A new pre-trade risk management tool for listed derivatives trading will shift risk checking to the exchange level and reduce latency for market participants, according to Nasdaq OMX Nordic.
The pre-trade risk management tool is currently being tested by participating members on Nasdaq OMX Nordic’s derivatives markets and will go live early in June. It lets member firms monitor their own order flow and that of their clients to avoid erroneous trades.
“The main benefit of these tools will be the reduced latency our members and their clients can achieve by concentrating pre-trade checks at exchange level,” Lauri Rosendahl, president of NASDAQ OMX Helsinki, and head of equities and derivatives, transaction services Nordic, at Nasdaq OMX told theTRADEnews.com.
“Having too many layers of risk checks can obviously lead to latency issues, but initial testing of these tools has shown members are keen to use them at the exchange level, rather than their internal systems,” he adds.
The new service includes different price and order size checks and daily accumulated quantity checks as well as per second limits and price order limits.
It has adapted from a system on Nasdaq OMX Nordic’s equities markets using technology from FTEN – a risk management software provider acquired by Nasdaq OMX in 2010 – and is compliant with pre-trade risk guidelines established by the European Securities and Markets Authority.
Rosendahl said the tool would be particularly beneficial to members offering direct market access (DMA).
“Listed derivatives trading needs more advanced risk checks compared with cash equities markets. Functions like mass cancellation of open orders and emergency action tools, such as kill switches, for members handling DMA flow are vital to reduce the impact of volatile trading scenarios,” Rosendahl said.
Increasing levels of trading automation require exchanges to take a greater role in dealing with erroneous trades, he added.
“We’ve co-developed the pre-trade risk management tools closely with our members to meet their needs and we think this is part of what a primary exchange should offer to facilitate fair and orderly trading.”