Saturday, February 4, 2012

market-risk system is nice-to-have? (2nd post)

Is market-risk system nice-to-have, as described in http://bigblog.tanbin.com/2010/09/risk-is-nice-to-have-to-traders.html ?

Q1: which app budget to cut when a firm must cut IT budget by half? Bang for the buck! I feel risk app stacks up well against a lot of systems like reporting, Massive and expensive market data engines, HR, mobile, algo trading, high-frequency, DMA, fancy pricers, real-time curve-builders.

Anything real time, anything high volume (to the cutting edge) tends to be expensive -- developer, hardware/software/hosting. Do they give better benefit/cost ratio?

Now a slightly less important question --
Q1b: which app budget to increase when times are good?

Q: who makes the budget decisions? How powerful is the risk app's sponsor in a budget war?

Risk apps do look like white elephants -- expensive, sophisticated but unreliable analysis. See http://bigblog.tanbin.com/2011/03/limitations-of-risk-models-haitao.html Bottom line -- you can criticize 99% of trading platform components as non-essential, questionable numbers, poor data quality, expensive and poor value for money. 30 years ago, successful traders flourished without custom applications. Some still do.

Recently, There is a lot of regulatory pressure on firms to be more "serious" about risk management but I always felt big banks (and big buy-sides) tend to pay lip service. True? An eq der risk system veteran gave me a few pointers. (I will add the least amount of annotation...)

* Risk, compared to other systems, has larger data volume.
* Risk uses more computation and more computer power. If you have a server farm, what are the top 2 use cases?
* Compared to cash products, Derivatives requires more risk analysis

I feel risk engine uses more math, more complicated business logic, more database, more business insight, more quant know-how than other components.

Another (management-level) veteran told me most investment banks lack the real time risk capabilities of GS and JPM.

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New York (Time Square), NY, United States
http://www.linkedin.com/in/tanbin