By Alexa JaworskiWhile the financial services industry has long used complex event processing, or CEP, platforms to speed up their algorithmic trading and market data efforts, buy- and sell-side firms are increasingly embracing the technology for risk management.Despite the industry's declining IT spending, risk is one of the areas where firms continue to invest. "A lot of that is driven by the need to have more up-to-date risk information more quickly," says Kevin McPartland, senior analyst with New York-based Tabb Group. Traders and compliance and risk management teams all need to understand the firm's exposures in real time, he says, which is where event processing's ability to rapidly sort through vast amounts of data comes in handy."There are an awful lot of firms who are interested in real-time risk," says Adam Honoré, senior analyst at Boston-based Aite Group. "You want to be able to react much faster, especially when you're dealing with counterparty risk. If you're talking about Lehman, Madoff--you've got to be able to react and know your exposures."In a report issued last year, Honoré noted that risk management has climbed to the second most common type of CEP implementation, behind trading. Buy-side block trading platform Liquidnet announced last June that it uses technology from Coral8 to monitor trades and identify suspect activity in real time, and London-based multilateral trading facility Turquoise is using a market surveillance platform developed by Progress Software Corp.'s Apama division and technology consultancy Detica Group. The U.K.'s Financial Services Authority also has a monitoring system from Apama and Detica.

Broker Interest

But brokerages have also been turning to the technology for their risk needs. Futures commission merchant Rosenthal Collins Group is expected to soon roll out a system that uses Coral8 technology to identify trading patterns that deviate from historical behavior. Last month, GFI Group, a London-based interdealer broker that specializes in over-the-counter derivatives, said that it plans to use a market and liquidity risk monitoring system from Aleri, which recently acquired Coral8.The new Aleri system, called Real-Time Risk Monitoring, combines the Chicago-based company's CEP platform with its online analytical processing server and is designed to let clients know when they have excessive exposure to a sector, asset class or counterparty. According to Don DeLoach, president and CEO of Aleri, GFI will be able to "absorb, normalize, aggregate and analyze information about various risk exposures in the firm, and then be able to dice and slice that so they can analyze risk concentration and zero in on the cause behind some of the issues they're seeing."GFI currently uses a homegrown system that provides the firm's risk department and senior business management with post-trade risk metrics, says Brian Farrelly, operations strategic projects director at GFI. Initially, explains Farrelly, the firm will use CEP tools to provide a real-time view of pre- and post-trade risk. "Transaction monitoring will be a byproduct of using CEP tools," he says, "in that it will enable us to define a broader range of risk scenarios we wish to monitor and be alerted to, over and above traditional risk metrics."GFI won't be alone in its decision to adopt a CEP platform for risk, according to Tabb's McPartland. "I'm sure we'll see this across all segments of financial services, whether it be the bulge-bracket investment banks, interdealer brokers, hedge funds, traditional asset managers--everyone is looking to manage risk more closely and effectively and closer to real time."

Prepackaged Risk Tools

CEP has always been capable of serving risk management purposes, notes McPartland, but "I think we'll start to see more out-of-the-box implementations focused on risk. It's been a bit of a trend for some of the CEP providers--instead of saying, 'here are your technology tools, go build whatever you'd like,' they're building solutions to common problems and using that as a starting point to sell to financial firms."Dan Hubscher, senior product marketing manager for capital markets at Progress Apama, says that clients interested in using CEP for risk management tend to be seeking a technology refresh. Rather than replacing a risk analytics system entirely, Hubscher says that some brokers could choose to "marry the analytics from the existing system, which tend to be sophisticated, with the CEP platform technology."Statistical arbitrage traders typically have used CEP to recognize trading patterns, says Aleri's DeLoach, but "as the market has matured, people have begun to realize that some [CEP] solutions out there are architecturally sound for processing a very wide range of use cases across the trade life cycle. Firms are beginning to realize they need to have, in essence, an instantaneous analysis of where their risk is across the trading operations and where they need to calibrate those positions or manage that risk."For some firms, CEP has become a competitive differentiator, points out Tom Price, senior analyst at research firm TowerGroup. Event processing technology can find selected pieces of data among the tremendous volume that enters an organization, says Price, and "can be used to identify risk elements--has a particular trader or desk exceeded their risk threshold?"This article can also be found at SecuritiesIndustry.com.

Register or login for access to this item and much more

All Information Management content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access