Trading Strategy Risk Check via Order Quantity Reservation
Find Innovative SolutionsGenerate Solutions
Solution Overview
Problem
Current risk management techniques in electronic trading systems often fail to effectively limit risk, leading to unfavorable outcomes such as complete trading strategy failure and increased risk exposure.
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 risk, then risk exposure should be reduced, but trading strategy failure increases and risk exposure actually increases
Solution Approach 1:
The system performs preliminary risk checks on all orders within a trading strategy before execution. By evaluating risk constraints ahead of time and reserving quantities that satisfy all risk checks, the system prevents trading strategy failure while maintaining effective risk management. This preliminary action ensures that subsequent orders can be executed without rejection due to risk constraints.
Solution Approach 2:
The system reserves quantities for trading strategies that satisfy risk check constraints before execution. This creates a cushion or buffer that prevents order rejection during strategy execution, thereby protecting against trading strategy failure while maintaining risk management effectiveness.
2Reliability
If order quantities are strictly checked against risk values before execution, then risk compliance is improved, but order execution efficiency decreases
Solution Approach 1:
The system performs risk checks and reserves quantities before trading strategy execution. By completing these compliance checks in advance, the system ensures risk compliance without causing delays during actual order execution, thus resolving the contradiction between reliability and time loss.
3Measurement precision
If risk checks are performed on each order individually, then risk control precision is improved, but system complexity increases
Solution Approach 1:
The system merges multiple individual order risk checks into a unified trading strategy-level risk check. By evaluating all orders within a strategy together and reserving quantities that satisfy all risk constraints simultaneously, the system maintains precise risk control while reducing overall system complexity through consolidation.
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.