Options Insider Radio Interviews Peter Hauser, president Brass MicroHedge

Options Insider Radio:  Welcome back to Options Insider Radio.  My guest is Peter Hauser, president of SunGard’s MicroHedge business unit. Peter, welcome back to the program.

Peter Hauser: Thanks Mark, it’s great to be here.   

Options Insider Radio:  I know we had you on a few months ago and I’m glad to have you back, because I’m constantly fielding questions from our users, whether it’s on email or in the forum, about MicroHedge. Maybe because it has a cache, it’s been around for a while, a lot of traders have used it in the past and they want to keep using it. In fact, just the other day a few former colleagues of mine were asking me about MicroHedge – if they can still get a version of it, how it works, and where they can get it, so I had to send them off to your site.

Peter Hauser: It’s nice to hear that.  I think it has something to do with the interface as well.  I’ve had a lot of clients say that over the years they get a better feel for the market because of the interface in MicroHedge.  Maybe that’s because they are used to it, but I think it’s very straight forward in being able to adjust your parameters – it’s all right there in front of you.

Options Insider Radio:  Making that a numerical strike by strike basis would be maddening for just about anyone, but anyone can kind of look at it from a glance.

Peter Hauser: Just being able to adjust all those parameters prior to MicroHedge, there was so much limitation with what you could do with it, and the different parameters that you could manipulate. Also being able to input your position into your greeks right on the top row, so you are looking at underlying market data, options market data, and you’ve got your risk line right there, so its all right there in front of you.

Options Insider Radio:  Since we covered most of the history and the basic functionality of MicroHedge the last time you were on the program, we don’t have to dive into that again. If listeners are new to the program and they want to hear that, they can go back and download episode 27 of Options Insider Radio, which came out a few months ago, and we explored that content in detail. So this time while you are here at the Options Industry Conference, I know you have had a lot of new upgrades since the last time we talked – a lot of new things to announce with MicroHedge.  So what are some of the big changes you’ve had since the last time we talked?

Peter Hauser: Well we’ve got a new version- MicroHedge 4, version 90 which is composed of really good new features.

Options Insider Radio:  Tells you how long version 90 has been around.

Peter Hauser: Some of the big things in this new version are intra-day decay, particularly expiration weeks, and being able to modify fractional to expiration. I think that’s a really nice improvement; we’ve had a lot of good feedback there. You can also put your interest rate from your stock and your interest rate from your option, which is particularly important if you’ve got hard to borrow stock and you are going to get a big difference in interest rates.

Options Insider Radio:  Well let’s set off then talking a little bit about fractional decay, because every options trader knows, going way back, you throw the model away as you get towards expiration, gamma and theta.  They are useless and now recently with the advent of a lot of these new short-term products, you have the dailies, you have the weeklies – that stuff has become more into focus.  How do you model the decay? How do you model the gamma for these almost, blink-and-you-miss-them, contracts? 

Peter Hauser: Actually with our model it was fairly easy to do. And we’ve given the ability to take it down to as small increments as they want. They can do one-one thousandth of a decay if they wanted to, so it really depends no the end user and how granular they want to get with the decay. At some point, I don’t know if it necessarily makes sense. We have also, as part of this, have a new model in MicroHedge: a Leisen-Reimer model. This helps somewhat in the intraday decay, but the big improvement there was the speed of calculating the theoretical values.  With all the market data coming at us, we had to improve upon how quickly we could calculate the theos. And the Leisen-Reimer model does it, we found, many times faster than the binomial model.  Not only does it arrive at the theoretical value sooner, but more accurately than we found with the binomial model.

Options Insider Radio:  Actually you hit on the next thing I was going to ask you about we hear a lot about the crush of data; you hear about it from the exchanges, and the brokers, but you don’t hear about it too much – at least we haven’t heard about it too much – from the software-vendor side. So I’d be curious to hear your perspective on how this new onslaught of data is changing how you have to design this sort of program, and the kind of effort you have to put into it now.

Peter Hauser: Yes, it is a lot of effort.  I guess you probably don’t hear from us because we don’t like talking about it so much. And it’s become a crutch even on the PC.  Fortunately with the CPU’s getting faster, and more cores per CPU has helped us, frankly. But one of the reasons we went to the new model was – and now they are talking about here at the OIC – the market data doubling in the next year – and even more perhaps – it does become pretty scary. So we have constantly had to optimize the software, but there is only so much optimization you can do.  That’s when we said, look we have to bring in the model or look at a different way of doing this. We’ve found the new model to be more accurate as well.

Options Insider Radio:  After a certain point you have to wonder with all the added expense and effort, the exchanges, the brokerages, and now the software firms have had to keep up with, these pennies and the changes that it has brought around, and whatever incremental gain we’ve received from this, we have to wonder if the benefits have outweighed the costs at this point.

Peter Hauser: I think at some point, it becomes detrimental to the industry.  We’ve had clients, and not a lot, but we’ve certainly had two clients I can think of in particular who cancelled MicroHedge, and I called them up and asked, you’re a long time user of MicroHedge, why are you cancelling? He said he was going to go trade futures, and his reason was that the cost of bringing in all that options market data, the infrastructure involved, the telecom cost of large circuit, he said he’s not even trading options.  He said I’m just going over and trading futures, because from a technology standpoint, it was much easier to deal with.   

Options Insider Radio:  In order to reach that point, their pennies are just a big negative, and they are driving business away at this point, at least from the institutional side.

Peter Hauser: Certainly on the institutional side.  I’ve talked to several hedge funds who have actually complained in the last few months about the lack of liquidity in the marketplace. In their mind, they don’t find it on the floor so much anymore, and you’ve got larger institutions like Bear Stearns and Lehmann brothers who are no longer around, and several others that are not committing capital so much anymore to get that trade done. So they are left calling an agency broker, who then turns around and calls several other buy side firms to try and match up the trade, and for that they are paying a premium.  It’s a much more expensive trade than going to the floor when their cost per contract on the transaction is much less.

Options Insider Radio:  Much less than liquidity, with the pennies you are a couple hundred up, as opposed to the guys who want 5,000 or 10,000 up, they have to go else where.

Peter Hauser: That’s exactly right and that’s exactly what they are saying. When they need to do 5,000 or 10,000 contracts, their preference is to go to the floor, but they just don’t see the liquidity there – they just don’t see getting it done.

Options Insider Radio:  Nnow one of the other things that confused the data stream coming up is the symbology initiative.  I think the new MicroHedge is upgraded to handle all those changes when and if they go through.

Peter Hauser: We are working on it right now; the testing begins September of 2009.  Our plan is to be done by July of 2009, so we are right on schedule. One of the problems that we found is just getting market data, because you know the exchanges are not putting out market data in the OSI format, so we had to create some of our own market data.

Options Insider Radio:  That’s the cost you don’t think of going into it. But yes, you would think OIC or OCC would put that out for you, just to test it.

Peter Hauser: And maybe they do but we are not aware of it.

Options Insider Radio:  Wasn’t the original date for that March of 2008 or so? If so, they are well beyond their original time table seems like now.

Peter Hauser: Well they came back and it was really the institutional side saying we can’t do this.  Looking at the marketplace right now, I can understand that that they’ve got so much going on with the institutional customer, with the marketplace, and the lack of staff because they’ve laid people off.  Now there is this huge initiative that really affects all aspects of their business from the front end execution side, to the back end clearing, to everything else and it’s a lot of work.  It’s a big initiative that SunGard has been involved in, and that has worked well because on the MicroHedge side we have got the expertise; we have been dealing with the market data for 18 years now. SunGard has a whole team that’s working on the LSI initiative from consulting standpoints, so we are working with that team and helping out a lot of these institutions bring their own internal code, and clearing systems up to snuff so they will be ready for the LSI.

Options Insider Radio:  Now we talked a lot about institutions, but on our website we talk about a strong retail component as well.  And I’d say of all the software questions I get, and probably the most frequent one I receive is, “Is there a retail or a scaled down version of MicroHedge, or is there one coming?” And we talked a little bit about this last time you were on the show, and you said there is something in the works, so I’m just curious how – if so – that progressing.   

Peter Hauser: It is; even in this latest version, one of the new features is that we are no longer rounding your hedge; in other words, if you bought 123 shares of IBM, you have a choice to round it up or down, so we just round it to 100 which large trader institutions are fine with – but your average retail person wasn’t very happy. We are now doing the hedges per share.  I think I’ve mentioned this in your last program, that we have come out with a new risk management program called Enterprise Risk Manager and it’s really for a larger institution, but the back end of that are servers.  It’s all server based from the ground up, and we did that really because this crush of market data.  We found that hedge fund institutions were having larger and larger positions, and to be able to handle a large position and the amount of market data coming at you, it really needed to be serviced on the back end. Now that we have the servers on the back end to write a lighter front end for that, we see this as being favorable, so that is our next initiative we are working on.  We can offer something that’s pretty compelling because there’s a lot of execution vendors out there that don’t do much in the way of analytics, or its very basic analytics, and we think that that’s a space that we can fill.

Options Insider Radio:  You know it’s interesting because 4 or 5 years ago, I think most people would have turned up their nose at doing a retail version of an institutional product like this. A few years ago, it was institutional and retail, and retail was the 5 lock guy and institutional was the 10 lock guy – the tweens did not meet. And there seems to be this new class that we have seen a lot on our sight, and I call them for the lack of a better term, “high end retail” where they have educated themselves, whether through free tools or their brokerage firm, or with sites like our or other services, and they become educated.  They have significant capital now and they want to move it to the next step. They want to trade more sophisticated products, rather than just buying call, buying put; they want a little more advanced technologies, more advanced products, and they want better software solutions then just what they are getting for free from their broker. It seems like there is a growing demand for these kind of more advanced stuff for the retail market, where maybe a few years ago, that probably wouldn’t have been the case.

Peter Hauser: Yes I agree with you and we tip toed into it, probably ten years ago now.  We did a MicroHedge light and one of the problems we found was it was really entering more of the educational space, that people did not know how to use it so much, and we sort of backed off because it seemed from the support standpoint we were overwhelmed with that. And now I think you are absolutely right Mark.  The average retail trader out there with options is much more sophisticated than they used to be, and we sort of call them the semi-pro of the retail, but they are really not retail.  These guys are very sophisticated people and they know what they are doing.

Options Insider Radio:  Do you have a timeline for a client, or a flash based, or a Java based unit that would be out there in a year or so?

Peter Hauser: Yes, I think the year timeframe is probably fairly accurate right now.  What we have going with the OSI initiative and other initiatives at MicroHedge: our new ERM product, and integrating with the recently acquired GL Trade.   SunGard also owns a sell side OMS Brass, so we are integrating with Brass. We’ve got some of that going on that fills up our roadmap through the end of the year.

Options Insider Radio:  Before you go, what I am doing with a lot of our guest is taking kind of an informal poll of their outlook for options volume this year to get a nice cross sampling, from both, people from exchanges, from brokerage firms, and software vendors as well. Obviously, the beginning of the year started off pretty weak when volumes weren’t doing very well, but the last few months had a bit of resurgence.  You deal a lot with the institutional side and the institutional side has been fairly decimated over the last 6 – 8 months, and I’m curious from your perspective, do you think it’s going to be the same as last year, better, worse, in terms of total overall volume?

Peter Hauser: I can’t imagine it being better than last year, just because the volume was huge in the fall last year, and I just don’t see that happening. However, I think it is going to pick up throughout the rest of the year. You’re right, the volumes were down even in December and January, but you’re still getting a lot of interest from both buy side and sell side institutions.  As you said, from the retail side of the business, and there’s more and more people involved, there are certainly more people who see the advantage now of hedging their positions.  There are a lot of money managers who have for long been saying, “If I bought a couple of puts against that position (they found religion now), yes.” And because of that, I think you are going to see the volume pick up.

Options Insider Radio:  Interesting, we had the institutional people from OIC here the other day and they said almost the same thing.  They said, I thought their business would be diminished now that so many institutions have gone away, but there are so many people that found religion now, and a year ago, they would have thought of a protective put as wasted money.  Now, it’s “Why didn’t I do this sooner, why didn’t I know about this sooner? Please come in and teach me about options and these protective things.” It has changed their perspective so there are fewer players but they are more interested than they were a year or two ago.

Peter Hauser: Yes and I think the marketplace in general is just a greater acceptance of options. I mean, Bill Brodsky in accepting his Joe Sullivan award was talking about how people were shocked that he would move to Chicago to run a futures exchange, and then even an options exchange and was sort of a wild west, and I think that was true. But now there is a greater acceptance of options even among these money managers that were only doing research on stocks.

Options Insider Radio:  That’s about all I have for you unless there was something you would like to add.

Peter Hauser: No it was great to be here and I appreciate you giving me the opportunity to join you.

Options Insider Radio:  I’m glad to have you back we would like to have MicroHedge on anytime you want to come on, because we are going to send you our emails directly and you could answer them for us. But like I said, it’s a popular product with both of our sides, our institutional and our retail side, and so we like to see more about what’s coming up with the product and I’m sure our listeners will look forward to hearing about it and maybe seeing that other product down the road in a  year or so.

Peter Hauser: That’s great, thank you Mark.

Options Insider Radio:  Perfect, thanks a lot.