| Best Innovation by an IT or Software Company |
| Winner: Derivix’s cloud-based Portfolio Risk solution for options |
The power in the cloud
With 15 entries, FOW’s Award for Innovation in IT and software was intensely competitive. We asked the judges to choose the three entries they considered best – and nearly all the entries were picked by some of the judges.
But there was no doubt about the winner. Convincingly ahead was Derivix’s cloud-based Portfolio Risk system – a tool that enables options traders to assess and manage the risk in their portfolios easily and cheaply.
This innovation combined two themes that have been very prominent this year: risk management and cloud computing – the use of applications delivered via the internet, so that the customer does not have to own either the hardware or software.
Risk management was at the forefront of many judges’ minds, as they sought to identify software which has addressed the keenest needs of a volatile market.
“We all know that efficiency of information and communication is an ongoing path to enhance all our businesses,” said a judge at one London brokerage, “but I think those innovators that have captured the very essence of what keeps their clients and their client’s clients awake at night really deserve the moment. Those who are seeking to innovate such that clients better understand risk are addressing a vital and important part of the evolution of our business.”
Derivix was founded only in 2005 by Jonathan Weedon, co-founder and CEO, with backing from Goldman Sachs and Susquehanna Growth Equity.
Its operations centre around pricing, risk visualisation, and analytics solutions for the options market. The Portfolio Risk system, launched in November 2008 near the peak of the market crisis, represents the evolution of all three facets.
The idea is to allow financial services firms of all sizes to compare stock and option portfolio performance in live markets, side-by-side with limitless simulations. They can visualise and manage current exposures, profit and loss and firm-wide risk in real time, not just hourly or daily.
Derivix argues that traders are courting danger if they cannot visualise their risks in real time, as markets move, and that firms must be able, just as quickly, to aggregate the risks of all their traders.
A gap in the market
The IT company believed, however, that existing portfolio risk systems were letting traders down by not letting them see their risks fully and quickly enough.
One of FOW’s US-based judges recognised the problem. “As a trader, I understand the importance of risk management. As a single trader, that is easy enough. Having to manage it across multiple traders and asset classes can be almost impossible.”
Many portfolio risk systems, Derivix noted, required expensive hardware, costing up to $20,000, which put them beyond the reach of smaller firms; and for large portfolios, they suffered from latency problems.
By using cloud computing, Derivix solved this cost and scale problem. Customers do not need to buy expensive high-performance equipment; the cloud-based servers can cope with any size of portfolio, even one with tens of thousands of positions.
Users can run pre- and post-trade risk shocks and other simulations against live market data, and assess risk by sector, account or group. Categories can be compared or the user can drill down to individual positions.
Such a solution may represent the shape of things to come. “To enable a very light and fast portfolio management using a cloud-based system is a true innovation,” as one Asian judge put it.
Another elaborated: “I think Derivix has helped fill a huge void on several fronts. Capital expenditure is low so even smaller firms can utilise this tool. Cross-sector, cross-instrument, cross-trader solutions to help manage risk in all aspects of the trading operation are essential, particularly when before, a shop may not have had a true view into correlated instruments.”
And while no such system can hope to be foolproof or simulate every eventuality, the real time accessibility of Derivix’s system must be a step in the right direction.
As one judge put it: “While I do not think it is possible to foresee every potential shock, having the tools available to protect against even 95% of them would be a plus for most shops.”
The options market is growing rapidly, and becoming ever more sophisticated. High frequency trading and political and market risks may interact in new and unforeseen ways in future. And as the 2008 subprime crisis showed, those with the best risk management can actually profit from a disaster, while those that are asleep can be slain.
As one judge put it: “Risk management has to figure highly in today’s world... for all our sakes.”
| Best Innovation by an IT or Software Company |
| Silver Award: CQG’s Spreader tool for spread trading |
Fast, sophisticated spreading
Second most popular among the judges of FOW’s technology award was CQG’s cost-effective and low maintenance system for spread trading, which drew admiration on both sides of the Atlantic.
“This is a brilliant product – we use it at [our bank] and love it,” as one judge in London enthused. “It’s smart, fast, and fully integrated into the broader CQG platform.”
CQG Spreader is a server-side platform, hosted at the CQG Spreader Core – a network of servers co-located at CME Group, Liffe, ELX Futures, Eurex and Intercontinental Exchange, as well as the US Treasury trading systems of BGC and BrokerTec.
This keeps latency to a minimum and relieves customers of the up-front cost of a black box system, as well as the maintenance costs.
The platform allows clients to create, trade and manage multi-legged spreads across markets exchanges and asset classes.
Customers, who must use CQG’s flagship product, CQG Integrated Client, can also manage incomplete spread orders. You can set up spreads with up to 40 legs and actively quote up to 10.
Once a trading strategy has been defined, CQG’s servers monitor bid/ask queues per leg in the exchange’s order book for liquidity. Co-location permits favourable placing for traders’ working legs in an exchange’s order queue, giving the server side system a distinct advantage over traders employing client side solutions. Orders can be modified and second legs executed in less than a millisecond, CQG claims.
The market seems to agree. “[The system] allows spread trading where there is no native exchange strategy,” explained one judge. “The advantages to prop traders, arbitrage traders or sell side broking desks are enormous.”
Another concurred, saying: “It looks to be one of the fastest tools available in this space due to their leverage of co-location hosting of their spread engine. The spreader is also deployable via an attractive application service provider model and includes sophisticated risk management for futures commission merchants to set limits on clients’ trading activity via the CAST risk management platform.”
Other features offered on CQG Spreader include incorporating computer-readable news events into spread trading strategies; using QFormulas to simplify comkplex strategies; and a Sniper Mode for near-instantaneous execution and to reduce message counts.
| Best Innovation by an IT or Software Company |
| Bronze Award: Active Hedge’s Ilinqu communications system |
Chores of communication become a pleasure
The technological needs of financial markets are so specific that it is not often an innovation is developed for a financial use that can then be applied in a huge variety of other situations.
But that appears to be the case with Ilinqu (pronounced “I link you”), a system developed by Dutch software firm Active Hedge.
The idea is brilliantly simple, but powerful – to bring together all methods of internet-based communication into one product, enabling a community of users to interact as naturally, easily and in as many ways as possible.
As the firm summarises it, “Skype and Twitter are for consumers. Ilinqu is for businesses.”
The concept behind Ilinqu was developed by the moderators running the SkyBox online community of frequent traders for BinckBank, the Dutch broker. SkyBox also wins an FOW Award this year (see page 19).
This task showed the moderators where the obstacles lay to using internet communication effectively. The first is user-unfriendliness – as Active Hedge puts it, “It’s in the computer somewhere, but almost nobody actually uses it.” Second is the IT planning effort, costs, consecutive user payment models and time to market. Third is the cultural change necessary in the way people communicate.
By bringing everything together in one place, with the absolute minimum of mouse clicks required – for users and moderator – these obstacles can be overcome.
Market participants who have seen Ilinqu in action are impressed. “The solution offered by the partnership between BinckBank and Active Hedge will undoubtedly have a huge impact on the level of customer service being provided to their clients,” one told FOW.
The system combines online chatting, two way and broadcast audio, voice-synchronised web cam for private conversation or video-conferencing, the ability to share a window on your computer with other users, secure file sharing – the list goes on.
“To me it wasn’t that this was new technology, we have had this type for quite some time,” one judge commented. “To me, the innovation came in how it was packaged for business, and combined the many existing technologies into what appears to be a very coordinated solution that companies can utilise straight out of the box.”
The potential applications of this system in the markets are legion, but an obvious one is for brokers, like BinckBank to foster communication with and among their customers.
| Best Innovation by an IT or Software Company |
| Bronze Award: SunGard’s Adaptiv Risk Cube risk management system |
Freeing risk managers to manage risk
Another risk management platform that figured prominently in the FOW judges’ thoughts was SunGard’s Adaptiv Risk Cube. It came equal third, narrowly beating the same company’s GL Instant Brokerage platform, which also impressed panellists.
The rationale for the product is that, in SunGard’s view, risk departments spend too much time running the risk process and too little time analysing risk. They need an efficient process to gather all the information they require and enable them to analyse it, from the enterprise level right down to the detail of every trade.
Risk Cube is a central results repository that collates and stores all the data needed to generate risk reports. It uses the data to generate risk results, accessed through a web browser interface.
The product collects an extraordinary quantity of information, from sources such as valuation services. Trade by trade, it gathers market value and scenario present value results. Risk managers can look at stress test scenarios, factor sensitivities, no action P&L and VaR scenarios generated by front office applications.
One client, a German bank, used Risk Cube to build an internal model for market risk and improve the analysis and transparency of large volumes of data. “In the current volatile environment,” the bank said, “it’s extremely important to have fast, reliable risk analysis that provides transparency across the enterprise. Adaptiv Risk Cube is a crucial component to providing a clear explanation of our P&L and Monte Carlo VaR analysis.”
One of the strengths of Risk Cube is that it stores every scrap of data, allowing comparisons with the previous day’s numbers and helping to pinpoint potential data errors and missing import files. This also enables it to spot large and worrying changes in VaR or other measures.
Online analytical processing (Olap) and business intelligence reporting give the user flexibility to design reports and dashboards. Risk Cube also maintains a full audit trail to help satisfy increasing regulatory oversight.
As one judge in Asia summed it up, the product is “an all important market risk monitor, without which traders might just be tempted to overtrade.”
| Best Innovation by an IT or Software Company |
| Bronze Award: Trading Technologies’ X_Trader 7.6 trading system |
Futures market leader gets even faster
Named Technology Innovation of the Year in FOW’s 2007 Awards, Trading Technologies’ flagship product X_Trader 7 is among the world’s most used futures trading platforms – the firm estimates that more than 50% of electronic volumes on the world’s top five futures exchanges go through its programme.
X_Trader 7.6, the latest incarnation, aims to be the fastest order entry system on the market, offering clients connectivity to all the world’s major exchanges via single click execution, backed up by real time fill and position information.
The Chicago-based vendor numbers all but one of the world’s top 25 futures brokers among its customers, offering users widespread scope for multi-broker execution opportunities.
This latest version, released in February 2009, provides significant improvements in all major functions.
Price updates have become swifter, thanks to Trading Technologies’ new PFX price protocol architecture, which maximises the speed of price delivery by reducing client interactions with price servers and minimising the size of messages. The service also recovers more quickly after network outages.
TT claims the advances in PFX have led to a tenfold increase in data throughput capacity. Order handling, contract loading and workspace opening times have also been improved.
It is this focus on reducing latency and simplifying execution which drew the strongest praise from judges: “[It provides the] best trading platform and enable[s] traders to concentrate on core business,” as one judge at an Asian bank put it.
Version 7.6 also gives traders new ways to filter and manipulate the display of market data, price movements and trading activity. Large trades can be highlighted and filters applied to multiple products in the Time & Sales window.
The platform’s search function has also been upgraded, making it easier to locate spreads, strategies and options via Market Explorer.
And X_Trader 7.6 has new Autospreader functionality that helps users control and refine spread trading strategies. For example, Base Volume Lean quantifies the minimum number of contracts a quoting leg order needs to lean against.
Other IT innovations that won support from some of FOW’s judges were SunGard’s GL Instant Brokerage, GoldenSource’s Derivatives solution, ACTIV’s options market data system, Horizon Software’s Horizon Market Maker, QuantHouse’s Publication Server, SuperDerivatives’ Reval and Mark to Market Data, TradingScreen’s FuturesHub and Trayport’s GlobalVision BTS for equity derivatives.