Supercomputers Heat up Pace in Bond Market
NEW YORK (AP) _ The supercomputer is making a move on the credit markets.
The profusion of ever more complex fixed-income instruments is forcing Wall Street investment banks to add high-powered silicon to their arsenals.
The workstation has replaced the primitive yield calculator as the bond trader’s standard tool. And increasingly, that workstation is backed up by the power of a supercomputer, or mini-super, with the number-crunching power to assess the impact of interest rate shifts on individual bonds or portfolios containing dozens of bonds.
″We’re in a technical business, there’s no doubt about it,″ says Tony Vignola, head of fixed-income research at Kidder, Peabody & Co. ″The capability of analyzing and processing information quickly is becoming an ever increasing means of staying competitive in the business.″
Technology’s biggest inroads have been in the field of mortgage-backed securities, whose complex structures demand raw computing power.
These securities represent packages of thousands of individual mortgages, some fixed-rate and some variable, with different pre-payment risks. What’s more, the securities often are packaged further into structures like collateralized mortgage obligations, or CMOs, which group bonds in tiers of increasing risk and compound the complexity.
″Basically, all the value is in the details, and there are zillions of details,″ says Vincent Pica, co-head of institutional strategies at Prudential-Bache Securities Inc.
Pru-Bache last year bought a low-end supercomputer from Intel Corp. and recently upgraded the machine using the company’s latest high-speed computer chip.
The iPSC.860, or hypercube as it’s called, helps the investment bank to design new mortgage bond structures and to assess securities in the secondary market.
The machine can evaluate how the bottom tier of a CMO will perform under scores of interest rate scenarios in about 90 seconds, compared with about 20 minutes for a desktop workstation, Pica says. Entire portfolio analyses that used to be done overnight now can be crunched out during the trading day.
That speed means business, whether it’s spotting a market opportunity for the firm or finding a trade for a client while the client waits on the phone.
″The race is to the swift,″ Pica says.
Elliot Swan, manager of Intel’s sales to the financial services industry, says the company has targeted its sales effort at up to 200 large investment banks, insurance companies and other institutional heavyweights.
″Everyone is overwhelmed with data,″ Swan says. ″Making sense of the data is really what this is all about.″
The state of the Street’s technology can be hard to gauge, says Gary Smaby, who runs a research firm in Minneapolis that bears his name. The hardware itself, plus the applications software that allows bankers to manipulate bond data, is guarded jealously by firms seeking a competitive edge, he says.
″We don’t want to discuss what we’re doing for competitive reasons,″ says Peter Roche, a spokesman at Morgan Stanley & Co.
The recent squeeze on Wall Street’s earnings may be slowing the spread of high-priced supercomputers. Pru-Bache declined to say what it spent on its hypercube. Intel says the machine ranges from $250,000 to $3 million, with the most likely Wall Street model selling for around $1 million.
Union Bank of Switzerland has invested about $450,000 in a low-powered hypercube at its New York securities operation in the past year, says Christian Gabathuler, the bank’s U.S. head of information systems. The bank has used the machine only for research but hopes to put it to work in its credit market operations by the end of the year, he says.
More common are so-called mini-supercomputers, says Smaby. They don’t offer the computing speed of a true super, but they cost much less and can handle complex bond calculations many times faster than a workstation.
Torque Computer Inc. sells a sort of turbocharged box for about $100,000 that can increase a workstation’s computing speed as much as 50 times, says Sam Bogoch, the company’s president.
″You literally turn hours into minutes,″ he says.
That kind of power is fast becoming indispensable in Wall Street’s race to design more exotic bonds and find extra basis points of yield.
As Pica says of Pru-Bache’s supercomputer, ″One year from now, we’re all going to look back and say, ’How did intelligent life exist without this thing.‴
End Adv for Monday, June 25