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I work for a small automated trading firm (in foreign exchange), and marking positions to market is one of the difficulties in designing an effective kill switc

I work for a small automated trading firm (in foreign exchange), and marking positions to market is one of the difficulties in designing an effective kill switch, because these marks can easily make the difference between a large gain and a large loss. In fast-moving markets (which is when a kill switch is most useful), it's very hard to determine the true mid-market rate. Our system of course always has such a notion, but if we used it to shut down our system every time it looked like we had lost money, then a market data glitch (which is not at all uncommon) would impose a large opportunity cost as a human intervened during an active market. Instead, we designed our system so that there's a very low threshold for it stop trading if it appears to have lost money, but to only do so temporarily. If our marked-to-market position recovers shortly thereafter while the trading system is idle, then the apparent loss was probably due to a market data glitch. On the other hand, if our position does not recover, then the temporary stoppage becomes permanent, and a human intervenes. (Obviously, there are more details here, but this is the general idea, and it's worked very well for us.)

dmak 13y ago
What kind of technology stack are you guys using? Also, is your system constantly being improved to detect these things or was it just a onetime setup kind of thing?
- ryporter 13y ago
  Our trading system is purely in C++. This particular subsystem was a replacement for a previous version, which was a kill switch and had led to opportunity costs. We spent a lot of time designing, implementing, and testing it, but haven't felt the need to touch it since then. It's sufficiently general that it doesn't need to be adapted as our strategies change, and it doesn't need to adapt to changing market conditions (as, e.g., a trading strategy does).
twic 13y ago
> a market data glitch (which is not at all uncommon) This is a point that bears amplifying. People who do not work in the financial industry may not appreciate just how bad market data feeds are. Radical jumps with no basis in reality, prices dropping to zero, regular ticks going missing, services going offline altogether with no warning, etc.
minimax 13y ago
They unintentionally built up a huge position well beyond their internal capital thresholds. You don't have worry about mark to market to detect that. If you think your FX strategy could end up with max notional of let's say £50MM, you can put something in place to stop trading if you exceed that. If you are a smaller shop, your prime broker is probably already doing something like that for you. Those types of risk controls (i.e. capital thresholds) are bog standard in our industry and it still kind of blows my mind that Knight managed to get around them so easily.

dmak 13y ago

What kind of technology stack are you guys using? Also, is your system constantly being improved to detect these things or was it just a onetime setup kind of thing?

ryporter 13y ago
Our trading system is purely in C++. This particular subsystem was a replacement for a previous version, which was a kill switch and had led to opportunity costs. We spent a lot of time designing, implementing, and testing it, but haven't felt the need to touch it since then. It's sufficiently general that it doesn't need to be adapted as our strategies change, and it doesn't need to adapt to changing market conditions (as, e.g., a trading strategy does).

twic 13y ago

> a market data glitch (which is not at all uncommon) This is a point that bears amplifying. People who do not work in the financial industry may not appreciate just how bad market data feeds are. Radical jumps with no basis in reality, prices dropping to zero, regular ticks going missing, services going offline altogether with no warning, etc.

minimax 13y ago

They unintentionally built up a huge position well beyond their internal capital thresholds. You don't have worry about mark to market to detect that. If you think your FX strategy could end up with max notional of let's say £50MM, you can put something in place to stop trading if you exceed that. If you are a smaller shop, your prime broker is probably already doing something like that for you. Those types of risk controls (i.e. capital thresholds) are bog standard in our industry and it still kind of blows my mind that Knight managed to get around them so easily.