Trading Risk Check System for Order Quantity Validation
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Solution Overview
Problem
Current risk management techniques in electronic trading systems often lead to unfavorable outcomes, including the failure of trading strategies, as they can inadvertently increase risk rather than reduce it.
Innovation Solution
A risk check system that compares the order quantity for each leg of a trading strategy to a corresponding risk value, allowing the strategy to proceed only if the quantity is less than or equal to the risk value, and reserves the order quantity for execution, ensuring that subsequent orders are not rejected due to risk constraints.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If current risk management techniques are used to limit trading risk, then risk reduction is intended, but trading strategy failure occurs and risk may actually increase
Solution Approach 1:
The system performs preliminary risk checks on all orders within a trading strategy before execution, including hypothetical risk checks for orders that have not yet been placed. This advance assessment ensures that risk constraints are evaluated in the context of the complete strategy rather than individual orders, preventing strategy failure due to mid-execution rejections.
Solution Approach 2:
The system implements a feedback mechanism where risk check results from executed orders are used to adjust and inform risk assessments of subsequent orders in the same strategy. This allows the risk management system to adapt to actual market conditions and execution outcomes, improving the accuracy of risk evaluation while maintaining strategy coherence.
2Reliability
If risk checks are performed on each order individually, then risk control is achieved, but trading efficiency decreases due to repeated checks and potential rejections
Solution Approach 1:
The system merges risk checks across multiple orders belonging to the same trading strategy into a unified assessment process. By evaluating orders collectively and using feedback from executed orders to inform subsequent risk checks, the system reduces redundant evaluations and improves execution efficiency while maintaining comprehensive risk control.
3Reliability
If order quantity exceeds risk value, then risk constraint is violated, but trading opportunities may be lost due to overly restrictive limits
Solution Approach 1:
The system performs preliminary risk checks that consider the complete trading strategy context before execution, including hypothetical assessments of future orders. This allows the system to identify and adjust risk parameters in advance, ensuring compliance while accommodating legitimate trading opportunities that might be incorrectly rejected by rigid individual order limits.
Data Source
AI summary
Various systems and methods are described herein for a risk check. The risk check bases a decision to allow a trading strategy to proceed on whether the order quantity for each leg of the trading strategy satisfies a certain condition. Particularly, when a trading strategy is initiated, the quantity for each of the orders to be submitted on behalf of the trading strategy, including the quantity of the initial order and any subsequent orders, is then compared to a corresponding risk value. If the order quantity for each of the orders is less than the corresponding risk value, then the trading strategy can proceed and the initial order can be sent on to the exchange. However, if the order quantity for any of the orders exceeds the risk value, then the initial order is not sent to the electronic exchange. Additionally, as described herein, quantity associated with the trading strategy is held or reserved for execution of the trading strategy regardless of the activity taken by the trader since the trading strategy was initiated. The reserved quantity can be drawn from the trading strategy until the quantity is depleted, the trading strategy has ended, or both, for example.