RegulatoryTechnology

The 4 Biggest Trading Limits Mistakes

It’s been wisely said before that “Little details have special talents at causing big problems”.   In time for Dodd-Frank and MiFID II limits we have just rolled out a new version of K3 limits.  [LOOK BELOW FOR FREE ACCESS TO ATLAS (Spot Start, Complete Limits Info, Open Interest, REST API)]

We just rolled out a new version of K3 limits getting ready for Dodd Frank and MiFID II limits coming up at EOY.  As companies consider how they are going to handle these new position limit regimes we thought it a good time to share the common details that many companies miss.

1.Spot Start Miscalculation.  

Believe it or not, exchanges don’t actually publish the date when a product enters the spot period.  What they publish instead is some text describing when the spot period starts.  Something like, spot starts x days prior to the maturity date except on Saturdays and Sundays and holidays etc.  Here’s the problem.  This forces companies to manually calculate the spot date.  

Never fond of manual process, we solved this with our cloud app ATLas.  ATLAS just  regularly downloads maturity dates and then through a little  coding magic calculates spot start dates.  It’s all easily accessible through a web interface or as a simple REST API call.

2.Missing the Diminishing Positions

I remember a risk officer asking what our position was at end of month on some New York Harbor contracts.  The answer was:  zero.  Confused he said, “Wait, weren’t we long X lots at the beginning of the month?  A: Yes.  Did we close the position? A;  No.  Enter the diminishing product.  If the exchange indicates that the product is diminishing, this means your limits position in the spot month will rateably decrease over the course of that month.  Beginning of the month you have a full position, and by end of month you are at zero.

The diminishing indicator is always available in ATLAS and of course K3 Limits always diminishes products in spot when indicated.

3.Parent / Child Roll Error

A trader once remarked that nothing she traded had position limits.  True they didn’t have explicit limits, but they rolled into a parent product which did have limits.  This is the parent-child relationship.  That roll up or “aggregation” may even be at a particular ratio. So for example, 1 lot of a child position may only be equal to half of a parent lot.

It gets even more complicated when maturity dates don’t match.  This one is easy to miss.  Let’s say your traders are trading CS Crude Contracts.  These are child positions to the NYMEX future 26; they roll up on a 1:1 basis.  But even though one CS contract is equal to one 26 contract, these products roll/mature on different dates.  If you go long Sept CS, part of your position rolls into Sept 26 and part into Oct 26 from a limits perspective.

K3 limits calculation does this automatically.  Atlas also indicates whether the product is a parent/child and the aggregation ratio.

4.No Exchange Delta

Trading options?  The rule is that you need to use an exchange published delta to determine position.  These can be a bit tricky to get.  But ATLAS downloads them  into a nice usable format behind a gorgeous API that can be called from any application.
As we gear up for Dodd Frank Limits, and MiFID II limits we will, of course have all the appropriate data in ATLAS and we are ready to go.  As always if you’d like a free preview of ATLAS to spot check your spot starts or just see how it works we’d be happy to accommodate.  Drop Tom Eisner a line at +1 (646) 461- 3820 or tje@broadpeakpartners.com

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