In one sense, real-time clearing seems to be a way for the world of clearing to get in sync with the world of high-frequency trading.
“Developments in technology have accelerated the speed and complexity of trading,” said Heiner Seidel, a representative of Eurex, “and clearinghouses have had to adopt those same advancements to ensure that their risk management keeps pace for the benefit of a safe market.”
That’s not to say real-time clearing isn’t useful across a variety of trading types, but HFT in particular can benefit from it. In volatile markets, mistakes in HFT can occasionally lead to flash crashes, sinking markets dramatically in a matter of seconds. By managing risk in real time, both immediately before and after these instantaneous trades, traders may be able to avoid these mistakes.
Eurex Clearing is one of the main clearinghouses to have embraced real-time risk management. Since March 2010, Eurex Clearing has been offering its “Enhanced Risk Solution,” a real-time risk data distribution service. The service has been made available across all asset classes and products and incorporates both pre- and post-trade risk controls.
ICE has been similarly busy. In addition to launching two new central clearing services for the U.S. and Europe, the company has also enhanced its internal intra-day risk controls. “We now undertake full revaluation and margining every minute throughout the business day,” said an ICE spokesperson, who also stated that real-time risk management was likely to expand in the future.
Perhaps not surprising, everyone wants some form of immediate risk assessment tool. A recent survey of global investment banks conducted by Lepus found that nearly all the banks were making some sort of move toward real-time risk management. The ability to immediately assess their risk position, they say, will allow them to undertake more trades with greater confidence.
For banks and clearing firms without the internal capacity to develop their own real-time risk management solutions, there are technology firms.
One of those, Cinnober, launched its TRADExpress RealTime Clearing system in 2010. The system attempts to match the speed of high-frequency trading.
Technology can’t entirely replace human oversight to clearing – after all, clearing has traditionally been a lengthy process for good reason. The process of clearing up to the point of settlement is well on the way to full automation, but settlement must still be done by humans.
High speed trading technology is fallible, as can be seen from flash crashes, and without human oversight, bad trades might be settled before anyone has a chance to catch them.
However, given the newly energized movement behind real-time risk management, it seems probable that the final step of settlement will continue to accelerate. The era of multi-day clearing is likely coming to an end.