Why Real-Time Really Matters

Three reasons why real-time matters:

(1) Real-Time Risk Analytics Bridge the Gap Created By Bad Data and Poor Liquidity. First let’s go back to basics. In this type of fast moving market environment, real-time risk analytics are essential. For example, options market participants need the highest quality implied volatilities, Greeks and scenario analysis to have full visibility into their current portfolio risk at any moment. That’s true whether it’s for initiating a trade or hedging positions. In market conditions where liquidity is spotty, it is essential to have accurate, real-time, adaptive theoretical prices and risk metrics to fill the data gaps and separate the bad data from the good.

(2) Real-Time Margin Calculations Prevent an End of Day Surprise. Margin is a real cash flow that needs to be monitored and managed throughout the day. Calculating intraday margin using real-time position information but prior-day clearinghouse risk files – as is often done in practice – is prone to substantial error, especially in volatile markets and with non-linear instruments such as options. Calculating clearinghouse risk vectors in real-time using clearinghouse methodologies (e.g., OCC TIMS, OCC STANS, and SPAN) and applying these to a specific portfolio is the only way to truly capture current market conditions and ensure preparedness for end-of-day margin requirements.

In the market dislocation of February 5, 2018, some proprietary trading firms and hedge funds had end of day P&L and margin calculations that differed substantially from their clearing firms’ calculations. Market participants must be able to accurately model margin risk throughout the day to ensure alignment with their clearing firms and prevent unpleasant end-of-day surprises.

(3) Real-Time Scenario Analysis Prepares for the Future Unknown. What if the market goes up or down by 10%? Or volatility spikes? Or skew flattens? Real-time scenario analysis can measure how changes in market conditions will affect individual securities or an entire portfolio by shocking variables such as price, time and volatility. Hanweck’s real-time scenario analytics tools allow users to modify scenarios on the fly – and can deliver thousands of customized scenarios for each security in real time to better prepare and understand the impact of potential market moves on a portfolio.

 

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