Risk Management in the Algo Trading Equation

As algorithmic trading grows and regulations drive dramatic increases in market data, risk management may need to move to real-time measurement to catch up, writes Xenomorph’s Brian Sentance.

The recent and continuing growth of algorithmic trading marks a fundamental change in the markets, one where the effects will be felt deeper as new markets and asset classes go electronic. With all the attention to algorithmic trading, risk management is moving down on financial institutions' agenda.

Today, risk management is a once-a-day snapshot calculation of the level of market risk, even for electronic, sub-millisecond trading execution. Certainly the risk management profession has enough on its plate and more issues are on the way. The credit and operational risk requirements of Basel II are coming up for 2008, and compliance with Basel I on market risk continues to be challenging for many institutions. Then there are the recent subprime lending crisis and credit derivative exposures, the new modeling challenges of innovative structured products, and private equity and debt portfolios to model and manage.

How is risk management responding to the rapid expansion in automated trading? Should risk management take on the challenge of moving toward intraday real-time measurement and management of risk?

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