Jun 24, 2010

Reflecting on SIFMA: Risk and the Explosion of Market Complexity

As SIFMA winds down today at the NY Hilton, it’s clear that risk is still at the forefront of everyone’s mind—and more specifically, being able to manage risk quickly. Algorithmic trading technologies were bountiful, hardware manufacturers were there with the latest high-speed systems (including some exciting stochastic simulation capabilities on the GPU), and there was even a complete cockpit racing simulator in case you didn’t get the message: “don’t be stuck in a Mini when a Formula 1 is required.”

All of this is not surprising, as people are still trying to sort out the best ways to ensure their companies are prepared to handle extreme volatility (see: The Crash of 2:45). But the common stress underlying every exhibit, speaker and attendee was that the financial markets are more complex than ever, and managing that complexity is going to take some creativity and innovation. 

Mark Pesonen of Bloomberg discussed this in his keynote on Tuesday, addressing the explosion of market complexity—seen in everything from the number and types of market participants and the volume of new market data, to the types of instruments being developed. Whereas for many years, firms were able to simply rely on a few information sources and broker relationships, companies now have to be able to manage and respond to a wide range of opportunities and risks from many directions to effectively participate in the market. 

On the derivatives side, this means that fund managers, banks, insurance companies and corporate treasuries of all sizes are upgrading their analytics to help them improve valuation accuracy and make better risk-management decisions. 

For us, this reinforced the message that now more than ever, having an analytics platform that can support all OTC derivatives and structured products in a consistent and transparent manner using market-standard models is a fundamental requirement of doing business today. 

Why? Well, from both a business and regulatory standpoint, it’s no longer an option to rely on broker quotes for illiquid or exotic deals. And if you manage multiple asset classes within your portfolio (rates, credit, equities, FX, etc.), you’ll need a way to model correlations using stochastic scenarios to get any kind of realistic risk projections. Now consider the fact that you can’t always wait a week or even overnight for some of these calculations, and it’s clear why people are turning to Numerix and our partner solutions. 

On a totally separate note, it was surprising how many business intelligence vendors have already integrated full iPad support on their platforms. The financial community tends to be among the early adopters, but it’s still interesting to see how quickly providers are seeing the device as something that’s as relevant to develop for as mobile platforms. Will we see a similar push on Andriod tablets later this year? 

Thanks to everyone who stopped by the Numerix booth, and we hope to see you at Quant Congress in July.

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