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Progress Software
09-13-2008 09:21 PM
I'm currently looking out of my hotel room window at preparations for the upcoming Singapore F1 Grand Prix - a road race under lights which - if the level of preparation is anything to go by - will be a truly awesome spectacle. I only wish I were staying here long enough to see it ...

But enough titillation for the petrolheads out there; there is a (CEP related) point here. In my previous post I mentioned a presentation I gave at last week's Derivatives World Asia event entitled "Real-time Risk Management and Compliance: Don't strangle the Front Office!". The sub-title gives away the thrust of the argument - the increasing need for real-time risk controls without adding unacceptable milliseconds in pre-trade checks to the orders send by Algo and High-Frequency traders.

This is a very topical subject for CEP right now. Our friends at Coral8 and Aleri have both recently discussed this use case. Here at Apama, our upcoming and much extended Algorithmic Trading Accelerator (watch this space!) includes a comprehensive Risk "Firewall" for real-time breach detection, alerting and prevention. By considering each trade instruction (order placement, amendment, cancel etc) as an Event, the requirements of real-time risk and market abuse detection would seem ideal for a CEP solution:
Not to mention the need for ultra-low latency decision making - don't strangle the front office!

aside: There is something of an irony here. CEP in its current incarnation found its initial home in the Front-Office for Algo Trading. Now the same technology is being deployed in the middle-office Compliance Unit (the "Profit Prevention Department" as some of my trader friends refer to it) to directly combat the risks from the Algos ... a case of fighting fire with fire?

Before we get carried away here though, CEP - or any technology - can never be a panacea for real-time risk management. In researching my talk I reviewed a number of case studies of recent incidents where risk management and compliance seems to have failed - none more so than the infamous case from earlier this year at SocGen, where one trader's actions brought about a 5 billion Euro loss on the Eurex Futures Market. In this case, however, existing controls did their job (though not in real-time of course) - prior to the approx 50 billion Euro position being "discovered", 75 separate warning were issued including:
and more. Such issues could easily be translated into risk rules and embedded in a real-time firewall, but the failings here were not those of detection - they were principally human failings in taking appropriate subsequent action.

We can of course seek to address such failings e.g. by adding "trip switches" to our real-time CEP firewalls which require reset by senior Compliance officers but we'll never solve the problem entirely. In the SocGen case, the trader explicitly circumvented existing risk controls by logging fictitious trades using knowledge of the risk rules that were being applied - risk firewalls will only ever be as good as the rules they manage and the data they get; compliance will always, to some extent, be playing "catch-up".

But when we're talking about risk, we are talking mitigation, not necessarily guarantees. To get back to the opening topic of this post, traders are like racing drivers; we need to give them the tools to go as fast as possible but tools which, when they crash - which they will from time to time - allow them to get out of the car and walk away with nothing more than a few bruises.

That is where the (CEP-powered) real-time risk firewall comes in.





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