In the wake of regulatory concern over disruptive trading practices, an industry group today will debate the need for a set of guidelines covering risk management in electronic trading.
FIX Protocol Ltd., a pan-industry group that promotes and supports electronic trading through the ubiquitous FIX communications standard, has crafted a series of 13 risk checks that it wants brokers handling electronic trades to adhere to, according to sources.
FPL’s risk management committee is made up of representatives from the 10 largest broker-dealers. The goal of the group was to come up with an industry solution to a problem currently on regulators’ radar screens.
A report issued by a joint advisory committee of the Securities and Exchange Commission and the Commodity Futures Trading Commission recommended that the two regulators consider restricting "disruptive trading activities with respect to extremely large orders or strategies."
The committee was formed last year to recommend changes to the rulebooks that might prevent a repeat of the May 6 "flash crash," which was said to be caused by a single large futures trade.
The guidelines published by the FPL risk committee focus on orders handled by algorithms and direct market access software. While most brokers do conduct risk checks, FPL contends, the organization believed that some basic standards needed to be published.
That "would not only be helpful to the industry participants but be looked at positively by the regulatory bodies," said Neal Goldstein, head of U.S. electronic product development at Nomura Securities, in a statement in January.
FPL is expected to discuss risk checking today at a press briefing at Morgan Stanley. They will be standardized in FIX "tags," or components of trade report messages. If a buyside trader’s order is rejected by his broker, the cause of that rejection would be noted in the trade report received by his order management system.
One tag, for example, is likely to denote rejections of orders that are bigger than an allowable percentage of average daily volume.
The hope of at least one member of the FPL committee is that becoming "FPL certified" will become a label brokers strive for. "It will become like those UL tags on a fan or electric appliance," he said. "People know the fan won’t explode and catch fire."
The member hopes that the buyside will place pressure on their brokers to become "FPL certified." If they don’t, then the institution shouldn’t send them any order flow, he said.
