First came SecDB at Goldman Sachs, then Athena at JP Morgan, then Quartz at Bank of America Merrill Lynch (BAML). Looking for an edge on the competition, each bank in turn built a pricing and risk system that was more complete and more flexible than anything the industry had seen before.
SecDB came to be known as Goldman's ‘secret sauce' – a platform credited with making the bank's army of quants and developers more productive than those of its rivals, and helping the bank avoid losses during the financial crisis.
Now, a group of technologists who worked on or launched those systems is giving similar capabilities to small hedge funds, regional banks, commodity trading firms, insurers and even to big dealers that want to update their own ageing risk frameworks. Known as Beacon, their product is a cloud-hosted service that offers a package of off-the-shelf trading and pricing tools, but the more innovative foundation for this is a development platform that allows users to quickly develop, roll out – and control – analytical apps. That makes it unique, clients say.
"They are helping us build SecDB for an insurance company," says Peter Cai, chief risk officer at Global Atlantic Financial Group (GAFG), an insurer spun out of Goldman Sachs.
GAFG needed to aggregate data across multiple trading systems and run a complete portfolio of assets, liabilities and hedges through complex scenarios. The upfront capital and operational expenditure associated with home-growing Beacon infrastructure, including consultancy fees, would easily extend into seven figures, Cai estimates. Instead, GAFG is paying by the hour to run Beacon from the cloud, making it easier and more cost effective to research new business models.
"It takes a larger insurance company months to put together a scenario that stresses the entire company across assets and liabilities. With the enterprise risk infrastructure being built with Beacon, we will be able to do it in days," Cai says.
Beacon makes it easy for software or data vendors to create and offer third-party packages in the Beacon app store
Kirat Singh, Beacon
Trading risk management provider Simplex, meanwhile, is partnering with Beacon in building a credit valuation adjustment (CVA) system for use by Japanese banks, and the next generation of Simplex's trading risk system will also be built on top of the Beacon platform. Ryunosuke Matsutake, Simplex's head of quantitative analytics and financial engineering, says the software firm chose an alliance with Beacon because it is a "unique platform with no direct competitor".
The background of Beacon's architects is also unique. Kirat Singh and Mark Higgins co-founded the firm in 2014. Singh, the firm's chief executive, had previously spent eight years building SecDB, before launching and delivering both Athena and Quartz; Higgins, the chief operating officer, worked alongside Singh at JP Morgan on the Athena project before which he developed pricing and risk solutions in SecDB.
The firm's chief commercial officer, Michael Kirch, spent 12 years with Goldman's commodities business.
Singh says Beacon is an attempt to take all of this accumulated wisdom and do something new with it: "We founded Beacon to create a modern collaborative technology environment in the world of institutional finance. Financial institutions and vendors have historically built closed proprietary technology to solve specific business problems. At Goldman, JP Morgan and BAML, we were very successful in building cutting edge trading systems based upon open transparent platforms. Beacon enables the same level of innovation and business agility for our clients and makes it easy for software or data vendors to create and offer third-party packages in the Beacon app store."
With both Goldman and JP Morgan giving clients access to a portion of their systems, Beacon feels it is a complementary offering to the externalised front-office pricing and risk analytics technology being rolled out by the firm's former employers. Singh casts this as an opportunity for Beacon, and he welcomes a trend towards creating a more open and collaborative fintech ecosystem.
His hope is that Beacon could act as a "bridge" between a bank's proprietary analytics and data and its external end-users - potentially solving some of the technology challenges involved in creating access, as well as the practical challenge of ensuring client data confidentiality.
Beacon has been designed with maximum flexibility in mind. The source code and client data are securely segregated and permissioned. Different micro-services can be used independently of each other, such as a data warehouse that comes with a large set of market data and suite of financial analytics, job schedulers, a dependency graph and enterprise controls that keep tight reins on business-critical applications while still allowing a firm's developers to be nimble and experimental.
It has already won a host of converts, who are using the platform in a variety of ways. Flexibility is a commonly cited draw. For example, tail risk hedge fund Asymmetric Return Capital uses the platform to deal with highly complex derivatives analytics. The fund's chief investment officer, Bryan Wisk, says he could not find another vendor platform that met its needs.
Axpo US, a subsidiary of Switzerland-based energy trader Axpo Group is utilising Beacon as a risk management system because it has the ability to integrate structured transactions into a real-time risk and pricing engine.
Jeremy Wodakow, head of Axpo US, says: "Other than in-house systems built by large banks, existing commodity enterprise TRM products often require plugins - C#, Excel, etc - to manage and value complex deals. Beacon programmers maintain the core infrastructure, but the transparent source code allows us to customize the platform and develop proprietary pricing models directly in the system. Axpo US is leveraging Beacon to drive our customer business forward by providing a cost-effective solution to price both simple and highly complex deals and manage our risk in an efficient, sustainable manner."
By all accounts, the sauce – though less secret these days – is just as tasty as ever.
The week on Risk.net, June 16–22, 2017Receive this by email