High Stakes: An Examination of Risk Management on the Buy Side (Part 1)

flash-crash-graph — This chart shows the Volume Synchronised Probability of Informed Trading Index (VPIN) over the course of the Flash Crash on May 6, 2010. The blue line shows the market value of the E-mini S&P 500 futures contracts that were the focus of the collapse (right-hand axis), while the green and red lines represent the VPIN and the percentile of the historical distribution (dating back to August 1, 2008) this corresponds to, respectively (left-hand axis). Note the non-linear timescale on the horizontal axis, showing that each sample is taken after a trade volume equal to 1/50th of average daily volume-roughly 41,000 trades. The VPIN enters the 90th percentile of the historical distribution after the E-mini value had dropped by merely 1 percent, suggesting the vast amount of flow at this point was "toxic." Originally formulated for Risk magazine by David Leinweber of the Haas School of Business at UC Berkeley.

tony-feature-djia-chart — Fat Tail Modeling (Source: FinAnalytica)

breslow — Stuart Breslow, Citadel Technology

david-merrill-finanalytica — David Merrill, FinAnalytica

thomas-lee-northpoint — Thomas Lee, NorthPoint

- By Anthony Malakian
- @a_malakian
- 26 Mar 2013

In 2008, the capital markets witnessed the collapse of some of Wall Street’s most prestigious investment banks. The resulting typhoon laid waste to many a hedge fund, asset manager and pension fund. Risk systems proved to be impotent. Much was learned and improved upon, but as the markets become increasingly automated and fragmented, risk concerns weigh heavy on the minds of fund managers.

This examination by Waters of risk management on the buy side looks at the new technologies, strategies and

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