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Alternative Market Briefing

Rise of high-frequency trading in Europe a challenge for traditional asset managers

Thursday, May 18, 2017

Komfie Manalo, Opalesque Asia:

The rise of high-frequency trading in Europe, dominating over 80% of the market, has become a challenge for traditional asset managers especially when it comes to risk management, said Philippe Malaise, chairman of advisory firm Koris International at the latest Opalesque 2017 France Roundtable.

Malaise gave the examples of the yuan devaluation in August 2015 and the Brexit vote in June 2016 which triggered significant volatility spikes. However, looking at volatility clustering, volatility reverted to its mean very quickly after these events, much different to the events in September 2008 where in the wake of the collapse of Lehman Brothers high volatility continued.

In case of Lehman's collapse, volatility took a number of months to mean revert. Malaise said the market saw the same effect in just a couple of days or even hours with the Trump election.

He added, "This makes it very difficult to control extreme risk in such conditions. When, for example, you must comply with stringent constraints in terms of max drawdowns, so let's say you can't breach a certain threshold of loss, then you must reduce exposure. But just before the market rebound, this could be the end of your strategy simply because you had to respect the risk budget initially set! This is a major challenge for a number of asset man......................

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