"And there you go, the strategy released by the risk manager is taking over that of the trader!". Algorithmic Trading is taking over every single electronic market. And that means that traders are not only in charge of managing market risk towards alpha but they are now facing model risk and operational risk on top. Those are not easy to test, spot nor manage. Nor are they native to a trading task. Hence, it is not obvious who should participate on the management of these new dimensions. We found that the industry is truly polarized around it.
We showcased a Virtual A.I. experiment where a tweet regarding an explosion at an Arctic gas distribution plant, triggered an advanced strategy from a prop trader. Her market impact affected abruptly the performance of a strategy being held at an Energy house. Its dynamics built up progessively a negative outlier from a risk management perspective. The trader wasn't available, and the risk manager had to release her own algorithmic rationale that was subsequently attached to that of the trader. The dynamics from a risk management point of view became then smoother. And that way she gained time while traders' responsibles decided what to do with the live strategy - human pace vs machine pace.
That's the future of Risk Management with today's technology (SciTheWorld's).
There was a lot of passion in the reaction from the attendees. Almost half of them openly disagreed. They stated that they didn't understand why they had to be responsible for such a decision. They were ok at their confort zone, discussing risk limits that are overseen at the end of the day.
Our answer was straightforward. First, we expect you to have agreed ex-ante such an action with your trader. Second, you could simply release a link to any Line of Defense so that the right responsible can take the decision via a mere email. And third, is doing nothing a responsible policy for the right management of these new types of risks and the right functioning of markets?
Even though we have strong views with regards to the right answer, it is also true that we understand that different companies have different cultures...
The other half+, on the contrary, were openly supportive with the thought provoking experiment:
- "We are going undoubtly towards that direction. We are going algorithmic"
- "We believe we need to have such responsibility on such types of risks"
Time will say whether we (along with our strategic partner, Oliver Wyman) are right or wrong with regards to the Best Practices of the Financial, Energy & Commodities industries. We are further conveying this message to Regulators and Supervisors (alongside one of our academic partners, Instituto de Empresa).
But nevertheless, the controversy is there to be challenged. We will all learn a lot from it.