Trading & Risk Technology

“JPMorgan Chase Loses $2B in Poorly Monitored Synthetic Hedge.” Headlines like this have abounded since Thursday, screaming out for a standup comedian, you know, one of the smart-mouth ones like Jon Stewart, to riff off:

• “Hey, when I lose my keys, I look behind the fridge … did they try that yet?”
• “Jeez … for $2B I can get them a real hedge, and I can even throw in a shrubbery!”

But this event further opens the door for critique from those of us who have been selling real-time analytics software — and frequently discussing our key use cases on trade and position monitoring.

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Some welcome good news for financial institutions came out in April’s “Building a Data Management Foundaton” webcast. Most respondents (80%) felt that their current data management systems are in good shape for future regulatory requirements. These regulatory requirements include Legal Entity Identifier (LEI) adoption, where a plurality have either made necessary changes or have a plan to do so.

More good news are the anticipated benefits from LEI – with over 86% of the audience convinced that LEI will be a positive change within 5 years of adoption.

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“The financial service industry has an image problem,” market information and strategies magazine Financial Advisor wrote after last week’s SIFMA Private Client Conference. “Earning back trust was a common theme during the one-day conference.”

There was optimism as well, with talk of nobility in financial services, increasing the “standard of care” and “stewardship.” But many acknowledged the damage done by market manipulation, bad actors and poor performance, with one speaker venturing that Generation X is completely soured on investing.

After tales of Goldman Sachs managing directors calling clients “muppets,” can you blame Generation X? Even recent activity would validate its concerns.

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Citigroup needed something positive. It reported increased revenue and profit during its Q1 earnings Monday, which is fortunate, given that “the global banking group could use some good news to counter the disappointment after it recently failed the Fed’s stress test,” Forbes noted last week.

Stress testing, or the U.S. Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR), is a rigorous examination that delves into the health of banks via 25 crisis-simulating variables. Such variables include 13 percent unemployment and a 50 percent drop in equity prices. The test is meant to inspire confidence that — unlike in 2008 — banks today can weather harrowing storms.

But what happens when there’s no confidence in the test?

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Efficacy and effectiveness of trading strategy lifespans are dropping, be they buried in a high-frequency trading algorithm or a long-term human trading based strategy. That’s a disturbing enough trend before considering that an increasing number of market participants are analyzing more information in greater depth to identify arbitrage opportunities or patterns that can generate profit.

A technological solution for increasing trading strategy lifespan to maximize all of that market research may not have been obvious during SAP’s press conference in San Francisco on Tuesday either, given the enterprise resource planning (ERP) vendor’s focus on becoming the fastest-growing database company by 2015. But SAP executives at The Westin St. Francis outlined how the company plans to enhance its presence in the real-time analytics space — and a lot of that has to do with SAP’s acquisition of Sybase.

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“During the recent crisis, we had a number of powers that might have been used on too-big-to-fail institutions,” Esther George said at the Hyman P. Minsky Conference in New York on Wednesday. “But [they] were not employed to any notable extent.”

What Ms. George, president of the Kansas City Fed, implies here is that the powers available to authorities in 2008 would have been sufficient to rein in high-risk banking practices, but pre-2008 regulators (including the Fed itself) did not execute those powers.

If this is the case, why have we had to put up with Dodd-Frank? Read the rest of this entry »

“We can rebuild him,” begins the old television series The Six Million Dollar Man. “We have the technology.”

With those words, U.S. intelligence chief Oscar Goldman launched Steve Austin’s career (the fictitious astronaut’s, not the stone-cold wrestling personality’s) as a red-jumpsuit-clad cyborg action hero. The bionic body parts that saved Austin’s life after the violent end of a test flight also made him “better … stronger … faster” than other Cold War operatives — and 1970s pop icons.

Electronic traders don’t have bionic body parts, such as Austin’s night vision-capable 20.2:1 zoom eye, but they do have visualization tools to better handle unstructured data. Visualization tools can process data volumes that would be impossible for lone humans to process, but the technology cannot see everything by itself.

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“Float like a butterfly; sting like a bee,” was Muhammad Ali’s catchy strategy for brutally striking while nimbly avoiding hits in the chaotic environment of the boxing ring. Capital markets firms require similar agility when trading in the roller coaster world of high market volatility.

It is a world that has seen instruments tied to bad home mortgages, so it should be no surprise that we now have instruments linked to volatility. Read the rest of this entry »

It was a compelling yet simple question: “Why haven’t we solved risk management problems?” Years after the financial collapse of 2008 — which was years after the warning signs began appearing — risk managers and executives still cannot see eye-to-eye on risk management architecture.

Luckily the business reporter who asked the astute question last week did so at Sybase’s “At the Edge” exclusive risk seminar, where we were about to reveal the results of two studies that provide the answer.

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Despite weeks of daily tests to the ensure company’s systems could handle its own Initial Public Offering, BATS Global Markets promptly noticed that they had a problem last Friday.

“Staff members were quickly dispatched to diagnose and fix the software problem, and within minutes the company had called the SEC to alert the agency,” The New York Times’ DealBook reported. The problem was a “software bug” that blocked orders to buy the stock, according to BATS. Meanwhile, mounting orders to sell pulled the share price below a penny.

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