Real-time pre-trade risk firewall. As high frequency- and algorithmic trading are replacing manual processes the need for automated control systems to reduce risk is increasing. Human errors, fat fingers and miscalculated algorithms can cost businesses millions of dollars and cause severe damages. Controls can be applied against trading activity via pre-defined limits implemented on a pre-trade basis.
Back testing and market simulation. Algorithms can be tested using historical data before they are put to work in production.
Surveillance algorithms can be used to spot potential market abuse and compliance breaches. The goal of real time monitoring is to detect potential patterns while they are happening. Such patterns include insider trading, front running orders, painting the tape, fictitious orders, wash trading, and trade collusion.
A. front running orders
Front running orders is the practice of a broker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers. It is not only unethical, but also illegal. It is also known as tailgating.
I. trading errors such as fat finger trades
A. fictitious orders
The practice is illegal as it creates an artificial price for a security.
A. order stuffing
A spoofer places limit orders that are not intended to be executed.