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| RISK MANAGEMENT IT COMES TO THE FOREFRONT IN THE WAKE OF SUBPRIME CREDIT CRISIS |
Ref: A/1824
Date: 7/7/2008
Contributor: Larry Tabb, Larry Tabb
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| Beleaguered firms will shift IT focus to enterprise-wide risk assessment and management, and core deliverables, as well as electronic trading and latency reduction. |
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It does not take long to notice when firms cut back on their electronic infrastructures: Their platforms are missing the newest features, algos are not performing as expected, asset classes and geographies are not covered, and execution costs go up. At the end of the day, lack of electronic trading investment will stand out like a sore thumb. So while other technology areas will see trimming, electronic trading will continue to see investment, as the larger firms will not want to be perceived as out of the market.
From a vendor perspective, opportunities will migrate from the smallest and the most cutting-edge to the largest and the most secure. During times of industry trauma, firms traditionally cut back on IT, centralize development to cut down on redundancy and slow the development queue, look to outsourcing to reduce cost and focus on core deliverables, and cut back on pushing the envelope. This will hurt many of the smaller vendors as firms focus on reducing the cost of core technologies (traditionally provided by the larger vendors) and cut back on newer, riskier technologies (traditionally provided by the more innovative, smaller vendors).
So while there will be blood, during fallout periods opportunity does not vanish; it just changes direction. The challenge is being flexible and gutsy enough to take advantage of the turbulence without taking too much risk. But as write-offs continue to increase, there is one thing of which we can be certain: The risk in risk management may be the least risk of all.
To provide the CRO with the appropriate risk infrastructure, firms will augment their Value at Risk (VaR) framework modeling to embrace scenario analysis. While VaR leverages various scenarios to calculate their risk levels, scenario analysis — depending upon the scenarios a firm runs — can provide a greater level of confidence in risk modeling.
In addition, three other key technologies will become increasingly important as firms revamp their risk platforms. First, normalizing and validating data across the enterprise will become critical. While the industry has been working on getting its data infrastructure correct for years, most firms have not tackled this on an enterprise basis. As firms begin to aggregate and analyze risk data on an enterprise level, data challenges become increasingly greater as different desks and groups use different underlying metrics to value assets or do not adequately align counterparty risk across divisions.
Further, it will become increasingly important for firms to manage enterprise risk on a more real-time basis — while maybe not on a sub-second basis, certainly intraday and, more likely, hourly. Historically, the difficulty of aggregating data and performing risk calculations has made enterprise risk management a pipe dream at many firms. However, as market, credit and operational risk management become more essential in running a modern investment bank; grid, cluster and utility computing become more common within investment banks; and organizations increasingly realize that it takes only one unhedged position to jeopardize the franchise, intraday risk calculations will become increasingly important in the corner office and the boardroom.
To obtain an intraday enterprise risk picture, firms will need a better data distribution platform to disseminate the data across the enterprise. It is one thing to know that the appropriate data comes from Source A, but tracking Source A to see if something has changed and propagating that change around to critical systems on a real-time basis will become increasingly important, as will distributing limits and risk warnings to the powers that be.
While risk and data management will remain on the front burner, all things electronic trading, low-latency, algorithmic trading and liquidity management will be top of mind as well. While the corner office and the board will not cry out, "We want algos," players in this market segment are either in it or not. On a traditional trading desk, a firm can cut the number of traders, reduce sales coverage, cut back on research or cut back on trading support. In a world where orders are entered by your clients, segmented by your algorithms, and executed through your dark pool and smart order router, however, if you do not have an electronic trading offering, you might as well shut down your business.
It does not take long to notice when firms cut back on their electronic infrastructures: Their platforms are missing the newest features, algos are not performing as expected, asset classes and geographies are not covered, and execution costs go up. At the end of the day, lack of electronic trading investment will stand out like a sore thumb. So while other technology areas will see trimming, electronic trading will continue to see investment, as the larger firms will not want to be perceived as out of the market.
From a vendor perspective, opportunities will migrate from the smallest and the most cutting-edge to the largest and the most secure. During times of industry trauma, firms traditionally cut back on IT, centralize development to cut down on redundancy and slow the development queue, look to outsourcing to reduce cost and focus on core deliverables, and cut back on pushing the envelope. This will hurt many of the smaller vendors as firms focus on reducing the cost of core technologies (traditionally provided by the larger vendors) and cut back on newer, riskier technologies (traditionally provided by the more innovative, smaller vendors).
So while there will be blood, during fallout periods opportunity doesnt vanish; it just changes direction. The challenge is being flexible and gutsy enough to take advantage of the turbulence without taking too much risk. But as write-offs continue to increase, there is one thing of which we can be certain: The risk in risk management may be the least risk of all.
www.tabbgroup.com
This article first appeared on Wall Street and Technology.
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| If you would like to comment on this article, please email us, quoting the article reference number A/1824. |
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