Maven Wave Risk Solution

Addressing RiskChanges in the financial markets in the past decade have been dramatic as a combination of faster and more powerful technology along with new market structures and products have revolutionized the way that trading is conducted. Concurrently, a rising tide of regulation has placed new and complicated burdens on all market participants.

Such change presents both opportunity and challenge, and as is often the case with change and innovation, not all areas of the market keep pace. Not surprisingly, risk management capabilities have lagged behind advancements in trading. At a time when regulatory zeal has increased the possibility of being fined or sanctioned, the very real threat that a rogue trading program can quickly cripple or destroy an enterprise has also exploded. Just ask Knight Capital.

In 2013, Maven Wave Partners recognized the profound gap between risk and risk management and sought to develop a solution.

Proof of Concept

As a first step, a proof of concept solution was designed to address the speed and scalability needed to meet risk management requirements. For the design of the proof of concept, historical data for all 3,200+ NYSE listed U.S. equities was utilized to create 50,000 randomly generated accounts and a 10­year Historical Value at Risk (HVAR) was run. The results, which were run to STAC M-3™ standards, showed that the solution could perform over 950 million calculations per second or, put another way, a processing rate of 28 GB per millisecond.

There are a number of different configurations available to achieve high performance results such as these. The design of a solution can be closely linked to the nature of the problem at hand and may include In­Memory Database (IMDB) management techniques, saturating CPU utilization, Grid computing, Data­vs­Code distribution, configuring system for mechanical sympathy, IO management, specialized hardware and algorithmic optimizations. For the proof of concept, we paired an IMDB system with specialized hardware to achieve extremely high data processing rates and to create data proximity to the calculation, which led to near 100% CPU utilization.

Bringing the Concept to Life

A proof of concept is one thing, but working solutions are an entirely different matter. While it is impressive to be able to run calculations at blazing­fast speeds with virtually infinite scalability, those metrics are useless if they are not configured to solve real­world problems that are vexing to an enterprise.

Based on conversations that we are hearing from clients and prospects in the market, here are some of the issues that we have been working on:

  • Real­Time Trading Diagnostics: Runaway trading programs affected both Knight Capital in 2012 and Goldman Sachs in 2013 to the tune of millions of dollars. To address the potential issues faced by firms that deploy trading algorithms for direct market access, Maven Wave has tailored the Risk Solution to accomplish the following:
    • Monitor order generation frequency to detect and potentially halt activity if abnormal behaviors are detected
    • Track the size of orders (clip size) with finer granularity and flexibility than exchange provided solutions
    • Calculate and flag P&L exposure for combined existing positions and working orders
  • Real­Time Calculation of Complex Positions: As electronic markets have evolved, trading strategies have grown more and more complex; including cross­product strategies that result in highly complicated positions across exchanges, markets, products and expirations. For example, a trader in the crude oil markets may face the following:
    • Trading at CME (NYMEX), ICE or even the Dubai Mercantile Exchange or TOCOM
    • Multiple markets, including WTI and Brent
    • Downstream products including gasoline, heating oil and gasoil, not to mentionvirtually countless other designations, such as bunker fuel and geographically definedcleared swaps (e.g. Singapore bunker fuel)
    • Expirations that stretch out up to 9 years in the future for crude oil as well asseasonally sensitive winter/summer expirations for products such as heating oil and gasoline¹
  • The Maven Wave Risk Solution addresses the needs of risk managers for complex positions. Product features include:
    • Capture and translation of outright and spread quotes to determine estimated position P&L
    • Integration of position and trading information from multiple exchanges and trading platforms
    • Flexibility to determine product position combinations
  • Real­Time Monitoring of Trading Behaviors: The rising tide of market regulation has placed numerous new requirements on risk managers including the real­time, active monitoring of trading behaviors. To meet these needs, the Risk Solution can:
    • Monitor open positions and market behavior to identify and flag “banging the close”
    • Track and calculate normal trading patterns and apply these patterns to identify and flag possible instances of “spoofing” or other predatory trading

Maven Wave as a Partner

Maven Wave is a full­service consulting firm that is dedicated to delivering exceptional business advancement through transformation and the Maven Wave Risk Solution fits that mission. By applying a fusion of strategic insight, business knowledge and technology leadership, Maven Wave can deliver a real­time Risk Solution to the financial services industry that meets the most pressing current and future needs.

For further information, please contact Chuck Mackie.

1 Additional levels of complexity come with the inclusion of options: time decay, sensitivity to underlying price movement and volatility as well as the shape of options pricing curves. Future versions of the Maven Wave Risk Solution will include options functionality.