Comment Text:
I believe that the recommendations on pre-trade risk practices are a “good” start, however, they are very basic and in some cases, they might do more harm than good. I am referring to the lot size limit and the intraday position. Those parameters can only be effective if the system is “aware” of the entire portfolio and not basing decision on a single order. i.e, a large order might be rejected due to the limit size but the intent of the order is to liquidate a very large losing open position. Matching engines are totally blind to the composition of trading firm portfolios; unless the pre-trade system is “smart” enough to distinguish between risk-increasing orders versus a risk- reducing orders then this rule will only create headaches for all the parties in the supply chains. The same argument can be used against intraday position limits. The accumulated position can be a risk reducing strategy either through spreading of an open position or just plain liquidation. Another, limitation of the proposed recommendations is not being able to deal with arbitrage trading between two products traded at two different exchanges. This trading strategy is a dominant one at large property trading firms.
