Future Focus - When Excel Isn't Good Enough

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Microsoft Excel has powered much of the growth of Financial Markets over the last 30 years. Excel is a great application. But (and this is a big but) Excel is dangerous....

This excellent article is written by Troy Peterson, co-founder of Hudson Fintech.

 

Remember J.P. Morgan's "London Whale"?

The trader who lost at least $6.2 billion in 2012 in CDS positions. As a result, J.P. Morgan agreed to pay $920 million in fines, related to its risk management systems and internal controls.

After the loss, J.P. Morgan conducted an internal investigation which identified a number of issues -

  • When the new VaR model was created for the synthetic credit portfolio, a quantitative expert, mathematician and model developer created it. The new model used a number of Excel spreadsheets, which were manually updated, by copying and pasting data from one spreadsheet to another. At the time, the internal Model Review Group identified this risk but approved the model nonetheless. Obviously copying and pasting data opens up the possibility of human error, but after the event the internal investigation identified an even greater issue.
  • The most concerning finding was the VaR model contained a significant error. Instead of dividing by the average differences in prices, the model erroneously divided by the sum of the differences.

 

As noted by J.P. Morgan, "This error likely had the effect of muting volatility by a factor of two and of lowering the VaR ...".

As any user of Excel will tell you, the more complex and connected the spreadsheets, the more potential for error.

 

The Challenge of Replacing Excel

The strength of Excel is its flexibility, but this can also be its downfall, especially when used by financial institutions trading and managing billions of dollars of risk.

The problem for financial institutions is that Excel is deeply ingrained in their infrastructure (and in the infrastructure of the whole industry), and any attempt to move away from spreadsheets is likely to cause major upheaval and cost tens of millions of dollars.

Until now.....

 

Using ECS to Replace Excel

Entity Component System (ECS) architecture is a data-driven methodology, which eliminates the complex hierarchies of object-oriented design that are present in traditional systems. There are many technology issues that ECS can resolve creatively with solutions that can complement the various other technologies already in use.

The Hudson Platform uses ECS for Financial Markets, providing the flexibility of Excel in configuring new data sources and adding functionality but forming a robust and resilient structure once in production. Hudson provides user authorisation, entitlements (functionality and data), logging and auditing while allowing proper software release management, which are all requirements for a bank’s production system. The platform is resilient with built-in data and code redundancy and scalable by simply adding more hardware servers to the platform.

 

Multiple Uses Across Financial Institutions

The key to replacing Excel is in Hudson's ability to integrate with the current ecosystem and adding value to edge cases where traditional software has not been able to deliver. The Hudson Platform can be used to replace several critical business processes built around Excel, for example:

  • KYC - Using Hudson to replace Excel workbooks that contain KYC data and are queried manually. This provides resilience, global access via web browser and predefined reports accessible via menu items.
  • Risk Calculations - Using Hudson to replace Excel, implementing functions from in-house quant libraries as Hudson systems. Retrieving raw data from various applications, calculate 'the Greeks', and publish to traders' PCs.
  • Reporting - Retrieve raw data from source applications, apply business logic, prepare reports in given layout, and distribute resulting reports via file copy and email to users.
  • Repo - Work alongside existing systems to provide functionality that the current applications can't provide, like evergreens.
  • EUCAs - Replace non-resilient Excel spreadsheets and other end user computing applications, such as access databases, with a production-level platform.

 

Finally, a credible and robust alternative to Excel....watch this space

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