Proprietary trading and risk; few areas are shrouded by as much misunderstanding, misinterpretation and misinformation. Let's keep it clear. Yes, there are risks associated with trading financial markets and trading derivatives. It's simple; no risk is no reward. To us, risk management is about identifying, controlling and understanding risk. It's never about eliminating it.
In our business we identify three types of risk: market risk, operational risk and credit risk. How we actually manage risk is as much part of our competitive solution as our technology. Putting the details aside, let's focus on the guiding principles of how we approach these risks:
- You can't control what you can't understand
- You should assume that your information or knowledge might be wrong
- It's a continual process, not a static process of checks and balances
- It has a strategic purpose, not just an audit purpose
- Trust, but verify
1. We only trade and make markets when we are comfortable with the product and the market. This requires experience, research and first class information systems.
2. The biggest mistakes are made when people get too confident, either about the information received or the knowledge they think they have. Look again or look from a different perspective.
3. Risk Management is integrated in the core of our operation which means we will continuously monitor if we're on the right track.
4. Proper risk management is a requirement. Exchanges, clearers, stakeholders and regulators set certain standards needed to be maintained. But it can be so much more than that. The 'fastest system' or the 'smartest algo' can be a competitive edge, just as the best risk management can be.
5. This not just applies to counterparty risk; it applies to all interactions we do with people, systems and organizations.