Published On: Tue, Oct 15th, 2013

How Do You Prepare for Significant Market Movements Triggered by a Trading Error?

Hani Shalabi, Head of AES, Asia Pacific Credit Suisse

Hani Shalabi, Head of AES, Asia Pacific Credit Suisse

“Trading errors are unpredictable so it makes it hard to prepare for every scenario. Therefore it’s important to have a few safety mechanisms IN place that act as catch-alls. One such catch-all is the basic circuit breaker. If an order moves a certain price percentage since arrival, pause it for a sanity check. If a fat finger error drags the whole market, at least it’s assured you won’t follow more than a certain percent. Even more granular is the concept of fair value which is the AVERAGE trailing short term price of a stock. If a dynamic price limit IS imposed, which is a small percentage offset from fair value, it is guaranteeD that you won’t trade into spikes. All AES orders have built-in spike avoidance.”
Kesara Manchusree TFEX Managing Director

Kesara Manchusree TFEX Managing Director

“ Achieving low latency has become increasingly more demanding for brokers and as a derivatives exchanges it is necessary to put certain preventive measures against unintended orders in today’s fast pace environment. TFEX separates its API between man-made order and machine order which helps monitor and enhances risk management. Pre-trade risk control such as maximum order size and price band have been implemented on the exchange in order to prevent abrupt movement in trading prices and will give sufficient time for the market to cool down. Furthermore, there are 2 levels of price band that are imposed on most of the product traded on TFEX. Nonetheless, if and when such trading error occurs we do have a policy to deal with such event. We believe that the best practice is to have a robust preventive measure.”
Hongsong Chou CEO Charles River Advisors

Hongsong Chou CEO Charles River Advisors

“When such error happens, the first question that I ask will be: is it real, or, shall I follow? In many trading algorithms that I have helped develop, the basic reaction is: be very careful as it may be not real. Many trading algorithms have a protection band which, if price and/or volume indicators are within such band, treat such movements as reverting in the near future. If such movement goes outside of the band over a critical period of time, the algorithms may start to follow. Risk control is key here in the heat of all such market reactions.”
Seunghyun Cho Chairman One Asia Investment Partners

Seunghyun Cho Chairman One Asia Investment Partners

“When someone’s trading error triggers a significant market movement, it becomes a very good opportunity to take advantage of and to make a very good profit. This sort of volatility is an interesting play for traders like me as fat tail risk can be managed at the strategy level. But my biggest concern is the counterparty risk. When the prime broker fails to deal with that volatility, it will affect my funds adversely. Thus, we have been spending a lot to build a risk management system so as to have an insurance on that risk.”

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