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The Financial Meltdown and the impact on CEP

The Financial Meltdown and the impact on CEP

September 26, 2008 0 Comments

Watching, waiting, wondering are the catch phrases of late. What will be the eventual conclusion of the meltdown and subsequent bailout of our financial system? Like many of you, I've been steadfast in my search for information, watching the news, reading blogs and op-ed's about how we got into this mess. I anxiously await our government's response. As a homeowner and family man with a retirement plan I am keen to understand this predicament. I also have a vested interest from a professional sense. The event processing technology in which we immerse ourselves is well entrenched in this same financial community.  Below I share a few thoughts and perspectives on our troubled financial times and how it might impact event processing technology.

Short Selling induced volatility

The idea behind short-sell trading is to sell an asset (i.e. shares of stock) that you the seller don't really own.  Then with luck the price drops, you buy the shares at the new lower price return the shares you borrowed and pocket the difference. Short selling strategies are common place in equities, currencies and futures markets and have been in use for a number of years. Which of course came to a complete halt when the FSA and the SEC banned short selling in an effort to stave off market instability. The FSA's clampdown gaged only a small number financial instruments, whereas the SEC's action was more punitive, setting restrictions on 800 companies. Once those regulatory bodies announced the crackdown the investment bank community, hedge funds and asset managers reluctantly scaled back their short selling strategies to comply. Short selling is a common use-case for CEP.  These recent restrictions are a clear indication of the need for algo strategies to be dynamically adaptable to market or regulatory conditions, whether in short selling or other types of strategies. It's imperative that the development tools provide the means to swiftly enable changes to strategies.

All told, the shorting restrictions were applied to those instruments that had massive impact on the market's stability. Just determining the market impact, the instability or general volatility was an investigative research project where CEP could have played a significant role. Volatility is a statistical measure of the scale of fluctuations in a price or index. By looking at historical norms, the FSA concluded 29 stocked exceeded those historical norms and the SEC determined it was 800. While I don't know if either regulatory body used a CEP product they clearly could have. Used in conjunction with a tick database for the historical market data, a CEP product like Apama provides the tool set and language to rapidly construct a market impact analysis solution with the ability to carry-out a multi-year analysis. 

Leveraged induced risk

Investment banks rely

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