Regulators across the globe are beginning to require that risk limits be under the direct and exclusive control of the broker, clearer or exchange. Buy-sides however also need to see and control risk in accordance with their individual business models, within the confines set by their sell-side provider. From specifically regulated environments such as Direct Electronic Access to more general cases of direct market access worldwide, all parties to a trade have a role in mitigating the pre-trade risks of all forms of electronic trading to ensure their own survival and protect the orderly functioning of their markets.
How it Fits in the Direct Market Access Platform
The Pre-Trade Risk Controls are embedded in the order execution gateway. The broker’s risk management system connects to the pre-trade risk controls via the Risk API. The system also includes a control screen where brokers can manually set risk constraints. Though limits are determined externally in risk management systems, the application of the limits is in-line, within the gateway. The system applies real-time, pre-trade risk constraints to orders based on the buy-side source, and sell-side managed risk limits; and as such helps those firms comply with exchange rules and regulatory mandates.
In addition to the broker limits, the system allows buy-sides to set more granular risk constraints within the limits set by the broker.
The Object Trading Pre-Trade Risk Controls (FrontRisk) are embedded in the order execution gateway (FrontTrade). FrontRisk provides a normalised view of positions and exposures. It tracks individual and gross positions and applies real-time risk constraints set by external risk management systems.
The comprehensive Risk API facilitates easy integration with any pre- or post-trade risk management platform, enabling the order execution gateway to automatically apply the constraints set by that platform.
This arrangement provides the sell-side broker with its mandated “direct and exclusive control” over risk limits, across all clients. However, the buy-side client can also view, access and set additional constraints within the limits permitted by its sell-side clearing providers.
The system is available as a Software Only deployment, or as part of a Fully Managed DMA Service deployment. See our deployment options for more information.
Capabilities the Pre-Trade Risk Controls Provide
- Write to our risk API once and manage execution risk across all major derivatives and cash equity markets over the same normalised risk interface – making it simpler to:
- Consistently apply pre-trade risk controls regardless of venue, minimising re-work for different markets.
- Simplify the designing and porting of trading strategies with normalised transaction data across all counterparties and exchanges.
- Minimise re-coding for middle and back-office functions by taking drop copy information across markets over the same risk interface.
- Gain a comprehensive view of risk exposure with one place to manage all execution risk.
- Get a comprehensive view of positions AND exposures across markets and locations.
- Track individual and gross positions.
- Integrate with any trading screen or risk management application.
- Govern exposure across multiple trading programs leading to efficient risk allocation for both broker and buy-side.
- Control risk in compliance with all global regulatory requirements.
- Comply with regulations across global markets, providing a consistent application of risk constraints across venues.
- Broker has access to all the risk controls they need to manage their risk in one place.
- Buy-side gets the ability to establish more granular risk constraints within the limits set by the broker.
- Manage ALL pre-trade risk constraints in one place
- Provides the sell-side broker with its mandated “direct and exclusive control” over risk limits, across all clients. However, the buy-side client can also view, access and set additional constraints within the limits permitted by its sell-side clearing providers.
- Interface can easily integrate with any pre- or post-trade risk management platform and automatically apply real-time risk constraints set by those external risk management systems. Alternatively, brokers and buy-sides can access a graphical user interface to manually manage risk constraints.
- Apply real-time, in-line risk constraints as orders pass through the Order Execution Gateway.
- Easily control risk from anywhere, with any counterparty, configured to your business needs, and get a single version of the truth. The pre-trade risk controls provide an extensible enforcement framework including user authorisation, risk profiles and configurable constraints. These are described in more detail in the technical features below.
- Reduce time-to-market and total cost of ownership (TCO) associated with obtaining, maintaining and (for sell sides – providing) a consistent risk control infrastructure.
- Optimise the buy-side/sell-side relationship and increase flexibility.
- Sell-Sides are able to offer clients a consistent approach to pre-trade risk constraints across markets and geographies, supporting order flow from multiple clients to multiple execution venues using a single interface.
- Buy-Sides gain flexibility in choosing broker relationships based on business needs. Buy-sides can use multiple brokers over the same market access and risk infrastructure, keeping the application of risk constraints consistent across brokers and venues.
The Pre-Trade Risk Controls system is the central point for independent monitoring of positions and controlling risk. The interface allows users to:
- View – View and manage order flow
- Review – Intuitive dashboard for oversight of Risk consumption and real-time Alerts
- Protect – Erroneous orders, Quantity, Positions, Exposure, Blacklists
- Control – Extendable Hierarchy and Profiles
- Kill – Global, and sub global trading Kill switches
Risk Enforcement Framework
The Pre-Trade Risk Controls provide an extensible enforcement framework including:
- Authorisation – controls access and privileges
- Profiles – levels at which risk constraints can be applied
- Constraints – limits that are applied to a profile
Pre-Trade Risk Constraint Types:
Constraints can be applied at both the product and instrument level and on instrument types.
- Max Order Quantity: Limits the maximum quantity of a new order request and prevents working orders being modified to a greater quantity than the limit set.
- Blacklisted: Restricts access to different profile levels. This includes parameters such as products, options or strategy types.
- Price Reasonability: Restricts erroneous orders reaching the market by defined price boundaries.
- Max Total Filled: Orders are rejected when the total number of filled lots in a trading day is reached or breached.
- Net Position: Once the Net Position limit is met or breached, this constraint prevents new orders and order modifications which can potentially increase the Net Position.
- Net Exposure: A constraint which rejects new orders and order modifies that, if filled, would create a position larger than the defined amount. Positions and working orders are evaluated.
- Spreads: Spreads can be controlled by setting limits by expiry or other settings.
- Max Order Value: Constrains the maximum value of an order, basis its product’s configured margin value and the order quantity.
- Max Transaction Rate: Constrains the number of new-, modify-, and cancel-order transactions that can be placed through a profile within a rolling one minute window.
The Pre-Trade Risk Controls are embedded in the order execution gateway, which is available as:
- a Software Only deployment, or
- as part of a Fully Managed DMA Service deployment – you write to our API or FIX interface once, and we do all the rest.
See our deployment options for more information.
Services Included in the Fully Managed Deployment Options
Write to our API once, and we do the rest.
- Client Services include onboarding, a sandpit environment for testing, the ability to connect any trading system, and the ability to choose from 60+ exchanges and work with a wide range of conformed brokers. Read more about our Client Services.
- Infrastructure Services include hosting, cross connects, hardware, network and bandwidth management, monitoring, and updating to conform to exchange upgrades. Read more about our Infrastructure Services.
Learn more about the Direct Market Access Platform
Get information about our Order Execution Gateway and our Market Data Feed Handler
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Read about our conformed brokers programme
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