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Innovations in Trading and Technology

22 January 2013

White Paper: Strengthening Barriers against Trading Technology Risk

Technology risk is evidently a factor that trading firms must live with and manage. Creators and users of technology have long recognized that there is no ‘silver bullet’ for eliminating such risk, and have come to rely on a defense-in-depth approach based on multiple layers of protection during both system design and operation. The barrier model of how accidents occur provides a useful metaphor for understanding and reducing risk exposure in such systems. The model emphasizes that

  • Losses occur when hazards penetrate aligned, often latent weaknesses in successive risk-containment barriers.
  • Adding independent barriers helps reduce risks and avoid aligned weaknesses, even if the barriers themselves are imperfect.

Independent, passive monitoring helps to separate trading system supervision from system operation, thereby removing common failure modes and false assumptions. By reducing the likelihood of aligned weaknesses, independent monitoring can provide an effective additional risk containment barrier.

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