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January 1, 2010

Addressing the Intraday Trading Position Conundrum

By Edward Cuoco and Victor Milligan

Current Systems Are Not Sufficient

The difficulty trading organizations face when assessing the data in a more timely fashion stems from a perceived inability to apply the data to risk reporting more frequently, while ensuring that the data is granular enough to revise the position in quarter-hour increments.  Attempts at systemic solutions to this problem result in one of two untenable outcomes: either the information can be processed intraday, but at insufficient granularity, which limits the solution’s ability to remove the need for post-day adjustments, or the data is granular but the time to acquire, process, and analyze the data is too long to allow it to be used in the same day.

For most trading organizations, it has not been possible to create a systemic solution for these problems within a time and price range that reflects value. Furthermore, attempts at integrating this data within the risk reporting process have taken more time and cost more money than has been gained in profitability. For those that have been completed, many other attempts have failed or simply been prematurely abandoned due to either the exorbitant expense or lack of demonstrable success.

The myth prevalent within many trading organizations is that these issues cannot be resolved without a massive IT investment. This myth leads trading organizations to believe there are only two possibilities: repeated and increasingly expensive attempts to create tools to integrate this data or giving up altogether and implementing work-arounds or reduce risk limits to allow the enterprise to simply live with the existing problem.

In reality, companies are simply trying to solve the problem with the wrong tools: focusing on using the typical tools of the trading world, which inevitably leads to a dead end and includes implementing enterprise systems such as CTRM (commodity trading and risk management) tools or back-office financial systems. These options, besides being large and complex, also require a significant investment of time and money and cannot be quickly adapted. While Excel-based tools are flexible, they lack both the ability to handle larger volumes of daily incoming data and the transparency and auditing ability needed to provide confidence at scale.