s Derivatives Strategy - June'98: John Succo’s Mistake
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John Succo’s Mistake

The trouble started when John Succo, trading manager at Lehman Brothers’ equity derivatives volatility desk, agreed to speak at an investment conference sponsored by Grant’s Interest Rate Observer.

After discussing the pricing of risk and the correlation between equity derivatives and the underlying stock market for a while, Succo was asked a question. “I don’t think my boss is here, so I’ll address that,” he responded. “I don’t think that the people running our firm, our equity floor, have any idea of the things that we actually do, of how we...(audience laughter) I’m serious...of how we hedge, the products that we’re involved with, the amount of risk we take or the lack of risk we actually take.”

He went on to describe a 26-year-old derivatives trader at a big bank who believed that his senior management’s understanding of the risks at the institution was “probably off by a factor of 10.” “And I think that’s probably pretty accurate. I think as I said before, management, if you’re making money, kind of leaves you alone until there is a crisis situation. And I don’t think that’s a way to run a firm.”

Succo then went to some lengths to distinguish his firm from the pack. “My management is a little different. I mean, we all have the same viewpoint on what our role is. We’re here to make markets for our customers. Management understands the risk that I take, because I’ve had this conversation with them. They don’t understand the mathematical background, the calculus, the rate of change, the correlation between various assets that we have. But you know, we put out a kind of risk report every day, where they know certain numbers to look at.”

According to the newsletter, four concerned clients called senior managers at Lehman. One of the senior managers listened to a tape recording of the talk and became convinced that Succo stepped over the line and that he undermined “the integrity of the firm.”

Succo then got the ax.

“I think that in the brokerage industry, there is no constituency for the truth,” concludes Jim Grant, editor of the newsletter.

Jacques Jumps to Goldman

Jacques Longerstaey has been so closely associated with JP Morgan’s RiskMetrics project that it’s difficult to imagine him anywhere else.

But last month, the 11-year Morgan veteran showed up at Goldman Sachs, where he will head a new risk management advisory group. “I’d been in touch with the people at Goldman for some time, scoping out the possibility of working in an interesting client advisory capacity,” he explains. “I can’t tell you exactly why it’s so interesting, but there are some strong pluses vs. the business model Morgan engaged in.”

Longerstaey stresses, however, that his new effort is not designed to compete directly with Morgan, and will have a greater emphasis on technology. Longerstaey reports to vice president Denise Hayman-Loa, who heads Goldman’s enterprise risk management business.

Lisa Looks Back

The title of the talk at the Women’s Bond Club was “The Risk Management Roadmap.” But for Lisa Polsky, it offered a moment to reflect on her first years in the derivatives business and the role women played in its formation in the late 1970s and early 1980s. By all measures, Polsky has made it to the top of the heap. As a managing director at Morgan Stanley, she serves as global risk manager and head of product development for the equity division as well as a member of the firm’s risk advisory board and capital markets risk committee.

But a couple of decades ago, she was a lowly foreign exchange trader—the first to bring a computer to Citibank’s spot FX desk. “It was a great opportunity for women because there was no competition,” she recalls about her early years at Citibank. “Nobody cared if I traded options because I wasn’t stepping on anyone’s turf. When I said I wanted to try options, everyone said, ‘Good, it will get her off the trading desk.’ Now you see a lot of senior women in derivatives because it wasn’t like trying to get into an area where everyone was competing. No one thought it was going to be successful. Then once it was successful, they couldn’t take it away from us. So here we are now, partners in major financial institutions, which is wonderful.”

She notes that Capital Market Risk Advisors, the first large consulting firm for derivatives, is run by two women, and that is “not an exceptional case.” There are a number of senior women who were instrumental in starting the business and instrumental in moving into the newest strategies and the newest areas,” she says. But when asked “How many women partners are there at Morgan Stanley?” she responded “not enough.”

Lately, Polsky as been serving as a member of the advisory board of University of Chicago’s new Program on Financial Mathematics. Although she sees academic financial engineering programs as a natural outgrowth of the quantitative approach derivatives have brought to finance, she cautions that degree programs may encourage graduates to confuse models with the real world. “Models oversimplify, so you don’t want to believe your model is the truth,” she warns. “If they think a model will tell them how to make money or manage risk, it’s not quite that easy. It’s part science and part art. You have to know what’s not in your model and have good business judgment.”

Alan Kurzer Ties the Knot

Over the last few years, Gerald Energy, a division of Gerald Inc., a New York-based commodity futures commission merchant, had grown to be a major force in the increasingly hot energy market, and began attracting many eager suitors interested in merging.

When U.K.-based EF & Mann acquired Gerald Inc. this spring, president Alan Kurzer considered joining Mann in a senior-level position. But he got cold feet when he realized Mann had no intention of bringing over more than a handful of Gerald Energy’s 50 employees.

The next thing he knew, he was being swept off his feet by Sakura Dellsher Inc., the futures commission merchant created by Chicago Mercantile Exchange legend Leo Melamed. SDI offered to acquire a majority of Gerald Energy, presenting Kurzer with vastly increased financial resources and capabilities. It also promised to retain most Gerald Energy staff not invited to move over to Mann.

Kurzer accepted the offer to lead the new energy brokerage operation at SDI, acting as senior vice president and managing director. “We could continue doing what we had been doing, and yet could do a whole lot more,” he says. “It was the best of both worlds.”

The acquisition sits well with SDI’s goals as well. The firm had been seeking to establish a floor presence at the NYMEX and had been on a multiyear plan to build an energy business from scratch. It was also trying to develop into a major force on the clearing side of the derivatives business, and to become active in the over-the-counter markets on a worldwide scale. By taking on the former Gerald Energy’s employees, it has accomplished all of those things in one fell swoop.

Kurzer sees the merger as a harbinger of things to come in the futures business down the road. “To be able to survive,” he says, “you have to be a low-cost provider. But you also have to be a ‘one-stop shop.’ You can’t be just a traditional stock brokerage house that does commodities, and at the same time you can’t solely be an OTC house. The ideal situation is to put it all together and benefit from the economies of scale.”


Measuring Speed

We at C-ATS Software take strong exception to the assertion, forwarded in your article on the speed of risk management engines (“Measuring Speed,” by Karen Spinner, February) that Monte Carlo methodology is too slow to support intraday risk management. In fact, we have clients who use the Monte Carlo functionality of our CARMA product for near-real-time credit risk analysis. This is possible because CARMA, as evidenced by benchmarks, can perform up to 5 million revaluations per minute to support risk-based decisions.

In addition, we would like to comment on the Bayerische Vereinsbank benchmarking cited in that article. At the request of BVB, the risk management practice of American Management Systems (AMS) was called on to perform a UNIX-based benchmark of CARMA along with several other risk management solutions. In every case, CARMA outpaced every competing solution, while providing full-blown Monte Carlo simulation using transaction data without the aid of compression or loss of analytical accuracy.

As the author noted in the article, speed is not everything. But when speed is combined with the ability to measure incremental and enterprise-wide risk, the result is the ability to optimize capital and manage the business against risk-related criteria. As far as we know, CARMA is the only solution fast enough with the required functionality to enable intraday evaluation and pricing of transactions against their impact on portfolio risk and net enterprise risk.

That’s why speed is important, and why we want the air cleared on who can deliver it.

David Gilbert
C-ATS Software

  • NetRisk named Luca Celati manager of its risk management advisory group based in London, and announced that Thomas Coleman has joined the group. Celati previously served as managing director for finance in COROB S.P.A.’s Taotek Group. Coleman is a former global risk manager and head of trading at TMG Financial Products.
  • CSK Software promoted William O’Shea from chief operating officer to general manager of the company’s trading systems business.
  • David Crammond has been named senior vice president and head of marketing for Sanwa Financial Products. He had served as president of Intercapital USA.
  • The Chicago Mercantile Exchange promoted Fred Arditti to senior executive vice president, William Jenks to executive vice president for management information systems, Mazen Chadid to senior vice president of trade operations and new product support, David Dugan to senior vice president of systems development, James Krause to senior vice president of systems development, Richard McDonald to senior vice president and chief economist, and Carmen Lita Schilling to vice president of government relations.
  • Swiss Re New Markets Corp. named Alan Dunetz director in its financial solutions unit.
  • Andrew Vickers has joined FNX Limited as product manager for Sierra Systems’ FX Cash Module. He had served as manager of the FX options globalization project at ABN AMRO.
  • BDO Seidman has named Ann Rodriguez financial services director in its New York metro business and technology solutions group.
  • BankAmerica, expanding its New York foreign exchange team, has hired Phillipe Newlin and Veronica de los Rios for its sales desk. Tony Capozzoli will serve as senior risk analyst, while Eric Nickerson and Sheldon Engler will join the firm’s global currency strategy group.
  • Fred Kinmoth, a former partner of London-based international law firm Herbert Smith and managing director of Peregrine capital, has been named a partner at Paul, Weiss, Rifkind, Wharton & Garrison.
  • OptiMark Technologies has named John Katovich senior vice president and cogeneral counsel. He had served as senior vice president, general counsel and director of legal affairs at the Pacific Exchange.
  • C-ATS Software has hired Geoffrey Owen, formerly director of risk management services at Dow Jones Markets, as sales director for the Americas.
  • STOXX Limited has appointed Michael Schantz general manager.
  • MINT has named Nancy Coryell vice president for client services. She had served as director of client and technical services at FAME Information Services.

Please fax information on job changes to: 212-366-0551

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