I’ve had the good fortune of working with Bob Giffords, the former CTO of a leading bond trading platform and a well-known industry spokesperson in the financial markets in EMEA, on a paper on Real Time P&L. The paper will be published soon, but in advance and as an augmentation, the web is a great resource. The web has the advantage of hyperlinking to other resources, for a more interactive style of communication, and to solicit feedback, which is always welcome and is constantly offered by posting here even if it was not appreciated!
begins by discussion the motivation for real-time P&L systems, the
requirements for such systems, some architectural best practices for
deployments of such an architecture based on CEP, a case study, and a view of
moving forward – what lies ahead in this application area.
The paper begins by discussion the motivation for real-time P&L systems, the requirements for such systems, some architectural best practices for deployments of such an architecture based on CEP, a case study, and a view of moving forward – what lies ahead in this application area.
First up, a discussion of the motivation for real-time P&L
Motivation for Real Time P&L
The financial markets are accelerating: transaction volumes are up, latencies are down, complex cross asset trading up, revenue margins down. Recently markets have seen sudden spikes in volumes, and nervous volatility when the old rules of thumb broke down. Technology and global regulators have both changed those rules by increasing transparency, intensifying competition and multiplying e-commerce relationships exponentially. Reforms such as Reg NMS in the US and MiFID in Europe have further increased the pressure, along with Basel II and the fair value accounting rules of the new international financial reporting standards (IFRS). The IFRS require, for example, firms to mark more of their assets and liabilities to market, while Basel II is much more explicit about risk adjusted capital reserves needed. Now, when markets move, traders need to catch them on-the-fly to cut their losses and go with the flow to ensure compliance with all the rules and customer mandates. The difference between just-in-time and just-too-late has just got a lot bigger.
It was not so long ago when daily profit and loss (P&L) and risk evaluations were state of the art. In a multicurrency world with ever more automated robotraders and instant, electronic global news, they are now painfully slow. This impacts not only the high frequency traders or global market makers trying to balance thousands of real time orders and quotes against a flood of market data with awesome peaks at tens or hundreds of thousands of messages per second.
Now the credit squeeze of 2007 has renewed the focus on costs and risk. It demonstrated that some firms can lose billions in a single day, algorithmic trading systems can get confused in highly volatile markets, and end of day positions may mask serious intraday exposures. So now even traditional investment managers are keen to optimise their trading performance and track the impact of intraday movements and fluctuating daylight exposures. If risk can change by the second, traders, investment managers and compliance officers too need to track their P&L in real time in order to provide a sensible framework for judging risk as a key factor in making trading decisions during the day. Not to have at least some idea of intraday performance is like flying blind.
Of course, some trading tools and broker algorithms already have real-time analytics. However, these all work differently and firms typically employ multiple solutions and lack ways to integrate them into a cross-platform view of risk. In addition, the increased adoption of cross-asset trading further complicates the real-time risk picture, and motivates the need to assess P&L across the enterprise.
However, is such a firm-wide portfolio map, marked to market in real time, really feasible, however desirable? Would it not absorb huge amounts of technology resources and be meaningless anyway, due to insufficient or stale market data? Would not the overhead of software maintenance inhibit innovation and the trading of new asset types like credit default or volatility swaps, so helpful for total return funds.
Agile investment firms are in fact demonstrating that real-time P&L is not only feasible, but highly lucrative as well. It opens up investment opportunities and trading styles, which might otherwise be excluded as too risky or too demanding in resources.
technologies like complex event processing (CEP), applied as a “white box”
systemfor real-time P&L, have turned
tracking real time market movements into a practical proposition for ordinary
firms. They can also play a key role in easing the transition to fragmented
markets with their notorious dark pools and to the complex array of order,
execution and liquidity management systems to support them.
Next section: The Requirements of Real-Time P&L