Q &
Ten questions with Tim Dodd
Head of Product Management, SunGard Front Arena |
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1. Tim, what's happening out there - on trading desks and in the wider market?
In a word, consolidation. In fact there is a kind of 'triple consolidation' going on. First there is the consolidation happening at the corporate level, as banks merge and new entities are created. This in turn is driving a new wave of consolidation of systems - there's a strong feeling that customers should concentrate on fewer systems and vendors. Most of all however, we are seeing a consolidation in how we think about and monitor risk.
2. What do mean by 'consolidation of risk?
Everyone's talking about the limits of models and measures of risk - VaR in particular is in the spotlight (see the excellent survey of the debate by Joe Nocera in the New York Times). But while there is an understandable reaction to the unseen risks that overwhelmed so many people, there is also a move to consolidate risk exposure from across markets, instruments and desks. You're the captain of the ship so you need to see your vessel's position in real time. Where are credit spreads widening? What's your exposure to each and every counterparty? What happens in a worst-case scenario? The more information you have, the closer you can come to a kind of GPS - accurate coordinates - of your risk exposure.
3. People have talked about a return to simplicity and 'plain vanilla' strategies and an end to complexity
You're never going to put the complexity genie back in the bottle. The computational power that makes modelling possible has created some of the world's most successful trading strategies - and will do so again. Of course there is a hiatus and in some places - I think of templates for OTC instruments introduced in the Italian market - there is a managed retreat towards a simpler landscape. But I think this will be temporary. Despite the recent ban in some short-selling, for instance, stock loan numbers are very strong, indicating that many people are shorting both as an absolute strategy in falling markets and an insurance policy.
4. In this environment is there less of a focus of power and latency? Is the old 'arms race' over'?
No - if anything the opposite is true. Models now have to be tested with data that goes back much further and includes more scenarios. To make a case for a strategy people will need to do more building, more testing. As for latency, multiple venues and regulations around best execution make speed a legal requirement, quite apart from the competitive advantage it brings. Volatility is the other big factor. More volatile markets such as we have seen over the last six months bring more instruments into play - as the markets' range widens, so more new instruments need to be written to cover more outcomes - that means millions of extra calculations.
5. Do you get the sense that markets are licking their wounds?
In some markets there is a definite sense of 'disconnect' - many once-familiar and sure relationships now no longer work and this is creating a hesitation in many players. Markets are behaving in decidedly new ways. FX is one of the few places where old relationships seem still to work - perhaps that's why so many people are playing in that market and volumes are still so strong there.
6. Do you see this 'disconnect' set to continue?
2008 was an extraordinary year. I believe we'll see a gradual return to more 'normal' market conditions. I'm not calling the direction of markets but I think that many behavioural relationships - the basis of trading strategies - will be reestablished while new ones are recognised and acted upon. Traders will begin to feel more comfortable about the environment they are in. The markets are there, investors need them, pension funds have liabilities, there is a lot of work to do. The traders, desks and banks who are ready will find opportunity. Instability, as ever, presents commercial opportunity for the strong and agile.
7. What's on the regulation horizon?
That's a live debate and while everyone knows regulation is coming, no-one is yet clear what form it will take. Politicians are going to struggle to come up with practical measures. In fact self-defense, the measures banks and traders come up with for themselves could anticipate or in some cases go further than regulation. Nevertheless you might see stronger capital requirements - something that Basel II was already doing - and a demand that more trading is on balance sheet. Clearing OTC instruments through centralised independent bodies is coming and I think we'll see a shortening of settlement times. Clearly there will be a focus on constraining credit risk. VaR will undoubtedly come under the regulators' scrutiny. I can see mandated stress testing and 'disaster scenarios' - new reporting requirements to at least consider possible 'Black Swan' events that may be lurking - though by their very nature they are unknowable.
8. You talked earlier about consolidation of systems. What do you see there?
Even before the wave of corporate consolidation, there was a wasteful and complicated duplication of systems. Traders essentially could have what they wanted and that was normally what they knew. The result was an amazing fragmentation of systems and practices - fine, perhaps, when the going is good - but insupportable when there is a new, keener focus on risk and cost management. The balance of power is definitely shifting toward risk and back office managers. People want to see the whole equation from front to back office - a single platform and a single vendor is the simplest, most robust and most cost-effective way to do that.
9. So the same trend happening in the back office?
Absolutely. The back office and risk management teams need to see a summary set of exposures - a single screen for exceptions. These are now must-have but the back office still has to look at costs: increasingly people don't want to manage a suite of vendor relationships. Then there is the best execution legislation and the need to connect to multiple exchanges through a single platform. SunGard's purchase of GL Trade means you can switch on up to a hundred and forty markets and venues instantly: you are immediately connected, competitive and compliant. That removes a gigantic headache for the back office.
10. How is SunGard placed in this new era?
While budgets are under great scrutiny, the trend towards consolidation - of platforms, systems and risk - is one that we have been behind even before the crisis hit. To consolidate with a single vendor demands size, stability, strength, experience and the very best and most robust products. Front Arena (especially when working with Adaptiv on the risk side) is one of very few platforms you can successfully consolidate upon. When you are looking for a single trusted partner you absolutely need strength and experience. SunGard has those in spades.