Dec 15th, 2022
If you are a participant in the capital markets, you know how critical risk management is to the success of your firm. As a trading technology partner to clearing firms, broker-dealers and hedge funds, Sterling Trading Tech (STT) has given me a firsthand view of how impactful our real-time, cloud-based market risk and regulatory margin calculation system is for our clients' businesses.
I often think about how similar our sophisticated risk and margin system (SRM) is to my daily blood sugar management and analysis. As a Type 1 diabetic, I moonlight in the latest and greatest diabetic technology, and I see a lot of parallels to the risk technology space.
Over 500 million people worldwide live with diabetes. This means their pancreas — which normally makes insulin to break down carbohydrates and produce energy – is unable to adequately perform its function. Most diabetics are Type 2, which is a metabolic (based on diet/lifestyle) or genetic condition – they produce insulin, but it is unable to work properly. Approximately 9 million people are Type 1 (including myself), which is an autoimmune disease. The immune system attacks and destroys the insulin-producing cells in the pancreas, rendering it impossible to produce insulin again.
As a Type 1 diabetic, I wear a small wireless insulin pump (my Omnipod) to administer insulin as a slow drip hourly to keep my blood sugar in the proper range (called basaling). Any time I eat carbohydrates, I administer additional insulin through my pump (called bolusing) so that my body can break them down for energy. The amount of insulin needed is determined by my blood sugar reading via my second wearable device (my Dexcom G6), which is a continuous glucose monitor (CGM). Note: I am not a medical professional and I do not have endorsement deals with either Omnipod or Dexcom…yet.
If my blood sugar is low, meaning I have too much insulin in my system (usually due to user error or extreme activity), I can feel dizzy or lightheaded, and I need to eat sugar (carbs) immediately to raise it. If my blood sugar is high (meaning I have too much sugar in my blood and not enough insulin), I feel tired, and I need to administer more insulin to lower it. My two wearable devices are able to speak to each other thanks to a third technology, an open-source application named Loop. This communication allows for automated insulin management to help keep my levels in range based on parameters I set with my endocrinologist (my doctor for diabetes). Additionally, and most importantly, Dexcom provides a trend line with my blood sugar reading so that I know not just what my current blood sugar is, but also the direction it's headed (up, down or flatline), so I can make decisions and corrections if needed.
While managing diabetes is literally a daily matter of life and death, managing risk can feel just as critical for our clients. STT offers the only risk system on the market that delivers both risk and margin analysis with real-time market data in a single product. Our risk system is able to perform advanced calculations to help risk managers assess market dislocation risk, concentration, liquidity risk and credit risk, among many others, to support rapid day-to-day decision-making for their firm.
My wearable devices allow for a ton of necessary customization, such as setting the ratio of insulin to carbs. Similarly, our SRM offers customization at the highest level to meet the needs of our clients. For example, our custom house/risk policy builder can utilize any combination of risk measures, including multiple price and volatility scenarios, OCC TIMS estimates and VaR (Value at Risk), based on our clients' own house policies that they have communicated to FINRA.
Managing my blood sugar in real time has given me a deeper appreciation for the management tools that our SRM provides to the capital markets. Here are three examples:
MOBILTY & REAL-TIME DATA
The SRM is cloud-based, with a web-based GUI so that risk managers can check calculations from anywhere (web browser, phone, iPad, etc.). It also provides real-time market data for intraday calculations as the market moves in addition to connectivity via various APIs.
The SRM's big data calculations ultimately enable risk managers to make informed decisions for their firm. This process is similar to what I do day in and day out as I monitor my blood sugar numbers, just like risk managers watch the market move. The difference is that there are no time or cost savings for me – a major benefit of our SRM!
AD HOC SCENARIOS & TREND LINES
Another major similarity between managing diabetes and managing risk is the importance of ad hoc capabilities. When managing my blood sugar, I can enter hypotheticals – if I were to eat 20 carbs or if I were to administer 2 units of insulin – there are predicative analytics that show where my blood sugar will end up over the next few hours. In our SRM, you can load a set of positions or start-of-day balances to ad hoc scenarios, such as beta-adjusted shocks or parallel shocks, to see what your P&L and greeks would look like in various market conditions – if the market were to move up or down by 5%, for example.
Even if insulin and carbohydrates are properly managed, other conditions like hydration, sleep, stress and, of course, user error can affect blood sugar, just as unpredictable volatility in the markets makes risk calls quite complex.
Lastly, both diabetes technology and risk technology offer click-of-a-button reporting. For example, I am able to see a 2-day, 7-day, 14-day, 30-day, 60-day and 90-day analysis of my average blood sugar numbers (the 90-day analysis is also known as my A1C or average glycated hemoglobin). My endocrinologist looks at my A1C as a benchmark – think of it like a quarterly earnings report! In the same way, our SRM can easily export reports and also includes custom reporting capabilities that clients use both internally and for compliance reporting to FINRA.
Bottom line: in both managing diabetes and managing risk, the best results are achieved through the latest and greatest technology. For me, that means the ability to live a normal, active life (hiking, biking, paddle boarding, etc.). For risk managers, it means access to the most sophisticated post-trade analytics available.
When I'm not losing sleep over managing my blood sugar, I'm losing sleep over the thought of any risk manager in our space who's unfamiliar with STT. Take it from someone who needs to monitor risk 24/7 (not just when the markets are open): with our SRM, your firm can more effectively manage risk in any set of conditions – and from there, the possibilities are endless.
We look forward to learning more about your trading needs.
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