Currency players combine to manage 'flash crash' risks

The world's leading foreign exchange dealers and trading platforms are collaborating on an industry-wide initiative to reduce the risk of an algorithmic-led 'flash crash' hitting the global currency markets.

Icap subsidiary Traiana is partnering with four top prime brokers and five trading platforms to launch a real-time risk monitoring service, dubbed Harmony CreditLink.

The system offers prime brokers the ability to to monitor their clients' credit risk across multiple ECNs on a real-time basis, act on exceptions in a single integrated dashboard, and open, change or close credit lines to manage risk. The system alerts dealers to limit breaches and allows the prime broker to modify credit lines or terminate trading activity with an integrated 'KillSwitch' capability.

The system has been developed in response to a surge in high-frequency and algorithmic FX trading by hedge funds, raising the spectre of a volatile 'flash crash' and systemic collapses hitting the currency markets.

Andrew Coyne, head of FX Prime & G10 eCommerce, Citi, says: "This collaborative industry initiative addresses a fundamental and immediate industry need - that of providing trading and limit management to prime brokers to enable them to monitor their clients' credit risk in real-time. Initiated independently of any regulatory call for change, this new solution will fundamentally change the way the FX industry operates going forward."

Related Companies

Bloomberg Refinitiv NEX Markets NEX Group Citigroup Corporate and Investment Bank Deutsche Bank JPMorgan Chase Morgan Stanley Traiana

Channels

Regulation & Compliance Wholesale banking

Keywords

Dealing rooms Trade execution Foreign exchange

Comments: (1)

A Finextra member 27 June, 2011, 13:02

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Going on the article rather than the title which seems to imply something different:

Surely one would think prime brokers are up to speed with this already, especially those that are FI’s. Calculating the potential future exposure on FX trades sitting open with their clients is a fundamental aspect of their OTC business. For exchanged traded instruments, this is already done for the brokers.

One would certainly hope they are already providing limit management across their book of positions, what kind of risk management system are these firms running? Then of course if these positions are sitting in the futures market the prime broker are simply passing the transaction through and the futures exchange sets the margin and takes the risk. Finally on integrated kill switches, these put the prime broker at risk of litigation. If they kick clients off trades and there are losses due to this action, they are going to have a hard time explaining this in a court of law. It is equivalent to a police officer shooting someone because they looked suspicious.