NYSE Slaps Fat Fingers With Checkpoint For Filtering Orders
August 3, 2009
With the rise of high-frequency trading come thousands of orders a second and 13 million or more a day--from a single firm. With such unprecedented use of microseconds--where scenarios are calculated, strategies determined and orders made all in less than the blink of an eye--never before has risk management been more crucial to the health of the marketplace.
One single error--an accidental push of a button or click of a mouse or faulty algorithm--could easily wreak havoc.
To help protect customers against such "fat fingering" mishaps, the commercial technology arm of NYSE Euronext plans to launch a risk filter by the start of October that helps a broker monitor and supervise the trading activity of market participants it sponsors.
A risk filter such as this is needed to guard investment banks such as Morgan Stanley, Goldman Sachs and others from the risks of giving their clients direct access to an exchange, when they sponsoring their connections. NYSE Technologies' plan to create such a risk filter was disclosed in a filing made with the Securities and Exchange Commission in December and approved in February.
The filter, dubbed the Risk Management Gateway (RMG), is slated for release to all users within the next 30 to 60 days. Upon launch, the user fee will be set at $3,000 per month for the first connection and $1,000 per month for each additional connection to the RMG. Currently, NYSE Technologies is recruiting a second round of beta customers, but has not identified any of the test clients to date.
"The motivation behind building out the RMG is to effectively provide an exchange facility service that allows our customers, the sell side firms, to connect to their customers in a way that fulfills anticipated regulatory requirements and agrees with what we think is a safe and orderly way to operate that function in the marketplace," said Murray White, senior vice president of NYSE Technologies.
"The RMG gives you additional automated risk management layers for your sponsored access clients," said Keith Bliss, senior vice president at institutional brokerage and NYSE member Cuttone & Co., which offers sponsored access into the exchange. Because Cuttone's mnemonic-a unique identifier for each member firm tagged on the audit trail of all trades-is on those transactions, "we technically hold the risk for anything that would go wrong."
Cuttone conducts an inordinate amount of vetting for any client the firm gives sponsored access, he notes. "We're comfortable with our own process and procedures, but the risk management software will be a nice addition to layer into those protocols,'' Bliss said.
If the order is consistent with the order size, credit limit and other parameters set by the sponsoring member organization such as Cuttone and any other stock exchange member who can sponsor access into the exchange, the order would be permitted by the gateway to continue to the exchange's trading systems. If not, the gateway would return the order to the sponsored participant. The gateway would only interact with a Sponsored Participant's order prior to its receipt by the exchange's trading system.
Magnified Impact
Once the filter is launched, NYSE Euronext will decommission the ADOT, Anonymous Designated Order Turnaround application--a previous generation of a similar, very "limited use" alternative gateway--that a few member firms were previously using, according to White.
