The ability to analyze credit exposure and collateral requirements quickly in real time was always critical. Critical to brokerages and banks wanting to reduce counterparty risk. Critical to making the right trading decisions. Critical to pricing transactions fairly. And critical to fund managers trading in swaps.
Now, measuring risk is getting serious. And happening in what is known as real time. There’s no turning back and there is technology available. It combines complex event processing – a.k.a. applying rules on lots of streaming data quickly – with real-time business intelligence.
There is no reason buy- and sell-side firms can’t make decisions with this minute’s data, rather than yesterday’s and wait for several hours or even a day.
Financial firms will have plenty of impetus. Regulatory mandates such as the Dodd-Frank Wall Street Reform Act and its counterpart across the Atlantic called the European Market Infrastructure Regulation will force risk managers at buy and sell-side firms to look for ways they can assess counterparty and portfolio impact in a real-time pre-trade basis. The May 2010 Flash Crash may also have highlighted the need for constant, as opposed to daily, risk analysis.
Risk managers won’t have an easy time. To bridge the gap between the quants who come up with trading models and decisionmakers who execute orders, they must straddle across three time slots. Those are the past, the present and the future.
“They [risk managers] must simulate the impact of various strategies for credit exposure, inclusive of any collateral held, in real-time and communicate their results to traders and senior management effectively,” says Allen Whipple, principal at Jersey City, N.J. based Quartet FS, a business analytics and intelligence software provider.
The problem: the necessary data is located in multiple business applications and accessing it can be time-consuming. Risk managers can’t afford to wait and rely on calculations which take hours to complete because the market changes in seconds.
Quartet FS, says Whipple, offers risk managers interactive reports in seconds, where it used to take hours. The fast reporting comes from a product called ActivPivot which is described as a “real-time in-memory object based generic aggregation OLAP engine.”
Traditional OLAP engines make decisions daily or monthly. But ActivePivot processes large quantities of data about trading, valuation and risk management instantly.
Why? It avoids the delay associated with mining data from databases. Data is interpreted as native “objects” rather than snapshots in a database or table. By operating as an “in-memory” OLAP engine, ActivePivot can instantaneously apply updates from various sources and push dynamically calculated results, called measures, to users immediately.
Other players which converge complex event processing tools with business intelligence tools with OLAP components include IBM, Informatica, Streambase, Tibco and Oracle. ActivePivot isn’t trying to replace those systems, says Whipple, but complement them where high volume, real-time performance is required.
Its applications: real-time pre-trade margining and collateral optimization. position exposures, profit and loss, and value at risk. Quartet FS has more than 20 bank customers and is marketing to traditional and hedge fund managers.
Quartet FS lists CMC Markets, an online derivatives trading firm, as using ActivePivot for real-time position recordkeeping, revaluations and collateral requirements An undisclosed European bank is using ActivePilot to calculate Value at Risk using Monte Carlo simulations.
Real-time OLAP technologies, such as ActivePivot, can also work in conjunction with classic risk management platforms such as Algorithmics, Quantifi or Quic which offer snapshot views of risk on a daily basis. The raw analytic results from those risk providers can feed into in-memory OLAP platforms to provide end users with interactive mining capabilities down to the trade level. Incremental impacts can also be assessed immediately and incorporated into the pre-trade compliance workflow, says Whipple.
This article originally appeared on Securities Technology Monitor.
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