High Frequency Trading and the Risk Monitoring of Automated Trading

Abstract

The High Frequency Trading evolution underlines three keys questions:

-How High Frequency traders could improve risk management tools to manage operational risks (algorithm issues) and market risks (price manipulation, liquidity and volatility)?

-How stocks markets (and brokers-dealers) could improve and contribute to prevent individual failure but also systemic risks (including interdependencies and correlations from HFT algorithms)?

-How supervisory authorities could/should regulate high frequency technology in financial markets in a risk monitoring perspective?

Based on case study and regulatory guidelines, this paper analyses key specifications on the automated trading risk monitoring tools.

The conclusion of this paper is to support the idea that the new worldwide trading architecture should be articulated around Stock exchanges as regulated Hub. Stock exchange could be responsible to organize "Quality Acceptance" test environment to challenge algorithms in an individual perspective but also in a systemic approach (linked to potential correlation of algorithms).

Keywords: High Frequency Trading, Risk management, Systemic risk, Testing and IT archictecture

JEL Classification: E60, E61, F30, F40, G10, G20