What is your general opinion on the FPL Guidelines?
We were very pleased to see them, as clearly any initiative coming from an organisation with a lot of credibility looking to promote best practices in the market place must be a good thing, and of course also from a selfish point of view as a software vendor: those best practices need some good software in order to support them
This particular area of pre-trade risk management is one where we’ve been active for a long time; we feel we have some particular advantages with our well developed products. We were very keen when the first issue of the FPL guidelines was published in 2011 to use them as a benchmark to check whether we were covering the major items that were being brought to light by FPL as best practice recommendations.
So we went through that as an exercise and we have done the same thing again on the updated 2012, guidelines, which provide more detail on derivatives-specific requirements.
So the value is that it gives you a benchmark for comparison?
Yes, it gives a basis for discussions with individual clients when looking at how the product line should be moved forward, because different points will have different importance to different clients based on the nature of their business. There are some guidelines that 99% of people were already following, at the level of fat finger checks etc. At the other extreme you’ve got some points in the guidelines which I would say very few people are doing and even fewer are doing them on a pre-trade basis, as it might be impractical to do so. Others are of a more specialist nature where it would depend on the nature of the business as to whether they are relevant or a priority. So there is quite a variety in there from the absolute vanilla to the quite exotic.
Is there anything you think the FPL guidelines missed or could have done better as the organisation always welcomes industry feedback, or is there a deliberate intent to leave gaps for others to fill?
They appear to be pretty comprehensive. They are fairly prescriptive; in the second edition of the guidelines you can almost take it as your outline product specification and start writing the code; they don’t leave much to the imagination, which is a good thing. This isn’t an area where one should mess around with vague discussions.
There are a couple of minor areas that our products cover that the FPL guidelines do not. One is in strategy trading, as strategies are not easy to pre-validate. Normally buy and sell legs cover each other, so validation of the whole strategy has to be done: if you validate each leg independently you will be too restrictive. We cover this, but FPL doesn’t mention it. It’s important in many derivatives trading contexts, and for equity pairs trading.
Second is the area of alerts, where FPL doesn’t talk about their use. Before getting to the point where you have to block an order, it is often useful to alert the trader that he has reached a certain percentage of a limit: we provide this option.
You talk about the different variations between companies on their pre- and intra-day trade and firms trading naked, why do you think those variations are still prevalent and are they diminishing?
Well once again it is a function of the business and to some extent the skill and experience of the people involved, and also a function of culture, where some are simply more cautious and prudent than others. What I would say is pretty much universal is the absolutely basic fat finger checks; price limits, reasonable order quantities and so on.
As soon as you move to the level of position checks, credit checks etc you get into the first divider as to whether those are pre-trade or at some point relatively close after the trade, and you will see examples where those are not checked until end of day: in that way people can be on an agency or principal basis effectively trading naked; they have some protection from erroneous orders but their organisation is not protected from intra-day trades that can build up a very risky position.
So we have touched on the philosophical differences between SunGard and the FPL recommended risk controls and different groundings, do those differences need to be reconciled?
I wouldn’t say there are different philosophies: all we are talking about is whether particular points of emphasis are appropriate, and to some extent that is driven by whether we come across a particular client case where something like the pausing of orders, for example, becomes important. SunGard’s relevant product line is fairly mature, it has evolved and developed to a point where it has a wide range of functionality: when you get to that stage the further development is going to be driven primarily by specific client requirements that you come across.
So the question is whether brokerage firms in the market place use the FPL guidelines as a driver for what they are doing and will that lead them to come to us and say “We want to see X or Y.”
It is absolutely not about two different philosophical approaches but more about whether gap X or Y gets filled because of a specific requirement.
Lastly perhaps is the question of practicality – what one can do pre-trade as distinct from post-trade, which is where there is an inevitable compromise that has to be struck with the demands of low latency and therefore how much processing time you can spend on pre-trade checks. With pattern risk checks, which are inevitably multi-order anyway, it is quite reasonable to say that you can do that analysis on a post-sending basis, and then when you have spotted a suspect pattern you come back and stop the next order in that sequence going through. There is room for reasonable compromise at that level, we would say.
To back up this point about there being really just one philosophy in this area, it is also interesting to look at how closely the FPL guidelines correspond to the other 2012 document we have in the European markets, which is already taking regulatory force in the EU. It is a set of guidelines published by the European Securities and Markets Authority (ESMA). Those guidelines go into several areas of compliance
and they have a strong emphasis on pre-trade risk control. Nobody who read the first FPL document in 2011 would have been at all surprised by what they found in the ESMA document of 2012. The principles are pretty clear and universal.
There is also fairly universal agreement that this particular regulatory push is a good thing: you don’t hear too many dissenting voices.