Operational risk refers to the potential for losses arising from inadequate or failed internal processes, people, systems, or external events. In trading contexts, operational risks include system failures, human errors, fraud, regulatory violations, and business continuity disruptions. These risks can cause significant financial losses beyond market-related risks.

Operational risk management involves implementing robust procedures, backup systems, staff training, and compliance monitoring to minimize potential failures. Technology risks have increased with electronic trading, while regulatory risks have grown with complex compliance requirements. Understanding operational risks helps build resilient trading operations.

Real-world example: A trading firm loses $50 million due to a software glitch that incorrectly executed thousands of trades, demonstrating how operational risk can create losses unrelated to market movements and highlighting the importance of system testing and controls.