Around the globe, cross-asset trading is a new darling for banks and traders who are desperately seeking upside potential in a world where traditional asset silos are largely stagnant. Today’s firms seek to break with tradition, driving toward a future where trades of every variety—mixing equities, foreign exchange, derivatives, commodities, and others—are not only possible but are driven to the extremes of efficiency thanks to automation and low latency.
The surge of interest in multiasset trading is occurring at a time when another relatively new trading practice, trading across geographical markets, has grown commonplace. This technique attempts to profit from minor price variations in the same financial products when they are listed on multiple geographic exchanges. Between these two new trading techniques, you can bet that risk is on the rise.
Pushing the Limits of Risk Control
In most financial institutions there are multiple dimensions to risk management; organizations need to ] protect themselves from volatilities in the market and threats posed by poor or inadequate internal process controls. While there’s no doubt that rigorous policies exist to create checks and balances that manage risk in new trading paradigms, in reality, the technologies we need to enforce these policies lag well behind our ambition.
The evidence is in the headlines. The fact that rogue traders, such as those who caused massive write downs at Société Générale in 2008 and at UBS in 2011, are able to evade detection and deceive auditors for weeks is proof that our supervisory controls are not sufficiently robust. The type of high-risk trading that these individuals participated in, primarily derivatives and futures, offers the enticement of high returns. When done properly, risk control should nullify the temptation to take on excessive leverage.
Cross-asset and multigeographical trading techniques are simply more fuel for the fire. We can’t continue to push the limits of trading without overhauling the systems that provide institutional control and monitoring. What we need is a consolidated platform that can report risk and margin requirements across an entire portfolio of diverse assets and monitor positions across trading venues.
A Networkwide Dilemma
Naturally, such real-time monitoring will require ultralow latency, but few organizations will find their data infrastructures sufficiently optimized for the task. In years past, when banks needed to cut latency from real-time trading orders, the primary innovation was relocation. By locating their trading systems physically close to trading venues, they could minimize latency without an overhaul of the wide area network (WAN). The requirements of real-time monitoring won’t be so simple to address.
Because they monitor data from a variety of trading systems across the network, real-time monitoring systems are especially sensitive to network performance issues. Success will require WAN optimization technologies, as well as a continuous systems health check to make sure performance issues aren’t preventing timely identification of alert conditions. Many financial institutions are investing in streaming technologies, such as Complex Event Processing (CEP) engines, to ingest high-velocity feeds and perform real-time alert management and monitoring across a diverse data set.
Seeking Geographical Coherence
Similarly, trading across geographies raises the complexity of the monitoring task list. Organizations need a geographically coherent view of global trading activity. Without that view, high-risk behavior and unbalanced positions will be impossible to detect.
The issue of geographical coherence is particularly meaningful in the context of recent instability in Europe and the associated eurozone. Investments made in troubled venues such as Greece and Portugal demand risk mitigation in other, more stable geographies. A more cohesive strategy that gives a better view of aggregated risk would allow firms to be more agile with respect to volatile market conditions. Without an understanding of aggregated risk, it’s much harder to take corrective action, which fuels irrational skittishness.
Software products on the market today are designed principally to do localized coherence. The increasing need for geographical coherence is prompting many vendors to offer new products that provide a global viewpoint. As part of the global transformation, investments are also being made in enterprise service buses (ESB) and federated data abstraction layers to minimize data movement where at all possible. At the high end of the market, institutions are making more investments in purpose-built hardware appliances, designed from the ground up to do global data synchronization at ultralow-latency speeds. Purpose-built appliances are the right approach for such intensive computing applications because they are the only way for organizations to get end-to-end control over hardware, software and firmware — manipulating all three in pursuit of maximum performance under very specific types of load and user profiles.
Hardware appliances aren’t the only tool in the high-performance toolbox. In-memory analytics, like the earlier in-memory databases, is helping to dramatically increase the outer limits of scale and performance. Because in-memory architecture eschews disk-based processing, it isn’t vulnerable to performance degradation. Applications that rely on in-memory technology can significantly outperform rival solutions, even those that have undergone extensive customization.
Building a Next-Gen
Risk Monitoring Platform
Today’s risk control systems are ill equipped to handle the strain of trading across assets and geographies. As the cutting edge of market trading moves toward true cross-asset global involvement, capital market firms must rapidly update their infrastructure to support success and minimize risk.
The sooner firms invest in continuous, high-powered analytical processing using both dedicated, purpose-driven devices and powerful in-memory technology, the sooner they can enjoy the fruit of innovation without forsaking consistency and control.
As Senior Vice President and Chief Technology Officer, Irfan Khan oversees all technology offices in each of SAP’s business units, ensuring market needs and customer aspirations are reflected within the company’s innovation and product development. Khan is also responsible for setting the architecture and technology direction for the worldwide technical sales organization.