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I am currently doing my research for my master thesis, which will clearly focus on the question of risk managment in algorithmic trading systems.

I have done research about this topic and found some valuable nuggets here:

  • Extreme Value Theory and Fat Tails in Equity Markets. Blake LeBaron and Ritirupa Samanta. May, 2004.

  • Algorithmic Trading and DMA

However, as I see, algorithmic trading is an extremely hidden topic. Therefore, I really would appreciate from you as financial professionals, a hint about papers about risk managment in hft/algorithmic trading/blackbox trading!

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3 Answers 3

up vote 3 down vote accepted

Indeed, algorithmic trading is a very hidden subject. It is even known that working in the algorithmic trading sector is very lonely because nobody is willing to share secrets, ideas or innovations.

Mentioning this, I have recently talked to a Technical Analyst/ Quant who has exposed some of his secrets. One of which was risk management.

The terms you are (maybe) looking for are:

  • Risk of ruin tables
  • Drawdown
  • Peak-to-valley drawdown
  • Number of consecutive losses
  • Confidence intervals

Try Google Scholar for these keywords.

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Do you work in this field? We're pretty loathe to have people outside the industry post total speculation about an important topic such as this. –  chrisaycock May 29 '13 at 15:17
As my answer implied: no I don't. Just trying to help out since info is scarce. If he judges me as an unreliable source then he shouldn't use my info. Up to him to decide. –  Jean-Paul May 30 '13 at 22:49

Algorithmic Trading in general is no different from normal trading except all of the trading is automated. So it encompasses the same risk parameters that normal traders would.

When it comes to High Frequency Trading, the risk management checks would be at Strategy Level as well as "individual trade" level.There would be checks for sizes, values etc. However any trading is essentially a "risk management" exercise and main risk in HFT is "execution" risk.

For example, Indian Regulator SEBI has provided the following guidelines -http://www.sebi.gov.in/cms/sebi_data/attachdocs/1333109064175.pdf

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You might want to check this:


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Can you summarize the contents of that paper? –  chrisaycock Aug 2 '13 at 13:01
Basically what it says is that order feeds and executions can get so fast (in the microseconds) that the risk monitoring (in the milliseconds) is no use, creating what he calls “shadow trading”. Regulations (like EMIR and MIFID) cannot expect to risk monitor this stuff. He thinks the exchanges ought to be responsible for risks, and has a look at how NYSE or CBOT could do that. I can’t really see how exchanges can be held responsible for the orders their client place, or cancel. But they can negotiate and agree guidelines with their clients. –  rupweb Mar 7 '14 at 16:12

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