be implemented into their electronic trading platforms to further support efforts to increase market stability. They aim to help firms more effectively manage risk in an environment where trading strategies are becoming increasingly complex and prevent situations where the parties to a trade, or the wider market could be adversely impacted by flawed electronic orders.
The guidelines were originally produced in spring 2011 by FPL's Americas Risk Management Working Group, and have since been reviewed and implemented by many sell-side firms. The guidelines were designed to encourage institutional market participants to incorporate a standardised, core set of recommended risk management best practices for electronic equity trades delivered directly to an algorithmic trading product, or to a direct to market (DMA) trading destination. In response to market requests to further expand the guidelines, working with representatives from the global FPL community, they have now been enhanced to provide:
• Support beyond equities, with the guidelines now including recommended risk controls for futures and options
• Further information about how risk can be more effectively managed when trading algorithmic and DMA orders
• Direction on how paused orders can be more effectively controlled
• Details about exchange mandated risk checks and recommended best practices explaining how brokers can work more closely with trading venues to mitigate risk
Commenting on the guidelines, Timothy Furey, Co-Chair FPL Americas Risk Management Working Group, Managing Director, Goldman Sachs said, "As electronic trading products continue to evolve, the use of effective pre-trade risk controls has become an increasingly essential element of the strategy used by sell-side broker dealers to protect the interests of their clients and h help to maintain the integrity of the markets. These guidelines provide electronic market participants with a set of suggested risk controls that will help reduce the chance of inadvertent errors and unintended impact on the market."
Commenting on the enhanced guidelines, Neal Goldstein, Co-Chair FPL Americas Risk Working Group, Global Head of Electronic Connectivity Solutions, J.P. Morgan added, "As global regulators work to add controls to protect our markets and increase investor confidence, these guidelines are a great example of FPL taking a leadership role within the industry to help achieve these goals. This FPL initiative has brought together thought leaders from across the electronic trading industry and produced a set of recommendations that this working group believes will ultimately serve to improve electronic trading workflows and reduce the potential for errors."
John Goeller, Co-Chair FPL Americas Regional Committee, Director, Portfolio and Automated Trading, BofA Merrill Lynch said: "One of the key strengths of these guidelines is that they include a matrix that provides a clear guide of recommended controls that could be applied to help avoid unnecessary risk in DMA, algorithmic and low latency trading. This offers tremendous benefit to the trading community."