Algo Risk Management Trading

[Sander1987]

Hi all,

Is any trader here familiair with this special algoritm some banks and institutions use? An algo that manages the risk of all traders trading for that particular firm.

Have you heard of this RM tool?

Cheers!

 

[wave]

Near real-time reconciliation—ETSs should have functionality to accept drop-copies from exchanges and clearing firms. Drop copies are duplicate copies of orders that allow a firm to compare the exchange or clearing firm view of trades and positions with the systems’ internal view. This helps to assure that all systems are performing as expected and maintaining accurate and consistent views of trades and positions. The drop-copy data may also be used by risk managers to view their firm’s risk exposure independently of the trading system.

 

[Sander1987]

Near real-time reconciliation—ETSs should have functionality to accept drop-copies from exchanges and clearing firms. Drop copies are duplicate copies of orders that allow a firm to compare the exchange or clearing firm view of trades and positions with the systems’ internal view. This helps to assure that all systems are performing as expected and maintaining accurate and consistent views of trades and positions. The drop-copy data may also be used by risk managers to view their firm’s risk exposure independently of the trading system.

Thanks for this. I find this very interesting. The tech behind it... and how it works in practice.

I have read that some brokers/institutions offer risk free (downside risk) trading because of such an algorithm (that they have in place to protect their downside and manage the overal risk. But this is common practice in larger firms?

 

[2rosy]

Nothing special. Do you think a brokerage bank or exchange just lets firms place orders without checking

 

[Ethilaloth]

There is no universal risk management system, as market conditions and structure of all banks differ. A separate program should be developed for each institution in accordance with its goals and problems. Large banks with a large number of divisions need a more developed and well-thought-out risk management system. But principles and functions of risk management system are the same for all institutions.
In order for the risk management system to function properly, it should involve all structural units of the company, from management to operational. The functions of each subdivision should be fixed, and the reasons for conflicts of interest should be minimized.
Many methods and tools have been developed to reduce the probability of bank losses. Their effectiveness depends on the ability to choose appropriate, use and adjust for each specific situation. Taking into account specifics of bank risks, methods are most often used:
-dispersion - the possible damage is spread among the members of the institution so that the losses for each of them are less significant;
-limiting operations - setting limits on the amount of risk tolerance;
-diversification - using assets to profit from different sources;
-insurance - transfer of liability for risk compensation to the insurance company from the contributions fund;
-hedging - transfer of risk to participants of financial risk through transactions.