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PTRM
IsProgrammaticTradingTooRisky? The beauty of employing a PTRM platform is that it can
Whenever there is a spectacular failure in trading strategy, relieve traders of the time-consuming recurrent trading
thereisnoshortageofpresscoverage.Withinthelastcoupleof activities and gives them more time to focus on P&L
years, traded market commentators have posed the question: enhancement through crafting more complex, higher value
“can programmatic trading amplify exposures when markets dealstructures.Italsoallowsthemtimetomonitoralgorithms
move against a strategy-based portfolio?” It is certainly true andactonstep-changesinmarketcharacteristics.
that if a poorly developed black-box algorithm is allowed to
run unmonitored and uncontrolled, large P&L trading losses Conclusions
could result. However, the same can be said of any poorly PTRM has already made significant in-roads into energy
constructed and monitored portfolio, including those built on commodities markets and, despite issues with credit, liquidity
manually executed trades. It is noteworthy that all of the andfungability,itcontinuestodoso.Thereisamisconception
large-scale energy trading failures from ENRON to Amaranth thatPTRMisonlyrelevantforhighfrequencytradedmarkets.
and SEM Group were all the consequence of investment However,aflexible,wellintegratedPTRMsolutioncanimprove
decisionsthatweremanuallyderivedandexecuted. trade performance by seeking out liquidity in thin markets.
FromaPTRMperspective,automatedtradingisbalancedby Connectivity is critical. Users need seamless trade flow via an
real-time risk assessment and control. Within a PTRM integratedframeworkthatprovidesaccesstodispersedliquidity
platform, trading and risk should be seen as two sides of the byroutingorderstoalternativeexchangesorOTCvenues.
samecoin.Anyandallpositionsgeneratedprogrammatically PTRMplatformscandelivercomplextradingalgorithmson
canbemonitoredinreal-timeiftheplatformhasarobustrisk multiple venues. They also offer many Use Cases that are far
framework.Eachtradegeneratedbythe Correlation Engine can lessexoticyetoffergoodopportunitiestoenhanceprofitability.
beassessedagainstpredefinedlimitsasdescribedearlierinthe PTRM can be effective in simply managing limit orders or
riskassessmentusecase. submittingphysicalnotifications–anaturalstartingpointfor
Thorough back-testing of new algorithms against time- newusers.Equally,aPTRMplatformhastoofferthecapacity
sequenced historical data will also mitigate the possibility of andscalabilitytosupportatradingorganisationasdemands
exposurefromprogrammatictrading.HenceaPTRMplatform increase. Organisations typically evolve their programmatic
must have the capability to store event streams and replay trading to embrace spread trading and other more complex
thesestreamsinatestenvironment. algorithmsacrossmultipleexecutionvenues.
Ultimately,effectiveriskcontrolcanonlybeachievedifthe Trade automation should lead to less risk not more.
business gives a mandate to a risk management team with a Computers are not prone to manual trading errors such as
clear risk policy that is independent of the trading confusingabuywithaselloraddinganextrazerotothetrade
organisation. This must be underpinned by rigorous risk quantity. They also react far faster than a ‘Point-and-Click’
procedures which are managed through continuous risk tradertocapturebestbidsandoffers.PTRMsolutionswillalso
assessment. Properly implemented, a PTRM platform will do executestop-lossorauto-hedgetradestominimiseexposureto
precisely this and will actually help to reduce market risk adverse market movements. The key to risk mitigation is the
comparedwithmanualtradingandriskpractices. provisionofariskframeworkthatwillallowriskmanagersto
limitmanagetradingalgorithmsinreal-time.
TheEndoftheHumanTrader? APTRMsolutionisonlyasgoodasthetradingstrategiesand
In short, most definitely not. The significance of PTRM risk procedures that are deployed. They can enhance trading
relativetotraditionalmethodsofexecutionneedstobekeptin productivityandprofitabilitybutrigoroustestingandhuman
context – PTRM algorithms are essentially automated trading supervisionofthealgorithmsinoperationisessential.
tools that drive increased productivity in trading operations. Anecdotal evidence suggests that the majority of energy
Effectivelyimplemented,PTRMcanenhanceprofitabilitywhilst trading groupshave deployed aPTRM solution or plan todo
mitigatingdownsidemarketrisk.However,itshouldbeevident so within the next year. As we have seen in the financial
that the algorithms driving PTRM are only as good as the securities markets, the main catalyst for PTRM adoption is
trader/programmerwhocreatesthem.Moreover,PTRMcannot competition. PT is established in oil markets and early
replacehumanelementsinmanykeytradingactivitiessuchas adopters in gas and power are now reaping the benefits.
structuringoriginationcontractsandvoice-brokeredOTCs. ‘Point-and-Click’powertradersareseeingbestbidsandoffers
Human traders are also essential in the PTRM supervision disappear off their screens before they can commit to them.
role, especially when markets are volatile and reactive to Thisisasuresignthattheyarelosingouttofasteralgorithms.
external price shocks. Most PTRM algorithms are mean- TheenergyPTRM‘armsrace’hascommenced...

revertingortrend-followingandcannotbeeasilyprogrammed
torespondtopricespikescausedbyshort-termsupply/demand
MikeReillyisHeadofCommodities,EMEA,withProgress®
Apama®–aglobalproviderofComplexEventProcessing(CEP)
imbalances (e.g. the failure of large generation plant or
platformsforprogrammatictradingandriskmanagement.
surprise oil inventory data) or longer-term jumps caused by E: mreilly@progress.com
militaryconflictorglobalrecession. www.progress.com/apama
worldPower2009 93
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