Continuing their tradition of market leadership, the Futures Industry Association (FIA) recently updated the white paper “Best Practices for Automated Trading Risk Control System Safeguards.” The white paper covers everything from pre-trade controls to post-trade analysis as they relate to automated trading and the FIA aptly points out that ALL market participants – exchanges, trading firms, brokers, clearing firms, and third-party service providers – have a role to play in ensuring that the highest standards are adopted and followed.

As a provider of a global trade aggregation platform, BornTec plays a key role in helping to address and manage some of the risks associated with automated trading. After a number of conversations with our customers about the role of third-party solutions like BornTec as it relates to the content of the white paper, three comments that came up time and again were “early warnings,” “adding another layer,” and “a better way.” These phrases describe how firms like BornTec are uniquely positioned to provide solutions that span the full universe of operational risk as it relates to automated trading and beyond.

Automated Trading Solutions: The Customer Perspective

In the complex web of interrelationships in the derivatives trading industry, third-party vendors are well positioned to deliver solutions that no other single industry participant can provide on their own. Our customers tell us that these solutions fall broadly into one of three categories: early warnings, adding another layer, and a better way. Here are examples of all three:

Early warnings

Every market participant knows that it is better to anticipate or head off an issue before it reaches a critical stage and a software vendor like BornTec is often ideally positioned to do just that. A case in point is with exchange message programs and message throttles, sections 3.3 and 3.4 respectively in the white paper. In both cases, a software solution is an excellent tool for monitoring activity to detect when message rates are climbing or limits are close to being breached, potentially identifying an issue before it becomes a problem.

Adding another layer

Markets are complex, with many moving parts, and adding additional views and checks can be a big help in unpacking complexity and monitoring activity. Two examples where a software provider can assist with automated trading are self match prevention and maximum order size. In the first case, software can provide monitoring across all execution platforms and in the latter it provides a view into limits that are in place across all systems. In both cases, the software solution offers a comprehensive view that no single provider, participant, or solution can deliver.

A better way

In some cases, a software solution is the best option, even when there are alternatives offered by other market participants.

For example, the white paper suggests that repeated automated execution limits should be set at the trader level but not with the broker or exchange. While there are valid reasons for doing so, the broker as well as exchanges have a role to play in monitoring disruptive activity and the real-time market surveillance functionality in CrossCheck can deliver in this regard without disrupting normal trading activity.

Another example applies to intraday position limits. While setting a maximum intraday position may work well at the trader level, doing so at the broker or exchange is both impractical and imprudent. However, in CrossCheck it is possible to simultaneously monitor intraday position limits across all systems, including ISVs and DMA, giving the only truly comprehensive picture of these limits.

Working Together Toward Market Excellence

The futures industry has always benefited from an approach to regulation and market management that is principles-based and the FIA continues that tradition with the AT white paper. While we agree with the FIA that the best practices outlined are the right direction for the industry, there are better alternatives in some cases and participants should first focus on a foundational element: ensuring that order and transaction flow data is captured in one place that is both reliable and accessible. Taking this approach will simplify the lift of implementing these practices and adapting to future controls.

With the FIA taking the lead, the futures and derivatives industry has a steward who continues to drive healthy market conditions that will benefit all participants. And while it may seem that many of the issues in the AT white paper have been debated for a quarter of a century, the truth is that the nature of market best practices will always be informed by what came before and that much is to be gained by taking a holistic and comprehensive view. BornTec looks forward to being a partner that contributes to the continued health and growth of the industry.