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Transcript of Investment Banking Technology
Investment Banking Technology
October 13, 2011
Chris BrookTechnical Lead, Credit IT - UBS Investment Bank
PUBLIC
University of BirminghamSchool of Computer ScienceCommercial Programming
www.ubs.com/graduates
Table of Contents
SECTION 1 Finance 101 - Key Concepts in Credit TradingSECTION 2 Grid ComputingSECTION 3 Real-time Business IntelligenceSECTION 4 Managing DevelopmentSECTION 5 Joining UBS
www.ubs.com/graduates
About Me
Chris Brook
Technical Lead, Structured Credit IT - UBS Investment Bank
Joined UBS June 2011
Masters graduate in Aerospace Engineering
6 years experience, specialising in distributed systems and database engineering
www.ubs.com/graduates
UBS — Our Services
Wealth Management Americas
Global Asset Management
Wealth Management & Swiss Bank
Wealth Management & Swiss Bank focuses on delivering comprehensive financial services to high net worth and ultra high net worth individuals around the world – except those served by Wealth Management Americas – as well as private and corporate clients in Switzerland.
Our Wealth Management business unit provides clients in over 40 countries, including Switzerland, with financial advice, products and tools to fit their individual needs. Our retail & Corporate business unit has a leading position cross its client segments in Switzerland.
Global Asset Management is a large-scale asset manager with businesses diversified across regions, capabilities and distribution channels.
It offers investment capabilities and investment styles across all major traditional and alternative asset classes. These include equities, fixed income, currency, hedge fund, real estate and infrastructure investment capabilities that can also be combined in multi-asset strategies. The fund services unit provides legal fund set-up and accounting and reporting for all retail and institutional funds.
Wealth Management Americas provides advice-based relationships through financial advisors who deliver a fully integrated set of products and services specifically designed to address the needs of ultra high net worth, net worth and core affluent individuals and families.
It includes the Wealth Management US Business, as well as the domestic Canadian business and the international business booked in the United State
Investment Bank
The Investment Bank provides securities and other financial products and research in equities, fixed income, rates, foreign exchange and precious metals.
It also provides advisory services and access to the world's capital markets for corporate and institutional clients, governments, financial intermediaries and alternative asset managers and private investors.
www.ubs.com/graduates
UBS Investment BankThree main functions
Equities – distributing, trading, financing and clearing shares and share-linked products
Investment Banking Department – advising companies on their structure, funding, flotation, mergers & acquisitions
Fixed Income, Currencies & Commodities trading in Foreign Exchange, Interest Rates, Emerging Markets and Credit
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101: How do Businesses Finance Themselves?
A share of the ownership of the company.
Price of each share = (Future Earnings + Assets - Liabilities) / Number of Shares
Issuing Equity (Shares)
Taking a Loan
Loans pay interest – they have a cash flow
A bond is a debt security that entitles the holder to repayment of the principal sum plus interest.
Bonds have a face value (on which the issuer pays interest) a coupon (interest rate paid by issuer) and maturity (date that the principal is due to be re-paid)
Issuing Debt
(Bonds)
Bonds pay interest – they have a cash flow
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101: What is the Value of Money?
Today, the value of £100 is £100 - But in one year it may be more or less.
It could go up (earn interest). It could go down (be affected by inflation).
The Time Value of Money
But:
• I’d really like the £100 back now…
• And, I may not be paid back! - there is a risk attached to this loan
I could loan it to someone for one year, at 5% interest… (£105 to repay)
Discounted Cash Flow
‘Present value’ = Value today of a £105 debt, re-paid next year (e.g. £100)
‘Future value’ = How much my £100 could be worth in one year (e.g. £105)
DCF techniques are used to adjust for the ‘time value’ of money
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101: Derivatives, Desks and Books
E.g. an Option - a contract giving the holder the right to buy or sell a quantity of something (the ‘asset’) at a set price, within a certain time period. The buyer pays a fee.
Derivatives
Trading Book
A portfolio of financial instruments held by a brokerage or bank.
Each book can contain 1000’s of trades.
Occupied by licensed traders, usually specialising in trading one particular type of investment product / instrument.
(e.g. foreign exchange traders, commodities traders, equities traders)
Trading Desks
A derivative is fundamentally a contract between two or more parties – a trade.
Its value is derived from the value and characteristics of another security - the underlying ‘asset’.
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101: The Risks of Trading
Market Risk – the risk of loss due to fluctuations in the market
The potential for the bank to experience losses due to fluctuations in prices of securities (e.g. the underlying assets).
Every day your portfolio value will change depending on the market price of each trade within it.
Credit Risk is the risk of loss arising from a client who does not make payments as promised.
Such an event is called a default.
Particularly in transactions lasting several years (e.g. a loan or mortgage) the lender may need tomake financial provisions against the risk of default.
Understanding Credit Risk is an essential component of managing the bank’s balance sheet.
Credit Risk – the risk of loss due to non payment
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101: Securitised Products: What is a CDO?
Collateralised Debt Obligation
AAA-rated Bonds
AA-rated Bonds
A-rated Bonds
BBB-rated Bonds
BB-rated Bonds
‘Equity’ Bonds
Credit exposure
DiversifiedPortfolio of Credits generate Cash flows
Last Loss
5th Loss
4th Loss
3rd Loss
2nd Loss
1st Loss
Assets Liabilities Losses
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From Sub Prime to Credit Crunch
Mortgages and loans produce a cash flow
Subprime: making loans to people who may have difficulty repaying
The Subprime mortgage crisis arose from 'bundling' American subprime and American regular mortgages into Asset-backed securities (ABS/MBS) and selling these bundles onward
1. Real Estate prices peaked in the US in 2006, and then started to fall
2. Leading to a rise in subprime mortgage defaults during 2007
3. Leading to an increase in losses reported within ABS/MBS
4. During 2008 finance institutions wrote off $750 billion in associated losses
5. ….which led to Banks experiencing reduced access to funds (and no money to lend)
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CDX Credit Default Swap Index 2007 to Feb 2011
HBOSRBS
Lehmans Merrill
Bear StearnsNorthern Rock
SubprimeCrisis
US eases money
Greece in Trouble
Ireland in trouble
Citigroup
Icelandin trouble
US Stimulus Package
AIGWAMU
Spain onwatch
AIG loss
GM&Chrysler bankrupt
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101: Managing Risk
Risk Management Market Risk (VaR, Stress) – probable loss on portfolio given changes in the market
Credit Risk (PFE, CVA) – probable loss on portfolio given default of counterparty
Profit and Loss explain (P&L) – daily change to the value of our trading positions
Sensitivities – of prices due to potential changes in underlying parameters on which their value is dependent
Collateral – how can we ‘net’ this / optimise our use of collateral?
Front Office (The Traders)
Position keeping, sensitivities
FX book management
Real time P&L – present value of our trading positions
Continuous hedging – protect trading positions against potential shifts in the market
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101: CDO Pricing is a little bit complicated…
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101: Monte Carlo Simulations
Monte Carlo is a powerful simulation method for estimating the future performance of a portfolio.
Relies on repeated random sampling to compute results.
Simulate sources of uncertainty affecting value, and then determine average value over the range of resultant outcomes.
Time
Monte Carlo SimulationValue
Distrib
utio
nof fi
nal v
alu
es
For illustrative purposes only.
Monte Carlo Simulation
Monte Carlo simulation allows us to evaluate a wide range of market conditions and investment scenarios.
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101: Monte Carlo Simulations – Computing challenges
Monte Carlo simulations are useful because…
They are generic – you can model any cash flow
They provide a Probability Distribution
However, they are computationally expensive…
You can try and optimise your model
You can pre-generate random numbers as input
You can optimise your software to enable it to run faster
And, you can run them on the Grid
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101: Calculating the price and risk of every trade in a portfolio
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Several hundred scenarios per trade
Multiple types of trade
Thousands of trades
Future
Option Swap
Forward
AAA-rated NotesAA-rated NotesA-rated NotesBBB-rated NotesBB-rated NotesCDO equity
AAA-rated NotesAA-rated NotesA-rated NotesBBB-rated NotesBB-rated NotesCDO equity
AAA-rated NotesAA-rated NotesA-rated NotesBBB-rated NotesBB-rated NotesCDO equity
AAA-rated NotesAA-rated NotesA-rated NotesBBB-rated NotesBB-rated NotesCDO equity
AAA-rated NotesAA-rated NotesA-rated NotesBBB-rated NotesBB-rated NotesCDO equity
AAA-rated NotesAA-rated NotesA-rated NotesBBB-rated NotesBB-rated NotesCDO equity
AAA-rated NotesAA-rated NotesA-rated NotesBBB-rated NotesBB-rated NotesCDO equity
AAA-rated NotesAA-rated NotesA-rated NotesBBB-rated NotesBB-rated NotesCDO equity
AAA-rated NotesAA-rated NotesA-rated NotesBBB-rated NotesBB-rated NotesCDO equity
AAA-rated NotesAA-rated NotesA-rated NotesBBB-rated NotesBB-rated NotesCDO equity
Delivered quicklyLots of data items
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Sequential Computing
Excel typically calculates cells sequentially, based on dependencies.
Multi-threaded Excel can calculate in parallel, but is limited by CPU cores.
The 50 cells in this example take 10 seconds each to calculate.
50 x 10 = 500 sec CPU time
A dual-core machine would take over 4 minutes to calculate this simple example
…Can we continue buying faster workstations?
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Parallel Computing on the Grid
Compute Server 1 Compute Server 100Compute Server 2 Compute Server 3 Compute Server 4 . . .
Grid ControllerA1 B1 C1 D1 E1A2A3A4A5A6A7A8A9
A10
B2 C2 D2 E2B3 C3 D3 E3B4 C4 D4 E4B5 C5 D5 E5B6 C6 D6 E6B7 C7 D7 E7B8 C8 D8 E8B9 C9 D9 E9
B10 D10 D10 E10
A1 C4 E5 D9 A8
Excel Add-in communicates with the Grid.
Grid Software divides calculation into 50 separate units of work. 5 second overhead in setting this up.
The work units are allocated to engines and computed simultaneously.
As engines complete, they notify the Grid Controller of the result.
Controller aggregates results and returns to Excel. Further 5 second overhead.
4 min calculation reduced to ~20 sec.
Distributed, parallel computation – break long running calculations into many pieces and run in parallel across many computers
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UBS Investment Bank IT: Key Facts & Figures
> 24,000 Grid Engines (dedicated cores)
> 6,000 servers – grows 5% per year
> 2.4 Petabytes of storage – grows 12% per year
> 31,000 system changes in 2009 - grows 10% per year
>1.7 MW power consumption = 1700 Kettles!
October 2010
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Current & future challenges for the Grid – feeding it!
Huge volumes of input and output data
Networks are not increasing in performance at the same rate as CPUs
Ensuring coherent data
Sequential or parallel calculations?
Sudden need for extra capacity – e.g. the ‘Flash Crash’ of May 2010?
CPU Scavenging? (use spare desktop capacity)
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Essay Question
Optimising workload to run on a grid is non-trivial…
Example: Daily Trade Valuation
108,000 trades need to be valued in London each day
There are 20 different trade types: some are fast to price, some are slow– 99% of trades fall into just 3 types (the simple or ‘vanilla’ trades)
– However, the remaining 1% of trades account for 30% of the net calculation time!
Calculation time for a single trade is due to two things:– The amount of network I/O required to move the input data to the calc node
– The amount of CPU time taken to calculate the result
We can bundle trades together, where they share common input data– This reduces network I/O time and contention, but will increase CPU time / decrease parallelism
The trade population changes daily, and new trade types can be created.
Question
Present some techniques which could be used to optimise the grouping of trades into work units, to reduce the overall end-to-end processing time.
Options could include using a feedback loop, based on instrumentation of the previous run.
What about machine learning?
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The challenge of Timeliness AND Complexity
Decision making happens under pressure
Data is changing dynamically
Large amounts of data have to be analysed / correlated
You need to visualise data in a way that supports decision making
This all needs to happen quickly
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Introducing OLAP (online analytical processing)
OLAP gives the capability to query and analyse data using dimensions.
OLAP Cubes extend the two-dimensional array of a spreadsheet into n-dimensions.
A cube’s metadata structure is created from a star schema or snowflake schema, by joining several tables in a relational database.
OLAP tools are sold by database and analytic software vendors, and are widely used in business to analyse historical data, e.g. for root cause analysis.
Data is imported into the cube, and processed into complex proprietary data structures, optimised for querying of results. Data compression, bitmap indexes, and pre-aggregation are used to achieve fast query performance.OLAP performance depends on pre-processing of the data. It can be too slow to collect and analyse the input data to enable the business to make decisions on ‘live’ information (e.g. market prices)
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Complex Event Processing (CEP)
Uses a ‘SQL-like’ language to query an Event Stream.
An Event Stream could be live market prices / exchange trades.
Detect patterns among multiple streams of event data.
Execute calculations on multiple streams of event data – e.g. calculate averages.
Information complexity is low but decision timeliness is fast.
The combination of CEP and OLAP provides a Real-Time Business Intelligence platform that enables us to analyse the latest information and react immediately.
Decision-making based on analysing streams of information in real-time.
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Performance Metrics
Our Cube has
1 trillion data points
20 dimensions, 39 levels
5-days history held in memory
5-days – 250 GB loaded into cube (50 GB x 5 days)
1-year history available on disk
1 year – 13 TB data is compressed into 1.5 TB and loaded into cubes
A new day’s data must be accessible within 10 minutes
This translates into
Processing concurrent Updates: 200,000 updates/sec – one every 5ms
Processing concurrent Queries: 266 queries/sec
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UBS has 65,000 staff: 17,000 in IT (and 5,500 in the Investment Bank)
UBS IT: Our Geographic Footprint
Brazil
Hong Kong
Japan
Australia
RussiaAmericas
3660
UK2829
.
APAC4341
Switzerland
5601
EMEA801
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Iterative / Lean Development
Iterative cycle (e.g. Scrum)
Split work into small, tangible deliverables
Split time into short fixed-length cycles
Limit work per iteration
Communicate: daily stand-ups (10 mins)
Continually improve: reviews after each iteration
Tailor methodology to the team
‘Lean’ principles (e.g. KanBan)
Define workflow stages: To-Do, In-Progress, Complete
Limit tasks per workflow stage
Constrain ‘Technical Debt’
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Essential Practices for Sustainable Development
Modular Design
Compose the system from modular services.Strive to make the software maintainable, above all else.
Source Control Single shared code repository (global).
Unit Tests (TDD)
Write tests first (delivers better designs). Learn IoC and a Mocking framework.Run the tests on the build. Aim for high test coverage (>70%).
Automated Builds
Re-build after every check-in… never break the build!Repeatable process. Auditable.
‘One-Click’ Deploy
Create scripts to install your most recent build, to any environment.
Design Patterns Learn the useful OO design patterns, and use them.
Continuous
Integration
Deploy your code automatically, and then run end-to-end tests.
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UBS Investment Bank IT: Award-winning Technology
UBS Delta: Most Innovative Actuarial Software Life & Pension Risk 2010
UBS Delta: Best Technology Vendor for Risk ManagementCredit Awards 2009
Technology Innovation AwardCredit Magazine 2009, 2010
Best Proprietary TechnologyBuy-Side Technology 2007
No.1 for Algorithmic TradingThomson Reuters Extel 2010
No.1 First for Overall Post-Trade ServicesZ/Yen McLagan 2009
No.1 for Post Trade Performance in FXMcLagan/Z-Yen 2010
No.1 for Post Trade Services – North AmericaZ/Yen McLagan 2009
Best in AlgorithmsAsianInvestor 2010
Best FX Post-Trade ServiceProfit & Loss 2010
Best All Round Solutions for Prime Broking Asiamoney 2006-2009
Best All Round Solutions for Prime Broking Thomson Reuters Extel 2001-2010
Best Firm for Portfolio Trading Execution Thomson Reuters Extel 2008-2010
Best product innovation for Prime BrokingAsiamoney 2009
Best Post Trade Services Global FX Week 2009
No.1 Internal Crossing The Trade 2010
Best Fixed Income Research and StrategyTechnical Analyst Magazine 2009
No.1 for Currency Forwards, Swaps and Vanilla Options Risk 2009
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Graduate Training Program (GTP) – Your future at UBS
24 months
Building the network
The UBS GTP program will equip you with the skills, knowledge and experience to achieve long-term personal and professional goals and challenge you to achieve your potential.
You'll learn the business while developing your technical skills to deliver real world solutions.
By the end of the two year program you’ll be an integral part of the UBS Group Technology team.
Into the future
Joining the teamGetting on board
Role-based TrainingTechnical training based on individual learning needs
GTP DiscoveryGTP intro to UBS & Financial Services
GTP FundamentalsGT Strategy, Business Model & Operating Principles
Rotation
Permanent Placement