Watch out Trading Shop...there's a horse bathing upstream!

Financial trading companies are fascinating in that the value of the organization is determined not by physical inventory, but by deals with counterparties whose values fluctuates daily based on external market factors. These deals, or trades, are stored electronically in multiple systems for multiple business purposes.

Initially they are stored in a Trading and Risk Management system (TRM) and then data flows to a number of other important systems such as a General Ledger (for accounting), Credit (for counterparty risk), Valuation (to know the value of the trading portfolio), etc. It is important to note that these auxiliary systems usually sit downstream of the main TRM and thus any shortcuts taken on the way trade information is first maintained in the TRM will flow downstream and can adversely affect the rest of the business.

This all reminds me of the time I went camping at the bottom of the Grand Canyon. We were in a area where there were natural springs that formed beautiful turquoise streams all around. The streams formed great watering holes for swimming and cliff diving but also served as a place to get fresh drinking water and rinse campers’ dishes.

Except that there was a horse in the campground that decided to setup shop upstream of the campground and do its business right in and around the stream. Needless to say, many of the campers tried to shoo away the horse until finally it made it’s way to another area.

How does this relate to trading shops? Well, the first point of action for most firms is to just get the trades from various exchanges into their TRM…worry about auxiliary functions thereafter. So task a smart developer to code up an interface to jam trades into the TRM. Problem is, this is a narrow view on the trade data. They only have to focus on data required to book a trade in the TRM and not any other systems/functions. Much of the valuable info from the exchange gets discarded and the trades aren’t enriched to facilitate downstream functions.

What’s the net result? Indigestion for the rest of the firm…thanks horse!  Shortcuts up front will impact vital functions such as Compliance activities, closing of books each month by Accounting, and Risk Management among others.

Oh and that developer…chain them to that interface. Any time the firm trades a new product, location etc…open up that code and get it up to date.