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Friday, March 21, 2008

CEP and Real-Time Risk – “The Dog Whisperer”

Posted by Chris Martins

This week’s Financial Times published an interesting article by Ross Tieman on technology’s role as a “scapegoat” (his term) for some of the problems in financial markets. With its both evocative and provocative title, “Algo Trading: the dog that bit its master”, you can get a sense of the article theme, though a complete reading of the piece is worthwhile.

One of the challenges noted by the author is in the area of risk management. Too often existing risk processes - and their supporting technology - focus upon performing end-of-day assessments. But when much of the trading activity is quantitative, that can be much too late to detect when positions are careening out of control and risk thresholds have been breached. There seems to be growing recognition for the need for continuous calibration of positions – what amounts to real-time risk management – in order to keep pace. Perhaps the notion of a “daily VAR” may well become an artifact of the 1990’s. 

Just as it powers a number of real-time trading deployments, CEP can be an equally rich technology foundation for building the kind of real-time visibility that is needed by modern risk management systems. The same technology that drives quantitative trading can equally be applied to the task of monitoring that trading and keeping it in check, if necessary.

Now risk management is an extremely complex endeavor, so I would not argue that CEP alone is the answer. But rightly implemented, CEP clearly offers the low latency infrastructure that can help drive the real-time calculations that are needed. Market regulators (e.g. FSA) and trading exchanges (e.g. Turquoise) have begun to recognize the potential of CEP to monitor market behavior. It is likely only a matter of time before trading firms awaken to the possibilities of CEP driving real-time risk systems that monitor behavior within the firms themselves.

So, if you’re concerned about the technology “dog” biting its master, perhaps it’s time to consider CEP as a prospective “dog whisperer” that can help manage the risk. 


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