In the wake of the rising volumes, computer glitches and capacity shortages experienced during the market's brutal decline in late February, hedge funds are reevaluating their systems and capacity needs, according to several industry consultants and IT service providers. After Feb. 27, when the stock market dropped 416 points and there were market data lags at Dow Jones & Company and slowdowns at the New York Stock Exchange, it's not surprising that hedge funds are reviewing their infrastructures to ensure they can perform in a more-volatile market.
Consultants and service providers say most large hedge funds were not impacted by the volatility in late February in terms of executing their orders and getting back position reports. "Larger firms that have invested in technology and operations have a robust technology infrastructure," says Jayesh Punater, CEO of Gravitas Technology, an IT services firm in New York that provides consulting, software development and systems integration for the alternative investment community. "Not only were they better able to cope with the market [decline], they were able to cope with market dynamics."
Still, hedge funds are concerned about their applications and the capacity of their infrastructures to withstand heavy trading volumes, say sources. "On a macro-level it definitely pushed people [who rely on automated trading] to look at capacity not only within infrastructure, but sustaining speed when capacity gets pushed," says Greg Treacy, director of U.S. sales at Neonet, an agency broker that provides direct-market-access trading to hedge funds and other buy-side firms.
Business as Usual?
Even prior to the recent market volatility, hedge funds that attract investments from institutional investors were focusing on business continuity and disaster recovery (see related article, page 21). "When volatility strikes, you can feel the tension around making sure the operations are up and running," says Jim Loy, managing director at Gravitas. "There's definitely a link between volatility and the business continuity and disaster recovery curve."
Now hedge funds also are looking to beef up the real-time applications that generate reports on the funds' current investments and power their ability to perform "what if" scenario analysis on their holdings. These tools can be "nicely integrated with accounting systems and OMSs [order management systems] to allow the portfolio manager to make decisions," Gravitas' Punater says.
Some funds are setting up internal data warehouses so that they can generate their own reporting infrastructure and look at risk across portfolios, adds Loy, who previously was head of infrastructure at Tiger Management, a leading hedge fund in the late 1990s, and subsequently worked in Morgan Stanley's prime brokerage business. "It truly simplifies the job of the operations departments as to what's the overall P&L for the firm, and there's attribution to different portfolio managers," Loy says. "It also gives hedge funds control over their data without being locked into canned reports," he explains. "You're not beholden to a vendor and you can slice and dice your data."
Another area of concern is the back-office "plumbing," such as making sure "the Microsoft applications and the e-mail and business continuity are robust so they are able to deal with huge volumes in trading," adds Gravitas' Punater. As hedge funds grow larger and they expand into multiple strategies and products, they are finding that their back offices have not kept up with their rapid growth in assets, he explains. In particular, hedge funds are focusing on accounting and back-office processing of trades, Punater observes, noting that investors also are demanding that funds have robust back-office recovery plans. In addition, "[Funds] are also having a hard time getting the data to the portfolio managers," the Gravitas CEO asserts. "They may need to reengineer or re-architect their operations."
Small Firms, Big Problems
Small hedge funds, which comprise the bulk of the industry, have the most issues to deal with, as most have not invested in robust systems and could be running their positions and reconciling trades in spreadsheets, warn industry consultants and vendors. Out of the total universe of 9,000 hedge funds (or 13,000, as some studies report), there are only about 400 or 500 that have robust infrastructures, estimates Sameer Shalaby, CEO at Paladyne Systems, a provider of a hosted front-to-back-office technology for the hedge fund community. "The bulk of the market has little or no technology infrastructure," he contends.
Typically, only funds with $1 billion or more in assets can afford a strong infrastructure, according to Shalaby. They don't get to be a multibillion-dollar fund without investing in infrastructure, as institutional investors require this as part of the due-diligence process, he notes.
But the bulk of the industry's assets are in the smaller hedge funds that can't afford to build their own infrastructures, Shalaby continues, and these funds may "start cutting corners" by doing some things on spreadsheets, or wait until next year to invest in an accounting system or order management system. "They'll definitely cut corners to manage costs until they have capital to deploy the infrastructure," Shalaby says.
But having the right risk-management systems in place is critical, particularly during volatile trading periods. "You can't fly a plane without radar, and in trading, some of these players have hundreds if not thousands of positions, and if you don't have a good risk-management system, you don't know what you're risks are," says Steven Harrison, president and COO of Imagine Software, which offers Derivatives.com, a real-time hosted risk management system that aggregates positions from multiple prime brokers.
To tap functionality they otherwise may not be able to afford, most of these smaller hedge funds rely on their prime brokers to supply their technology, which usually includes connectivity to execution venues, market data and software to manage their positions. But, "The moment the hedge fund adds a second prime broker, it finds out the technology that one prime broker provides cannot aggregate the positions of the second prime broker," relates Gravitas' Punater. While some prime brokers offer a service to aggregate the data from the other primes, it's not in the interest of the hedge fund to let one prime broker see all of its positions and risk revealing its proprietary strategies, which is why the fund has multiple prime brokers in the first place, he notes. But if hedge funds can't consolidate all of their positions, they may not be aware of their overall risk, Punater stresses. Clearly, this could raise risks for the fund's clients, he adds.
A Little Help, Please
Rather than face these IT infrastructure challenges on their own, many hedge funds are turning to solution providers that can offer an integrated hosted infrastructure with all the components that the hedge fund needs as well as sufficient backup capabilities. "The idea is to supply a hedge fund with all the technology it needs to run its business, taking care of redundancy, disaster recovery requirements and all the connectivity to markets," says Paladyne's Shalaby. For its hedge fund OMS, Paladyne partners with other vendors, including NYFIX for order routing and market connectivity, Reuters for market data, and Advent's Geneva for derivatives accounting. "Our clients could frankly trade from an Internet cafe if they had to access their portfolios," Shalaby contends.
Such bullet-proof capabilities are becoming a competitive differentiator for hedge funds. According to Shalaby, one reason hedge funds are reacting to the recent market turbulence is that they are facing scrutiny from institutional investors that are asking about the resiliency of the funds' infrastructures and how they performed under previous emergencies, such as 9/11. "These are now becoming standard due-diligence questions," Shalaby says. "If you were down and you're competitor was up, then guess what, I'd rather invest with your competitor."
Publish Date:Apr 30, 2007
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=199200266
Thursday, May 17, 2007
Thursday, May 03, 2007
WS&T News - Wall Street and DTCC Bring Derivatives Processing into 20th Century
At the SIFMA show today, Frank De Maria, global head of derivative client services and operations at Merrill Lynch, offered an interesting quote from Alan Greenspan, made six weeks ago: “I was shocked to find credit derivatives speculation and clearing operated with 19th century technology.” He was talking about trades being handled by phone, fax and paper. De Maria then Googled other 19th century inventions and found the stapler, barbed wire, dynamite and the zipper among them. Point being, it's time for modernization. Merrill Lynch and 13 other Wall Street firms have been working with the DTCC to build a data warehouse for derivatives, such that all derivatives trading data are in one place and there's one "golden copy" of every trade record.
"There will still be fails, but you will know the source of every fail," De Maria says. "You can proactively manage a fail, where today it's reactive."
So far, 850 firms are participating in the data warehouse, which is called Deriv/SERV. That includes 500 hedge funds, 150 asset managers and one custodian, according to Janet Wynn, managing director of the DTCC. "We will run heavy user acceptance tests this year," she says.
The DTCC also hopes to add other types of instruments to the warehouse as well.
In a separate session, Noland Cheng, managing director of Morgan Stanley and chairman of SIFMA's operations committee, said the committee is working to build an industry data warehouse that will combine records processing for different types of investments, reduce overhead effort for a lot of firms, and help regulators perceive the industry as efficient.
Publish Date: May 03, 2007
Source URL: http://www.wallstreetandtech.com/blog/archives/2007/04/wall_street_and.html
"There will still be fails, but you will know the source of every fail," De Maria says. "You can proactively manage a fail, where today it's reactive."
So far, 850 firms are participating in the data warehouse, which is called Deriv/SERV. That includes 500 hedge funds, 150 asset managers and one custodian, according to Janet Wynn, managing director of the DTCC. "We will run heavy user acceptance tests this year," she says.
The DTCC also hopes to add other types of instruments to the warehouse as well.
In a separate session, Noland Cheng, managing director of Morgan Stanley and chairman of SIFMA's operations committee, said the committee is working to build an industry data warehouse that will combine records processing for different types of investments, reduce overhead effort for a lot of firms, and help regulators perceive the industry as efficient.
Publish Date: May 03, 2007
Source URL: http://www.wallstreetandtech.com/blog/archives/2007/04/wall_street_and.html
Wednesday, April 25, 2007
State Street Strengthens Derivative Servicing Capabilities
Industry Veterans Kevin Sullivan and Neil Wright Join State Street To Focus on Further Developing Derivative Processing Solutions
State Street Corporation (NYSE: STT), the world’s leading provider of financial services to institutional investors, today announced the appointments of Kevin Sullivan and Neil Wright to senior vice presidents with responsibility for overseeing the ongoing development of State Street’s derivative processing capabilities.
Sullivan co-founded Eagle Investments Systems in 1989. The company was acquired by Mellon Financial in 2001, and Sullivan remained to serve as Eagle’s chief technology officer up until 2006. As a product specialist at State Street, Sullivan will be responsible for building the technology infrastructure to support the company’s derivative processing.
Wright joined State Street from Citigroup where he was a director of derivative operations.
Prior to this role, he was senior vice president of asset manager solutions for JPMorgan Chase. As a product expert, he will be responsible for developing strategies to support State Street’s derivative servicing capabilities working closely with the business leaders, derivative specialists and information technology teams.
“These two industry veterans have devoted a considerable portion of their respective careers to developing the most sophisticated derivative processing capabilities,” said Joseph Antonellis, vice chairman, chief information officer and head of State Street’s North American investor services business. “Staying ahead of industry trends and automating the derivative servicing process will be key challenges for service providers. We are delighted to add the extensive experience that Kevin and Neil will bring to our teams and to the development of a derivatives center of excellence.”
Sullivan and Wright will further build on State Street’s derivative servicing capabilities for its customers who are increasingly using derivative instruments as investment tools in their portfolios.
State Street Corporation (NYSE: STT) is the world's leading provider of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $12.3 trillion in assets under custody and $1.8 trillion in assets under management at March 31, 2007, State Street operates in 26 countries and more than 100 geographic markets worldwide. For more information, visit State Street’s web site at www.statestreet.com.
Publish Date: April 19, 2007
Source: Business Wire
State Street Corporation (NYSE: STT), the world’s leading provider of financial services to institutional investors, today announced the appointments of Kevin Sullivan and Neil Wright to senior vice presidents with responsibility for overseeing the ongoing development of State Street’s derivative processing capabilities.
Sullivan co-founded Eagle Investments Systems in 1989. The company was acquired by Mellon Financial in 2001, and Sullivan remained to serve as Eagle’s chief technology officer up until 2006. As a product specialist at State Street, Sullivan will be responsible for building the technology infrastructure to support the company’s derivative processing.
Wright joined State Street from Citigroup where he was a director of derivative operations.
Prior to this role, he was senior vice president of asset manager solutions for JPMorgan Chase. As a product expert, he will be responsible for developing strategies to support State Street’s derivative servicing capabilities working closely with the business leaders, derivative specialists and information technology teams.
“These two industry veterans have devoted a considerable portion of their respective careers to developing the most sophisticated derivative processing capabilities,” said Joseph Antonellis, vice chairman, chief information officer and head of State Street’s North American investor services business. “Staying ahead of industry trends and automating the derivative servicing process will be key challenges for service providers. We are delighted to add the extensive experience that Kevin and Neil will bring to our teams and to the development of a derivatives center of excellence.”
Sullivan and Wright will further build on State Street’s derivative servicing capabilities for its customers who are increasingly using derivative instruments as investment tools in their portfolios.
State Street Corporation (NYSE: STT) is the world's leading provider of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $12.3 trillion in assets under custody and $1.8 trillion in assets under management at March 31, 2007, State Street operates in 26 countries and more than 100 geographic markets worldwide. For more information, visit State Street’s web site at www.statestreet.com.
Publish Date: April 19, 2007
Source: Business Wire
Tuesday, April 24, 2007
Credit Derivatives - At the risky end of finance
The use of credit derivatives has boomed and bemused. These new financial instruments have yet to face their biggest test.
Read the complete article at - http://economist.com/business/displaystory.cfm?story_id=9033348
Publish Date:19-April-2007
Source:The Economist
Read the complete article at - http://economist.com/business/displaystory.cfm?story_id=9033348
Publish Date:19-April-2007
Source:The Economist
Isda trumpets progress in credit derivatives while regulators sound alarm
Strong progress has been made in speeding up post-trade processing and cutting the backlog of outstanding confirmations in the fast growing credit and equity derivatives markets, says the International Swaps and Derivatives Association (ISDA).
Post-trade processing of privately negotiated derivatives transactions continues to significantly improve, says Isda, with dealers reducing levels of outstanding confirmations across the asset classes.
Isda's benchmark survey shows the time it takes to process credit derivative trades has fallen to 5.5 days, compared with 16.2 days in 2006, and there has been a reduction to 14 from 50 days for rates products.
Equity levels have fallen to 21 days from around 50, while commodities stand at 7.5 days compared to 23.3 days a year ago.
Among the large firms, over 70% of credit derivatives confirmations are sent out by T+1, up from 50% a year ago.
Commenting on the figures, Robert Pickel, executive director and chief executive officer, Isda, says: "Against a backdrop of robust growth in our business, the industry continues to make real progress in strengthening its operational infrastructure and reducing risk."
But speaking at Isda's annual meeting Jean-Claude Trichet, president of the European Central Bank, called for further market action to improve transparency in global credit derivatives sector and warned that financial markets may have become "excessively complacent".
Reflecting the concerns of regulators worldwide, Trichet warned that credit derivative instruments had not yet been properly "stress-tested", observing that some aggressive investors seemed to display a cavalier risk-taking attitude even while their balance sheets were not necessarily resilient enough to handle shocks.
Publish Date:19-April-2007
Source:http://finextra.com/fullstory.asp?id=16822
Post-trade processing of privately negotiated derivatives transactions continues to significantly improve, says Isda, with dealers reducing levels of outstanding confirmations across the asset classes.
Isda's benchmark survey shows the time it takes to process credit derivative trades has fallen to 5.5 days, compared with 16.2 days in 2006, and there has been a reduction to 14 from 50 days for rates products.
Equity levels have fallen to 21 days from around 50, while commodities stand at 7.5 days compared to 23.3 days a year ago.
Among the large firms, over 70% of credit derivatives confirmations are sent out by T+1, up from 50% a year ago.
Commenting on the figures, Robert Pickel, executive director and chief executive officer, Isda, says: "Against a backdrop of robust growth in our business, the industry continues to make real progress in strengthening its operational infrastructure and reducing risk."
But speaking at Isda's annual meeting Jean-Claude Trichet, president of the European Central Bank, called for further market action to improve transparency in global credit derivatives sector and warned that financial markets may have become "excessively complacent".
Reflecting the concerns of regulators worldwide, Trichet warned that credit derivative instruments had not yet been properly "stress-tested", observing that some aggressive investors seemed to display a cavalier risk-taking attitude even while their balance sheets were not necessarily resilient enough to handle shocks.
Publish Date:19-April-2007
Source:http://finextra.com/fullstory.asp?id=16822
Monday, April 09, 2007
Spending on OTC derivatives IT to hit $1.3bn in 2011 - TowerGroup
Spending on OTC derivatives trading technology by institutional brokers will rise from $915 million in 2007 to $1.3 billion in 2011, a compound annual growth rate of 9.5%, according to the latest TowerGroup forecasts.
But the analyst group says although rapid growth in OTC derivatives is driving technology spending there is currently no "single system" for broker dealers that provides the structure and processing capabilities required.
With the rise in e-trading and automation, TowerGroup says certain "vanilla" OTC derivative products can be handled effectively as they are, but processing of hybrid derivatives is continuing to challenge broker dealers.
In order to improve processing, TowerGroup recommends that firms remove legacy systems that don't support new volumes and products and combine derivatives trading systems with a service-oriented architecture (SOA) to aid in the integration of disparate trading applications. Dealers should also look to harness extra computing power for complex risk measurement through the use of Grid computing.
Firms should also develop a vendor management system, says TowerGroup, and determine which suppliers have developed modules that represent emerging industry standards.
Stephen Bruel, analyst in the securities and capital parkets practice at TowerGroup, says: "Due to the fast moving nature of the OTC derivatives environment, the industry is seeing increased spending on technology as well as increased pressure on technology firms to keep up with derivatives innovation. The successful management of these challenges will enable broker dealers to reap the rewards associated with this high growth, high margin derivatives business."
Last month the Bank for International Settlements called on financial firms to introduce automated systems to cut confirmation backlogs in the over-the-counter derivatives markets.
Publish Date:04-09-2007
Source:http://www.finextra.com/fullstory.asp?id=16765
Tuesday, April 03, 2007
Algo Takes Credit
A new report predicts algorithmic trading will move into the credit and commodity markets within the next decade, but there is work to be done to ensure success.
The mushrooming market for algorithmic trading will expand into the markets for credit default swaps (CDSes), corporate securities and commodities, according to a new report from Datamonitor, a London-based analyst firm. The report, "Trading System Transformations in Global Markets," predicts that the next generation of algorithmic trading models will penetrate the credit and commodity markets by 2015.
Nii Barnor, an analyst at Datamonitor, says Bank of America, Citi, Goldman Sachs, Lehman Brothers and Morgan Stanley are leading the charge in the evolution of algorithmic trading to meet the demands of traders seeking ever-faster connectivity to new markets. "As the market becomes more standardized, it is expected that algorithms will move into the realm of CDSes and corporate securities. In addition, as commodity exchanges become more electronic, fluctuations in prices will push the demand for mathematical solutions to quickly capitalize on opportunities," the report states.
Datamonitor estimates that global spending on algorithmic trading on derivatives, foreign exchange and commodities will more than double from $31 million in 2006 to $79 million in 2009. However, that figure is still dwarfed by current global spending on algorithmic trading for equities trading, which reached $176 million in 2006.
Read the complete article at http://www.watersonline.com/public/showPage.html?page=435896
Source:http://www.watersonline.com
Publish Date:01-March-2007
The mushrooming market for algorithmic trading will expand into the markets for credit default swaps (CDSes), corporate securities and commodities, according to a new report from Datamonitor, a London-based analyst firm. The report, "Trading System Transformations in Global Markets," predicts that the next generation of algorithmic trading models will penetrate the credit and commodity markets by 2015.
Nii Barnor, an analyst at Datamonitor, says Bank of America, Citi, Goldman Sachs, Lehman Brothers and Morgan Stanley are leading the charge in the evolution of algorithmic trading to meet the demands of traders seeking ever-faster connectivity to new markets. "As the market becomes more standardized, it is expected that algorithms will move into the realm of CDSes and corporate securities. In addition, as commodity exchanges become more electronic, fluctuations in prices will push the demand for mathematical solutions to quickly capitalize on opportunities," the report states.
Datamonitor estimates that global spending on algorithmic trading on derivatives, foreign exchange and commodities will more than double from $31 million in 2006 to $79 million in 2009. However, that figure is still dwarfed by current global spending on algorithmic trading for equities trading, which reached $176 million in 2006.
Read the complete article at http://www.watersonline.com/public/showPage.html?page=435896
Source:http://www.watersonline.com
Publish Date:01-March-2007
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