Monday, August 17, 2009

(except options?) risk is nice-to-have to traders (锦上添花)

Credit risk, credit rating and credit analysis is essential in calculating interest rate, loan amount etc. I think this is a very old trade.

Here I limit myself to market risk or "trading risk", not credit risk nor operational risk. Trading firms largely pay lip service to computerized risk data. In fact, the "risk management" concept is increasingly vague and all-encompassing .

Risk systems (mark to market, PnL, VaR…) is not in the “critical path” like pricing, market data, execution, trade booking, position management. People can often wait to read risk numbers after market close. I was told GS and some sophisticated trading houses have more real time risk data. However, GS could be lucky. Or GS could be profitable for other reasons but nevertheless want to publicize their risk system for political reasons.

In the extreme case, a trader can execute trades over the phone with a counter party, bypassing all computer systems.

Compared to traders, higher management cares more about risk. Some traders often don’t care about risk, even though real time risk numbers could be available. If that is the case, then it means risk numbers are less relevant to traders than other data such as position data or market data. However, in eq options, i was told the real time "sensitivities" of open positions are truly important to traders. Greeks and vol are the focus.

VaR is the single most important risk output to higher management.

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http://www.linkedin.com/in/tanbin