For many financial trading firms, having a robust pre-trade risk system is likely to feel like one of those unpleasant but unavoidable costs of doing business. A fair amount of pain, not very much gain.
Consider the potential upside. Gaining any kind of competitive advantage from having an in-house pre-trade risk system can be extremely expensive. Anything that offers demonstrable benefits will typically involve FPGA technology and a high amount of cost in terms of development and ongoing operations.
Then consider the downside. Not having an adequate pre-trade risk system presents enormous problems – it essentially means a firm can’t do business.
In other words, pre-trade risk systems have a kind of inherent asymmetrical risk attached to them (there’s something ironic about that).
So for many firms the best option will be off-the-shelf, commoditised technology. But the problem with that is it guarantees that pre-trade risk is viewed purely as a cost, albeit a cost that at least is not prohibitive. It’s no wonder that the focus of so much regulation has been viewed unfavourably.
The API approach
Perhaps there’s a different way to consider the whole pre-trade risk component. Is there a way to deliver real business benefits to your firm and your customers without going down the high-cost, in-house route? What if you could help your clients make better use of their collateral without spending a fortune developing and maintaining a proprietary system?
The answer is an API-based pre-trade risk system that normalises information across markets, lets firms identify gross exposures and allows controls to take account in real time of any risk offsetting.
At any given moment, firms trading similar instruments on multiple venues are going to have risks that offset each other. If those can be netted out, a firm can minimise the amount of collateral it has to put up with various venues. This may be the case for commodities futures, interest rate products, foreign exchange instruments and a wide variety of other markets.
Having real-time risk systems connected via APIs can give clients the freedom to adjust their risk settings at any point in the day. If there are collateral savings to be made by identifying those areas where some risks offset each other, why not make them? The only thing required is the real-time information that allows a firm to make those decisions and the software that allows controls to be adjusted.
A good deal of pre-trade risk is often done via exchanges, so why would a firm want yet another pre-trade risk system? The fact is, different venues often calculate risk slightly differently. Any firm trading on multiple venues – and that will account for the vast majority of trading firms – will need to have a view of the whole trading book. Having a uniform system allows that kind of intelligent pre-trade risk management. That’s why data normalisation is so important. By providing what is essentially a new layer of information, it allows more sophisticated, cost-effective risk decision-making.
There are added benefits to having the right third-party software. At Vela we make sure our risk controls are compliant with all the major regulatory frameworks. And since the system is available via an API, it can be easily integrated with existing systems.
So yes, pre-trade risk controls may feel like a pain point. But that doesn’t mean they have to be one.