Ordering – transactional risk

Transactional risks are the real problem in the first place for arbitrage, but they also affect directional strategies. In simple terms, this is a risk of the following:

• Entering or exiting the market at a wrong price
• Entering or exiting the market at a wrong time
• Entering or exiting the market with a wrong trading size
• Not entering or exiting the market at all

All four situations are more than possible in all markets and are even quite frequent during periods of insufficient liquidity (see Chapter 3, FX Market Overview from a Developer’s Standpoint, for a more detailed discussion of liquidity issues).

Key takeaway

Transactional risks are managed by a set of algorithms that are also an essential part of any trading application.

Well, it’s been quite a trip across the various risks, and we now understand that the initial idea of a trading application with a simple and straightforward linear logic definitely won’t work in real life. Now, we can suggest something (unfortunately) more complex, but (fortunately) more realistic.