FIX Protocol Limited (FPL), the messaging standards body, has released its latest set of guidelines for pre-trade risk controls, which it says are designed to complement existing regulations.
The guidelines, which were originally designed in spring 2011 by FPL’s Americas Risk Management Working Group, cover pre-trade and intra-day risk control guidelines that brokers can implement into their electronic trading platforms to help boost market stability.
The latest version includes recommendations for risk controls for futures and options, further information for managing the risks associated with algorithmic and DMA orders, information on how to control paused orders and details on exchange mandated risk checks and best practice on how brokers should work with trading venues.
John Goeller, co-chair of the FPL Americas regional committee, and managing director, global execution services at Bank of America Merrill Lynch, said the new guidelines aim to standardise workflows for different types of orders before they reach the market.
“Industry participants can use the document to explain why we need risk controls and the functionality they should offer,” Goeller told theTRADEnews.com. “It’s all about knowing who the client is and what their appropriate limits should be. Workflows can also differ depending on the type of order, i.e. algorithmic orders that work over a set time horizon compared to a DMA order that goes straight to market.”
He added that large investment banks that operate a multitude of electronic trading and routing platforms could use the guidelines as a starting point to standardise risk checks across the services they offer.
“There are also guidelines on exchange provided risk controls and how these should work in conjunction with the controls offered by brokers,” he said.
The focus on pre-trade risk controls has intensified since the flash crash on 6 May 2010 when US markets plummeted in value before quickly rebounding because of an algorithmic order that was sent to the market without appropriate limits. Since then the Securities and Exchange Commission has banned firms from trading on markets without pre-trade risk controls. European regulators also plan to shore up the risks related to electronic trading in MiFID II, while securities watchdog the European Securities and Markets Authority released its own guidelines for automated trading at the beginning of last month.