HTX Pairs Trading has a number of risk checks and guards against incorrect data, user error, and extreme market volatility. The same checks are applied to each order/model in the application. These include:
Model Settings
These are checks done on order creation that are based upon model setup and calculated prices.
Quantity warnings
Warning levels can be configured to alert the user when they have entered a quantity that is greater than some level. It also warns when they’ve entered a quantity in one symbol’s terms that might create a target position in another symbol that is greater than some level. The trader always has the ability to override this warning.
- Example: A maximum quantity warning is set to 10,000. The user enters a target quantity of 7500 in a model that is 1 share of Symbol1 = 2 shares symbol2. Since Symbol2’s target quantity would be 15000 shares, the user is warned that this quantity might be too large.
- Slice Qty: The same applies to slice quantities. That is, quantities in the marketplace at any given time.
Bid/Offer thru Market
The application can be configured to never bid or offer through the market. Instead, the limit price will be adjusted to the opposite side of the market.
Maximum Thru price
The application calculates maximum amount (in basis points) through the market a calculated price can be. If the calculated price is too far through the market, order entry on that model will cease.
Example: If maximum through is set at 3% and the application is buying SymbolA which has a current offer of 100. If the calculated target buy price is 104, that would be too far through the market. The order will not be entered and the model turned off.
Max/Min prices
Absolute maximum and minimum limit prices can be set for any part of a pair.
Scheduled deactivation
Models can be assigned to configured groups. Each group can have a scheduled shut down time. This is typically used to shutdown before getting too close to market close.
Legging Risk and Transaction Analysis
These are settings that control off sides exposure in the market place as well as bad executions.
Odd Lot Piggy Back/ Auto Reload
The system monitors any legged positions and allows setting a maximum any model can be “legged”. If the model’s contra exposure is greater than the maximum, then initiating order are suspended until the contra has traded.
Contra Slippage
The system records the target price for each contra order entered. When they trade, the execution price is measured against the target price. If the executed price is too far from the target price, the system shuts down that model to protect against bad data or extreme market conditions.
Market Data Checks
These checks protect against bad quote data and/or extreme market conditions:
Market Data Updates
If no quote updates are received for a certain amount of time, the market data feed is considered down and all models are deactivated.
Price Filter
The system checks the net change on the day. If it greater than a certain percentage (usually 10%, but can be changed), the model is turned off to protect against one leg of a pair having extreme moves or bad data.
Max Contra Cross
The system monitors the bid and offer on the secondary symbol. If the market is locked or crossed by a certain amount, then the quote is treated as suspect and order entry is stopped.
FX Max Gap
There is a maximum change from on quote to the next for a currency quote. If the new quote is different from the previous by more than the max gap, then the FX feed is considered suspect and the models deactivated.