Latency plunges for pre-trade risk checks

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SEC rule 15c3-5 was passed in November 2010, aiming to “to ensure that broker-dealers appropriately control the risks associated with market access, so as not to jeopardize their own financial condition, that of other market participants, the integrity of trading on the securities markets, and the stability of the financial system.”

The response was varied. Some thought the rule allowed for too much discretion for sponsoring broker dealers in setting up pre-trade checks. Others felt that the latency involved in checking orders before they enter the system would impose a time hit that would severely disadvantage firms trading on an agency basis.

As it turns out, neither fear turned into reality. Sponsoring broker dealers are taking the rule seriously, and they have developed solutions that have pushed the envelope on latency. Indeed, one of the more interesting competitions in the overall latency race has been among broker dealers offering 15c3-5 checks.

Lime Brokerage, a unit of Wedbush Securities, recently announced that it has reduced the time it takes to conduct pre-trade risk checks to less than a millionth of a second, achieving an average of fewer than 250 billionths of a second (nanoseconds) via its new LimeDirect service, which it calls the “world’s fastest pre-trade risk management system.”

That announcement seemed to one-up Ullink, which said in October that it had reduced its time for pre-trade risk checks to less than two millionths of a second. And that announcement seemed to better the mark announced by Bank of America Merrill Lynch a few months earlier, of 10 millionths of a second.

To be sure, clients using these systems may experience longer latency periods, depending on how they’ve set up their service. But the point is that it doesn’t look like latency will be a major argument against pre-trade checks, as if that were really an issue any longer. Said Jeff Bell, CEO of Lime, "We developed LimeDirect(TM) to end the discussion on latency and to provide a robust risk management solution where clients didn't have to trade speed for compliance." -Jim