The following statement can be attributed to the Futures Industry Association Principal Traders Group (FIA PTG) regarding the Federal Reserve Bank of Chicago’s recently issued research paper concerning market safety and risk controls in high speed markets:
“FIA PTG encourages efforts such as this research paper to study how to improve the safety and soundness of our markets. FIA PTG firmly believes that ensuring a robust trading infrastructure is essential to maintaining a healthy and resilient marketplace that serves the interests of all market participants.
“FIA PTG has been a leader in this area, issuing multiple industry recommendations concerning risk controls in software change management, direct access trading, and generally for trading firms. We were heartened to see this research paper recognize the importance of such industry best practices.
“The research paper identifies a number of areas where additional efforts can be made to reduce risk, many of which FIA PTG has proposed in the past. As the research paper suggests, developing a multi-layered approach to risk controls – at the trading, clearing, and exchange levels – is essential to building a robust marketplace. We support the paper’s suggestion that the management of drop copies (information on filled and working orders provided by the exchange) could be improved. This area has been a topic of our previous recommendations regarding risk management and is especially ripe for industry-led efforts. Additional suggestions for risk controls at each level of the trade life-cycle can be found in FIA’s Market Access Risk Management Recommendations.
“FIA PTG also agrees that clearing firms should periodically review trading controls and quality assurance procedures of the trading firms they work with. Trading firms should also review, but not solely rely on, risk controls provided by the clearing firms and exchanges. Further, trading firms should periodically review their own internal trading software development and change management procedures, and when appropriate, consider adopting the practices presented in FIA PTG’srecommendations on these issues. In addition, a manual “kill switch” should be available to those responsible for managing a trading system’s risk, as the research report recommends. Although external controls are important, we believe that robust computer programs that enforce internal risk limits and provide other smart risk controls will often serve as the first and most effective line of defense in a multi-layered approach to safety and soundness. We have outlined many such controls in FIA PTG’s Recommendations for Risk Controls for Trading Firms.
“As market participants and policy makers consider appropriate oversight measures, it is critically important to take into account the role of each industry segment in the marketplace and the potential risk that it poses to the rest of the marketplace. In particular, we think it is important for policy makers to recognize that firms trading on behalf of clients pose different types of risk than firms trading only their own capital.
“We look forward to working cooperatively with regulators as groups like ours define industry best practices.”