Reflector

Pre-Trade versus Post-Trade

What difference does it make? On the surface, it would appear that the main difference is the sequencing: one is before and the other is after. However, that is not terribly pertinent. The actual distinction lies in the fact that post trade risk assessment systems often operate off a dropcopy service, outside the communication channel between the trader and the venue (i.e.: the system cannot prevent the trader from submitting another order). The core differences are:

Latency

Systems on the critical path introduce latency; drop copy consumers do not.

Actionability

Systems on the critical path can see/manipulate everything; where as drop copy consumers usually can only observe fills (and in systems where they can observe potential orders, they are not in a position to stop that order before it reaches the venue).

Insight

Because of Actionability systems on the critical path can, at any point in time, assess the complete range of potential positions that the trader’s order can result in; drop copy consumers do not have any idea what orders are about to be executed.

Rigor

Because of Insight, pre-trade risk limits can be enforced nearly absolutely (the exceptions include: reference rate updates, price uncertainty on market orders, rogue fills, external position adjustments, and manual risk limit adjustments); post-trade limits are inherently porous. When a post-trade risk system observes that a trader crossed a limit, it is not unreasonable to assume that the trader could be well on his way to twice that limit within the next few seconds.

Regularity

Because of Rigor, pre-trade systems do not need anything but a numeric limit. Post-trade systems, because of their essential lack of tangibility, tend to resort to measuring a plethora of alternative, unsatisfactory signals:

• Percentage utilization warnings. This is actually the most sensible item on the list. However, if this is the de facto limit, why not just use this one as the full amount?
• Order count. This metric tracks and limits the maximum number of orders a client can place per second. Combined with a max single order size, it can limit how fast a trader can add to his/her positions.
• Filled-Only limits. One could say that the entire point of moving from post-trade to pre-trade is so that we can replace this misbegotten metric with something more relevant.
• Settlement-day-based limits. This is another category of limits conceived of in post-trade that does not translate well to pre-trade.
• Various other dead-man-switches. This bullet point highlights the fact that in a post-trade environment, the counter that keeps the position is physically separated from the mechanism that is supposed to “control” the trader.

Stability

Though the post-trade metrics required to ensure Regularity are all at best tangentially related to risk, they are often hooked up to to an extreme “risk control” instrument that can do only one thing: cut the wire. The crudeness of this  operation leads to many complications, yet it is performed because it is the only action a post-trade system can perform. The equally crude metrics that trigger it are problematic, but they are the only metrics that a post-trade system can measure.

Pre-trade systems never have a need to perform this action.

MarketFactory’s Reflector enables you to dynamically manage both market risk and credit risk across FX venues and proprietary client trading platforms. Reflector works in REAL TIME.  It will block any order that would break a limit.

• Real-time, pre-trade checks against global limits across all venues
• Set Net Open Position (NOP) and Daily Settlement Limit (DSL)
• Customized limits on base currency, currency pair, trading entity, trading groups, netting, tiering, margining and more to capture complex relationships
• Web GUI and/or REST API administration
• Safety checks on order size, throttle checks, quotes in the market, and pending limits
• Customer configurable email alerts