DATA MANAGEMENT
Riskdata Introduces ShockVaR Measurement
ered around negative 16 percent. On Oct. ing its usefulness and dependability. Nas-
22, the Nikkei’s ShockVaR reading fell to sim Nicholas Taleb, author of “The Black
negative 19. 3 percent, which coincided with Swan,” a book that examines the difficul-the Nikkei’s 9. 6 percent market drop and ty of predicting events based on past ob-ran contrary to positive movement in the servations, has declared that “VaR is char-other three indexes. Since the most recent latanism, a dangerously misleading tool.”
turmoil began in Tokyo, Riskdata calls this “There is some truth in the criticism of
evidence of the indicator’s ability to antic- VaR,” said Riskdata’s LeMarois, “if it is re-ipate increased stress and pin-point its lied on as only one figure for the measure-source. ment of risk. VaR should be considered only
BY MAUREEN NEVIN DUFFY
Riskdata, a supplier of risk management solutions to the alternative investment industry, is aiming to improve
hedge fund transparency by teaming with
Hedge Fund Research to publish daily
value at risk (VaR) indicators, including a
new measurement—ShockVaR.
During a market crisis, says Riskdata,
VaR calculations, or how much a portfolio
might lose over a particular time frame,
may not accurately account for risk. “
Unlike more traditional VaR measurements,”
said Riskdata chairman Olivier LeMarois,
“ShockVaR indicates the possible over- or
under-estimating of risk during periods of
extreme market stress.”
ShockVaR shouldn’t be solely relied upon
any more than traditional VaR, but it’s an
interesting tool in determining “where hot
spots are in terms of risk,” said LeMarois,
adding that a lack of risk-related information amid market turmoil can cause panic.
During the last two weeks of September and all of October, hedge funds were
buffeted by historically high volatility,
noted Ken Heinz, president of Chicago-based Hedge Fund Research. His firm’s
role in ShockVaR “is just an effort to reflect the reality of performance dynamics.”
As an example of the effectiveness of the
new measurement, Riskdata points to its
calculation of the Nikkei 225 index—which
tracks equities on the Tokyo Stock Exchange—on Oct. 20 and Oct. 21, when its
ShockVaR rating rose from negative 15 percent to negative 13 percent, compared to
the S&P 500’s negative 14.5 percent and
the Stoxx 50 and FTSE indexes, which hov-
“If you oversimplify
reality, one day
reality gets you.”
Olivier LeMarois
“With the backdrop of global recession,
short-term turmoil is building up in various markets around the globe and in various asset classes,” said Ingmar Adlerberg,
CEO of London-based Riskdata, which
also calculates risk for bonds, equities and
commodities. “The least that can be done
in such a situation is to monitor closely
global risk parameters, to anticipate as
much as possible the source and consequences of the next possible shock.”
A commonly used tool, VaR has been
heavily criticized in light of the market
meltdown, with several academics attack-
in conjunction with other risk indicators. If
you oversimplify reality, one day reality gets
you.” Historically the industry has relied
simply on VaR and volatility, in an isolated
process, contends LeMarois. “This has been
a major flaw in the market—VaR is not the
alpha and the omega of risk. We can give
much more, as in the new ShockVaR.”
Riskdata’s VaR and ShockVaR measurements are available for free on its Web site,
where theoretical portfolios comprised of
hedge fund indexes—supplied by Hedge
Fund Research—are used to demonstrate
its capabilities over a range of strategies. ■
MiFID
— Continued from page 10
more are anticipated soon.
Although European traders have an increasing number of places they can view bid-and-offer prices, not all investors have the
data feeds they need to make comparisons.
The newcomers are also challenging the
market data and price reporting dominance
of the London Stock Exchange (LSE).
On Oct. 22, BATS Europe, Chi-X and
the Nasdaq OMX Group’s MTF announced
that they had formed a working group to
create a uniform symbology for European
equities, which would allow market data to
be more easily consolidated across trading
venues and facilitate smart-order routing.
The initiative could eventually lead to a European version of the consolidated data feed
in the U.S., the lack of which gained increased attention when LSE was recently
forced to shut down trading for a day. Many
dealers did not switch to other venues because they still rely on the exchange to provide benchmark pricing data.
Plus Markets, a quote-driven system for
shares listed on LSE’s Alternative Investment
Market, filed suit in London’s High Court
in September, challenging a rule that requires
trades conducted on platforms other than
AIM be reported to the London exchange.
Plus called the rule “archaic, anticompeti-tive and outside the spirit of MiFID.”
Xtracker already provides a table of execution venues, said Woodward, that tracks
the movement of liquidity based on clients’
transaction volumes. The same data is used
to provide transparency for retail fixed-income trades though a free service, Bond-MarketPrices.com, and a system for the buy
side—XBIS. ■
Penson’s Pendergraft — Continued from page 12
same time that rule arrived Fed funds came that seems like the logical time for the
down 100 basis points, so it’s hard to com- penalty. I’m not sure [the day after set-pare apples to apples. However, I’d say the tlement] is the right deadline, but gener-number of stocks trading at a negative re- ally speaking it’s a logical rule.
bate is up sharply since that rule arrived. Essentially the cost of being short has gone up.
Is that making it more difficult to lo-
cate and borrow stock? It’s more expen-
sive but not necessarily more difficult.
The regulators have clamped down
on failures to deliver securities but left
locate or pre-borrowing requirements
mostly untouched. Is the back-end approach the Securities and Exchange
Commission is taking effective?
They’ve attacked the issue in a very logical way. The issue is whether or not you
actually make delivery for that short sale.
There’s no need for a pre-borrow as long
as you can make delivery. If you don’t,
Have securities lending volumes returned to pre-ban levels? We said in our
earnings conference call that balances had
declined—in some cases around 50 percent—but that we expected a slow recovery of balances as the ban expired and the
market adapts to the close-out rule.
brokerage account, although what we do in
that market is actually done through our futures company, Penson GHCO. Since most
systems have challenges supporting single-stock futures on the brokerage side, you have
to set up a relationship with an FCM [fu-tures commission merchant], and that makes
it much more complicated for a brokerage
firm, especially a correspondent firm.
forecasting for the next year? We expect
technology revenues to be at or above the
third-quarter level. We do anticipate seeing a bit of weakness in development revenues due to what’s going on in the marketplace. On the other hand, we expect the
fourth quarter will be a record from a re-curring-revenue perspective, because of
increased volume and volatility and the increasing number of new clients.
Could this increase interest in single-stock futures, which provide a synthetic
way to short stocks? It could. The issues
around single-stock futures have generally
been the liquidity in that market—I think
it’s improving—and also adapting systems.
You can trade single-stock futures in a brokerage account, but not everybody’s system
supports that. Our system supports it in the
Penson customers can trade single-stock futures in the brokerage accounts? Yes. They can also trade just regular commodities in a futures account that’s
linked to their brokerage account, and we
can automatically sweep margin back and
forth and make it a seamless process for
that customer, even though it’s under different regulatory jurisdictions.
Have you seen increased demand for
single-stock futures? No, we haven’t.
What technology revenues are you
Some broker-dealers prefer to call
themselves more of a technology company. Is that Penson’s goal? We are always
fundamentally going to be a series of brokerage and clearing companies. But in today’s
environment, having a technology piece to
offer to customers is very important. It makes
customers stickier and it creates opportunities for us to earn additional revenue dollars
off of that same order. For the same reason,
we’re expanding our execution services—
we’re trying to gain a larger percentage of
our clients’ wallet share. ■
