Can EDM and BI Solve Wall Street’s Risk Problems?

The past couple of years have marked some of the most gut-wrenching moments in Wall Street history. Just months after the markets showed signs of recovering from the financial crisis, traders and investors watched in horror this May as the Dow plunged nearly 1,000 points in less than an hour before recovering to close down 348 points -- leaving the industry and the public dumbfounded as to why it happened.

Chief executives, CIOs and regulators have been scratching their heads, searching for solutions to help solve the Street's risk management woes before the next crisis hits. But the answer may be right under their noses; it may be as simple as solid enterprise data management (EDM) and business intelligence.

"Enterprise data management is the starting point for risk management," insists Ron Ruckh, managing director at advisory firm LECG. "You need data to evaluate risk. If you go back to the Stone Age, you would say, 'I'm a cave man, and I don't go out to get the egg because I've seen my friends not make it back to the cave.' "

David Wallace, industry marketing manager for financial services at SAS, says an increasing number of firms have expressed a need for data integration and business intelligence (BI) solutions. "Most of it is around not being able to quickly integrate all the information they need from siloed applications that exist in firms," he says.

Adds LECG's Ruckh, "Understanding information is the only way you can judge risk. Data management and business intelligence go hand in hand. You'll use software out there to assess that data and build the methodologies to interpret the information. That starts with EDM." Beyond Basic BI

Once a company's data is in order, it needs to use strong analytics to manage risk effectively, suggests Venkat Muller, senior director of financial services industry solutions for TIBCO's Spotfire Analytics. "The use of analytics has grown exponentially," he relates.

Yet Muller says he is a firm believer that companies need to go beyond traditional business intelligence and the idea that following "one-way communication" from users will "magically" produce some strong, easy-to-interpret analysis spewing out of a machine. "We're promoting going above and beyond the paradigm," he comments. "In order to do that, there must be a two-way interchange. You have to see the data in terms of visualization, but you also have to be able to ask questions of the data and to receive timely answers."

In order to protect against uncertain outcomes and mitigate risk, you have to conduct ad hoc analysis, Muller continues. But sometimes, "You forget why you even asked a question," he says. "There's a chasm between analysis and the people who ask questions. That chasm is what we call the analysis gap." Nonetheless, "Business intelligence is yesterday's paradigm," Muller adds. "Unless a company is able to do ad hoc analytics, it will be left behind."

A Fresh Portfolio Perspective

Firms also need to explore better and more innovative ways of looking at the data itself, suggests Will Kinlaw, managing director and head of the portfolio and risk management group at State Street Global Markets. One of the most valuable lessons learned over the past few years of market turbulence, he points out, is that traditional portfolio construction techniques cannot assess the full amount of risk inherent in a portfolio.

State Street Global Markets unveiled in July a new tool to help institutional investors spot and respond to unusual trends across asset classes while they are constructing or managing portfolios. The company's Turbulence Indices measure the unusualness, or turbulence, of daily market behavior, such as the May 6 Flash Crash, or of longer-gestating trends, such as the credit crisis, according to Kinlaw. The indices are a broader gauge than the CBOE Volatility Index, or VIX, across a number of asset classes, covering U.S. and European equities, currency, U.S. fixed income and global asset classes, he contends, explaining that each index provides a single, daily measure of turbulence based on the abnormality of its constituents' returns on that day. Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio

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