Risk Controls and Operational Risks in Algorithmic Trading
Summary
This discussion collects risk management topics relevant to automated trading, with particular attention to high-frequency systems. It names drawdowns, runs of losses, empirical loss distributions, confidence intervals, value at risk, slippage, liquidity, transaction costs, and backtest bias. It also points to operational and market structure concerns such as latency, order flow limits, faulty tick data, quote stuffing, and sudden market disruptions.
The responses distinguish general trading risks from risks specific to automated execution. They suggest checking strategy-level and individual-trade limits, including size and value checks, while identifying execution as a central HFT concern. The post offers search terms and references regulatory guidance and a paper, but does not develop a formal risk framework, compare controls, or present empirical evidence. It is best read as a starting checklist for literature searches; the relevance and treatment of each item will depend on the trading venue, instruments, strategy, and system design.
Key ideas
- Risk review for automated strategies can include drawdowns, loss sequences, tail behavior, slippage, liquidity, and trading costs.
- High-frequency systems face execution risks alongside strategy-level risk.
- Operational concerns include latency, order flow limits, faulty market data, and unusual market conditions.
- The discussion provides research keywords rather than a tested or complete risk management method.
Tags
Full text
# Papers about risk management in algorithmic trading? # Papers about risk management in algorithmic trading? I am currently doing my research for my master thesis, which will clearly focus on the question of risk managment in algorithmic trading systems. I have done research about this topic and found some valuable nuggets here: - Extreme Value Theory and Fat Tails in Equity Markets. Blake LeBaron and Ritirupa Samanta. May, 2004. - Algorithmic Trading and DMA However, as I see, algorithmic trading is an extremely hidden topic. Therefore, I really would appreciate from you as financial professionals, a hint about papers about risk managment in hft/algorithmic trading/blackbox trading! ## Answer by Jean-Paul (score 9, accepted) https://quant.stackexchange.com/a/8104 Indeed, algorithmic trading is a very hidden subject. All I can help you with are some industry-specific terms which might speed up your search for relevant papers and information: - Risk of ruin tables - (Peak-to-valley) drawdown (maximum drawdown, duration of drawdown etc.) - Number of consecutive losses - Confidence intervals - Empirical distributions (for risk or P/L management) - Value-at-risk VaR (or likewise) measures (use a valid leptokurtic distribution) - Influence analysis - Slippage problems - Liquidity problems (especially in thinly traded securities or derivatives) - Model backtesting biases (e.g. survivorship bias) - Latency issues and competition (and different quotation times between exchanges) - Transaction costs - Order rate flow control - Order Flow Toxicity - Pre-trade (and post-trade) checks - Unexpected market conditions (unknown unknowns, such as the financial crisis) - Flash crash recognition (and hedging or exploitation by aggresive counter strategies) - Outlier problems and faulty quotations (with HF tick data) - Quote stuffing - Queue jumping (but that's only for HFT; corresponding picture) Try Google Scholar for these keywords. Good luck :) (if anyone knows any other keywords, please append them to my answer) ## Answer by QuantInsti (score 1) https://quant.stackexchange.com/a/8102 Algorithmic Trading in general is no different from normal trading except all of the trading is automated. So it encompasses the same risk parameters that normal traders would. When it comes to High Frequency Trading, the risk management checks would be at Strategy Level as well as "individual trade" level.There would be checks for sizes, values etc. However any trading is essentially a "risk management" exercise and main risk in HFT is "execution" risk. For example, Indian Regulator SEBI has provided the following guidelines -http://www.sebi.gov.in/cms/sebi_data/attachdocs/1333109064175.pdf ## Answer by Luca (score 1) https://quant.stackexchange.com/a/8622 You might want to check this: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2285407&download=yes
Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.