Efficient risk control —challenges and techniques.ARQA's case studyVladimir Kurlyandchikdirector, business development

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FLASH CRASH

Introduction

$31.7 mln $100 mln $440 mln201220132013

May 2010

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Typical risk models

For equities:

counterparty limits

size of order

frequency of orders (in some cases)

For derivatives:

fixed amount of dollars (rubles, euros) per contract including options

For FX:

full prefunding for corporates

leverage 1:100 and higher for private investors

For bonds:

counterparty limits

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Client needs

Private investor: One account to trade any asset type

HFT client: Different types of arbitrage strategies

Institutional client: Effective risk management

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Gap reasons

Trading platform fragmentation — broker uses different platforms for different

asset types and exchanges

Risk control works as defense against fear

Risk management department is not a business but a support unit of sell-side

company

Latency reasons — people don’t want to affect latency by complex risk checks

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How to solve the problem?

Level 1 Changing the attitude to risk management

Level 2 Clear understanding of client groups (trading patterns and

requirements)

Level 3 Easily adapted risk management solution architecture

Level 4 Quality of implementation of risk management solution

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ARQA approach

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ARQA approach

In all asset types

In any currency

For different settlement dates

Flexible rules of calculation

Position

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ARQA approach

Different sources:

• trading venues (LSE, LSE derivatives, Turquoise, CME, Eurex,

EBS ICAP, WSE, MOEX)

• market data vendors (Thomson Reuters, SunGard, S&P Capital

IQ)

• FX liquidity pools

As fast as possible

Market Data

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ARQA approach

Full prefunding

Several margin trading models (one leverage for all assets, different discounts for

different assets, etc.)

Classical prop-trading limits (limit on short, long, net in a particular asset)

Netting opposite positions in correlated instruments (stock against single stock

futures, currency pair against corresponding futures, local stock against GDR)

SPAN-like methodology

RISQ models

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ARQA approach

Flat fee

Fixed amount of money per contract

Commission scale

Minimum and maximum commission amount

Pre-trade and post-trade calculating

Fees

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ARQA approach

Multi-currency Multi-currency support

Different scenarios

Business advantages for different client groups

Full risk control

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ARQA approach

RISQ terminalMain tasks

show real-time position from different angles

show real-time information about risk parameters for client position

what-if calculators

Automate some procedures margin calls

position termination

obligation rollover

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Infrastructure cases

Example 1: Servicing retail clients

Gateways

Replicator

End clients

RISQ/EMS server 1

RISQ/EMS server 2

End clients

Gateways

Exchanges

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Infrastructure cases

Example 2: Servicing HFT client

Black box

RISQ server

Transactions

RISQ filter module

Yes/No Exchange

Drop copy

Gateway

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Infrastructure cases

Example 2: Servicing HFT client

Black box

RISQ server

QUIK KillSwitch

Yes/No

Exchange

Gateway

Trigger exchange KillSwitch

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Infrastructure cases

Example 3: Extending existing infrastructure by advanced risk checks

End clients

Broker’s EMS

RISQ server

FIXadapter

FIXorder router

Exchange

Gateway

Transactions Drop copy

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Numbers

Capacity

Number of positions – 2 million

Number of orders – 30 million

Number of trades – 2 million

Latency

RISQ server, margining on stocks with discounts – 1 ms per

transaction

RISQ server portfolio margining – 2-3 ms per transaction

FIXPreTrade RISQ filter for Windows, any model – 100 mcs

FIXPreTrade RISQ filter for Linux (tcp off load), any model –

30 mcs

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Development and testing

Dedicated business analysis staff

Enrichment of internal expertize by internal and external seminars

Cooperation of inside development team and technical support

Delivery new versions for testing with special cases from developers and analysts

Specially developed environment to run automated tests

Investigations of new releases before go live dates