Polytechnic Institute of NYU Department of Finance and Risk Engineering Newsletter
No. 7, Fall 2008
FRE@NYU-POLY
INSIDE THIS ISSUE
1. Essay: Financial Technology and
Services at a Time of Economic Turmoil
2. Department News
3. From the Department Chair FRE Continues to Grow
4. Faculty News
5. Other News Research and Publications
6. Student Activities
Financial Technology and Services
at a Time of Economic Turmoil
changes how prices should be quoted and how orders
should be executed.
It seems that the financial industry has entered a
period of what Schumpeter called “creative
destruction.” Established organizations break down
and something new and possibly unexpected rises in
its place. As Schumpeter and others observed, these
creative changes are driven by technology. Indeed, we
may also be entering a golden age of financial
technology. There are three basic reasons for this:
Department Corner
Online registration for Spring 2009 will begin
shortly. Please check the department’s
Blackboard site for class schedules or
www.poly.edu/class and search for spring.
The dates for the spring session can be found
on the main Poly website at
www.poly.edu/calendar.
By Roy S. Freedman
Over the past few years, it seems that the major media
outlets are filled with bad and worsening economic
and financial news. The sinking dollar implies that
foreign goods cost more for Americans; record oil
prices imply that it costs more to run industrialized
and agricultural economies; the credit crisis means
that it is more expensive to borrow money and launch
entrepreneurial ventures. Large financial firms are
suffering. The financial sector has been
underperforming other sectors in the market over the
last year. We hear more and more reports on how
legacy institutions such as Bear Stearns, Citigroup,
Lehman, Fannie Mae need to be rescued. In
addition, many venerable trading centers such as the
New York Stock Exchange are losing market share;
their market structures are changing to forms that
would be unrecognizable just a few years ago. These
market changes are also affecting government
oversight agencies such as the Securities Exchange
Commission (SEC). In its quest for “best execution,”
the SEC is coordinating the ongoing national market
system reorganization (Regulation NMS) that
Markets are evolving at an accelerated pace: What is
half-life of an exchange? From one perspective,
exchanges and markets are consolidating. The New
York Mercantile Exchange and the Chicago
Mercantile Exchange are merging. Archipelago – an
Electronic Matching Network – merged with the 200
year old New York Stock Exchange – which after
other consolidations is now NYSE Euronext. A
recent headline in Wall Street and Technology
indicates what is in store: “NYSE Says Good Bye to
Specialists; Hello DMMs.” As markets consolidate,
who will integrate the systems?
From the opposite perspective: exchanges and
markets are fragmenting. For example, there are
now about 50 new electronic markets that match
buyers to sellers without disclosing identities
www.poly.edu | 1-800-polytech
Polytechnic Institute of NYU Department of Finance and Risk Engineering Newsletter
Financial Technology and Services
at a Time of Economic Turmoil (continued)
(disclosing who you are to an intermediary might move the market
adversely, so that you might not get the best price). These “dark pools”
are based on sophisticated order execution algorithms, differing by
matching frequency, price formulation, access, and ownership. For
example, the London Stock Exchange and Lehman Brothers are jointly
forming a new dark pool (which could be jeopardized by the potential
sale of Lehman). Dark pools match orders continuously; unlike human
driven systems, they neither slumber nor sleep, nor are they subject to
conflict of interest or biases. Commensurate with the development
of dark pools are various surveillance systems that detect evidence of
“order gaming” for market manipulation. Who will design and build
these new markets and new trading tools?
Increased efficiency due to mature financial communication standards:
Financial technology standards such as FIX, FIXML, and FpML are the
language of quotes, trades, and confirmations. Exchanges and markets
are best modeled as utilities and “liquidity providers” that send feeds
containing millions of financial messages to trading and risk management
clients. What used to be a human-intensive communication activity is
now a computer-to-computer messaging activity. How are these systems
specified and maintained?
Financial communication technology is also being applied to deal
making, especially in the $600 trillion market of derivative contracts.
Several years ago, derivative trading was characterized by error-prone
human processes, which caused backlogs. Communication standards can
now automate the online negotiation of complex trades, brokerage
agreements, margin arrangements, and master agreements specified by
the International Swaps and Derivatives Association. From a risk
management perspective, these standards also enable the development of
systems that monitor exposure limits, agreement conflicts, and other
adverse events.
Low-latency, high-frequency trading exploit market inefficiencies:
Globalization, uniform financial communication standards, and concern
by regulatory authorities for “best execution” helped evolve a trading
environment where a single large order is broken up into several small
orders to be executed over time. These orders can be submitted, canceled,
or modified thousands of time per second in ways that are impossible for a
human to track. Who specifies these algorithms?
It is imperative to the development of high-frequency trading that financial
networks have a network latency measured in milliseconds or less -- the
time from when a liquidity provider’s price goes through a network to
when it arrives at a client trading system. Latency depends on market
network connectivity, network routing speed and server hardware. Highfrequency trading algorithms usually require many price quote updates per
second per financial product (typically running over thousands of
products). High-frequency trading systems are currently benchmarked
around one million messages per second, with high reliability (several
seconds of down time per month.) Because of this, many trading platforms
utilize grid computing and other commoditized implementations of
commercial off-the-shelf systems. From a risk management perspective,
these low-latency financial networks are also being mandated in SEC
mandated disaster recovery programs.
A golden age of financial technology? There are other aspects of what may
be a new golden age of financial technology. More and more developing
countries are investing in financial technology. For example, this year the
Ethiopia Commodity Exchange opened under the belief that capital
markets work better than other methods to end starvation. Other markets
such as electricity futures and carbon trading are maturing. In all cases, in
order to design, build, and maintain these financial systems, we need people
with financial backgrounds who know technology or technology people
who know finance.
Professor Roy Freedman (FRE-NYU-POLY) is a leading expert on Financial
Technology. He is the author of books and articles and an outstanding professor.
Department News
Bloomberg at Your Service
Fred Novomestky recently returned from Switzerland where he
attended the Second Workshop on Computational and Financial
Econometrics at the University of Neuchatel. He presented a paper
on “Least Absolute Deviation Regression: A Lexicographical Linear
Goal Programming Formulation.” His paper was documented and
presented as a numerical technique for the solution of portfolio
investment problems.
In the finance industry, companies send employees to Bloomberg
for training. Every end of the month, we will send 15 to 20
students and faculty to Bloomberg for training as well. This is a
free service provided by FRE and Bloomberg . It will be a monthly
training course, no exam, purely learning experience at Bloomberg.
The topics would cover “Bloomberg Essentials: Equity,” “Equity
news, Research & the Economy,” “Company & Peer Analysis,”
“API: Downloading Data/Bloomberg Data to Excel” (Basic and
Adv.),”Stock Strategies: Equity Idea Generation,” “Fixed-Income
Idea Generation,” “Fixed-Income Portfolio Management” etc.
Please RSVP to Irene Liao (wliao@poly.edu) for further
information. In addition, we will use Bloomberg intensively for
our courses. Professor Charles Stone (Applied Derivatives), and
Professor Aime Scannavino (Advanced Financial Econometrics) are
two such examples.
Ed Emmers joins NYU-POLY after an important career at S&P.
Ed will be speaking in a bi-monthly lecture series, along with other
esteemed practitioners, on “Outstanding Issues in Global Financial
Markets.” This series is a non-credit and complimentary service to
the FRE students and NYU-Poly’s family.
Charles Tapiero delivered a lecture in Casablanca, Morocco on the
“Global Financial Crisis and Contagion.” The lecture was attended
by over 700 people from both academia and the Moroccan corporate
world. A lecture was also delivered at Polytechnic’s Management
program in Israel on the same topic.
2 • www.poly.edu/fe
The Department Has Inaugurated its Expanded
Space at Rogers Hall
Old friends and new are welcome to come to RH 519 to see our
expanded suite. The entrance is now directly opposite the elevators
on the 5th floor of Rogers Hall.
Polytechnic Institute of NYU Department of Finance and Risk Engineering Newsletter
Finance and Risk Engineering Continues
to Grow at Polytechnic Institute of NYU
A Bloomberg station was installed and is fully operational and at the
service of students and faculty. It was installed in our new and
expanded space in Rogers Hall in Brooklyn. In addition, we will
maintain a consulting service for students who seek to use Bloomberg
for their research and their study. Already some courses (such as
Securitization, Applied Derivatives Finance) are planning to use the
Bloomberg station intensely as well as the many possibilities it provides.
Charles S. Tapiero
Topfer Chair Professor of Financial Engineering and Technology
Polytechnic Institute of NYU, New York
The Fall 2008 term promises to be challenging and inspiring. The
FRE/Financial Engineering Master of Science Degree Programs have
opened this year with increased growth in both quality and quantity.
The merger with NYU, resulting in Polytechnic Institute of New York
University, has not hampered our development and may contribute to
additional external services we can provide. The crafting of these
services is still in progress.
The entering class statistics speak for themselves: The admitted class has
an average quantitative GRE/GMAT score of 786+, which is equivalent to
that of leading institutions such as MIT and Stanford. At least 160 new
students have arrived for the 2008 fall term, making it the most important
ever and representing a growth rate of 100 percent over last year.
We have added an outstanding academic colleague to the department–
Nassim Nicholas Taleb, our Distinguished Professor in Risk
Engineering (more on Nassim below). We will likely add another
exciting faculty member very soon, raising the quality of the
department staff higher, which will help to meet both the qualitative
and quantitative challenges we are facing in the classrooms.
Currently the FRE family consists of approximately 400 on-going
degree seeking students, all at the master’s level with another 60
students pursuing a finance minor in their undergraduate degree (albeit
in a separate program and classes). This makes us the largest and
probably the most successful program of its kind. It is, therefore, a
source of comfort, challenge and responsibility to maintain and
augment the quality and the services our educational programs provide.
We are pursuing at the same time our research and commitment for the
excellence of risk engineering, financial engineering and financial
services and technology within the New York University family,
emphasizing our commitment to bridge theory and practice. To this
end, both a Research Center for Risk Engineering and a Research
Center on Financial Engineering and Technology Management are
being activated.
In addition, this fall term, all FRE students will at last be able to access
numerous new services within the department.
5 • www.poly.edu/fe
The new space at 55 Broad Street (in Wall Street), dedicated to FRE,
will expand both our teaching space facilities with cutting-edge
technology and, at the same time, provide an opportunity to meet
potential employers, becoming a “home” for the many students who
work on Wall Street.
Next year, we intend to launch a full and extended summer term,
which will allow students to pursue their course requirements and finish
the program sooner. At the same time, the summer term will be open
to international and joint degrees programs. These programs will
provide an opportunity to diversify the FRE educational experience
geographically and intellectually. The FRE international programs will
provide these opportunities to students in an increasing global world
(stay tuned for news).
Complementary educational services have also been expanded. Mirella
Ivan is renewing her pre-requisite introductory course to mathematics,
algebra, probability and statistics. In the past, this course was received
extraordinary well and, therefore, we hope to renew this course a
number of times during the year.
Consulting services within the department have begun and will provide
support in handling some of the quantitative problems we face in
financial engineering, software programming and the use of the
important collection of packaged programs the department has
acquired and installed in our financial labs. These functions will be
directed by Irene Liao, our IT magician and by Mirela Ivan our quant
geek. In addition, senior GAs will be available at all times to provide
one-on-one in the many matters that all students are confronted with in
dealing with our software collection.
The Research Centers for Risk Engineering and Financial Engineering
and Technology will be reactivated under my direction with a number
of activities that include: An expanded working paper series; the
acquisition of additional research books; International research scientists
and visitors including among other Ron Kenett (KPA Consulting and a
leading research on Risk), Tyrone Duncan a famed Mathematician in
Fractal Mathematics, Aime Scannavino (University of Paris II),
Bertrand Munier (University of Paris II), Konstantin Kogan (Bar Ilan
University) and other visitors from the Technion (Israel), Concordia
University, Canada, Stanford etc. The research center has also created a
position of research fellows with some prolific and academic experts
joining the center’s activities (for example Professor Anne Zissu, and
Charles Stone). We will also provide to a selected few, motivated
students a stipend to focus their Capstone Project on selected research
projects to be evaluated by the center’s academic staff.
Polytechnic Institute of NYU Department of Finance and Risk Engineering Newsletter
Faculty News
Farewell to Juliette Acker, a Pillar of the FRE Department
Our FRE Program Manager, Juliette Acker, has left Polytechnic and
relocated to Brazil to pursue an international career. Juliette was a pillar in
this department and a committed and outstanding professional manager
who contributed to every facet of the department’s growth from its origins
to what it has achieved today. We wish Juliette all the best that life can
bring in this new adventure and are grateful to her for contributions to
FRE and to Polytechnic. She will be greatly missed.
Renowned Author of The Black Swan, Nassim Nicholas
Taleb: Distinguished Professor of Risk Engineering Joins
NYU-Poly’s Department of FRE
We are excited to welcome the internationally acclaimed author and
world renowned scholar, Nassim Nicholas Taleb to Polytechnic Institute
of NYU. Taleb, who will join Polytechnic as Distinguished Professor of
Financial and Risk Engineering, has authored The Black Swan: The
Impact of the Highly Improbable (2007) and
Fooled by Randomness: The Hidden Role of
Chance in Life and in the Markets (2001,
2005), and Dynamic Hedging: Managing
Vanilla and Exotic Options (1997). His books
have sold more than 1.4 million copies with
more than 50 translations in print. The Black
Swan has been the highest selling publication
in the world in 2007 and 2008.
Taleb’s current concentration focuses on the development of the rules of
decision making and the identification of unreliable theories and models
and how they can work to shield individuals and society from them
(“how to live in a world we don't understand”). Previously, he served as
derivatives trader and “quant” for more than 20 years before starting a fulltime career as a scholar of applied probability and risk management. He is
known for a “multidisciplinary but no-nonsense” approach to analyzing
model errors and the role of high-impact rare events or “black swans.”
Taleb is currently visiting professor at the London Business School and
co-director of the Decision Science Laboratory focusing on errors in the
estimation of remote events. He was the Dean’s Professor in the Sciences
of Uncertainty at the University of Massachusetts at Amherst and taught
derivatives model errors at the Courant Institute of New York University
for eight years. Before becoming a researcher, he held senior derivatives
positions with such major institutions as Credit Suisse First Boston,
UBS, BNP-Paribas, Bankers Trust (now Deutsche Bank). In addition,
Taleb worked as a trader in the Chicago Mercantile Exchange, and ran
his own derivatives firm for six years.
Taleb continues to advise central banks and various government agencies
on security, model risk, and risk management. He currently is the
principal of a hedge fund and member of the board of several
institutions.
Taleb holds an MBA from the Wharton School and a PhD from the
University of Paris. Select Honors: Power 30 Wall Street Journal/Smart
Money ( 2007), Frost & Sullivan Visionary of the Year (2008), Derivatives
Strategy Hall of Fame (2000). The London Times called him “a giant of
Mediterranean thought ... Now the hottest thinker in the world.”
Erich Kunhardt, Provost; Susan Lestingi, VP Marketing and Communications; Nassim
Nicholas Taleb, Distiguished Professor FRE; Charles Tapiero, FRE Department Chair
3 • www.poly.edu/fe
Polytechnic Institute of NYU Department of Finance and Risk Engineering Newsletter
Other Highlights
In Memoriam
We welcome Jonnette Romano as our new staff addition. She is
secretary and assistant to the department chair. Jon has extensive and
previous experience having worked in the Financial Services Industry
(AIG) and we are excited about her dynamic energy and high level of
commitment. Please stop by to say hello to Jon.
An Unexpected and Painful Loss
Mark Your Calendars for October NYU-Poly
FRE Career Fair!
On October 16 and 17, the NYU-Poly Career Fair, the NYU-Finmath
Fair, the premier career fair for FE, takes place. Please follow up with
Polytechnic’s Career Management Department and Melissa Kutchner
at NYU.
Students should remember to go to Polytechnic’s career office so that
résumés can be reviewed and uploaded to CareerLink, NYU-Poly’s
career database, for participation in this grand event. Note many
employers only look at résumés uploaded on online system. Barbara
Lord of the Department of Career Management is organizing a
meetings to assist FRE students in this process.
A Joint Topfer Chair Seminar: Financial Engineering and
Electrical Engineering
The department of financial and risk engineering,
our staff, students, and the entire Polytechnic
community are deeply saddened by the loss of one
of own FRE students, Andrei Koloskov. Andrei,
fine student outstanding member of the Polytechnic
community, was killed in an auto accident earlier
this month. We extend our sympathies to Andrei’s family and loved
ones. He will be missed.
Research and Publications
A New Journal, “Risk and Decision Analysis” co-edited by with
Alain Bensoussan and Charles S. Tapiero will publish its first
issue in October 2008.
Jean-Carlo Bonilla, Himanshu Kasana, and Karen Zhang have a
research team working on algorithmic trading. The themes they
work on include: Opportunities in Coupled Market for Intraday
Trading, and Fusion Analysis: Tech and Fundametal Analysis.
Professor Tyrone Duncan will be visiting FRE for a week in October 20
and will be delivering both a class to FRE students on fractal calculus
and another at a first and joint seminar with the Department of
Electrical and Computer Engineering on Mutual Information. Professor
Duncan is an outstanding academic with an important collection of
contributions to fat tails and fractal mathematics. Professor Duncan will
also be available to discuss with students the many research possibilities
of fractal mathematics in finance.
Charles S. Tapiero, Orders and Inventory Commodities with Price
and Demand Uncertainty in Complete Markets International
Journal of Production Economics, 2008.
Abstract of the Seminar: Mutual Information and
Estimation, University of Kansas
Bertrand Munier and Charles S. Tapiero, “Risk Attitudes, with
Bertrand Munier, Encyclopedia of Quantitative Risk Assessment,”
Brian Everitt, and Ed Melnick (Eds), USA, Editors, Wiley, 2008.
Mutual information provides a quantitative relation between two
stochastic processes. It is a basic notion in information theory and is
used empirically to determine a quantitative measure of the relation
between two time series. In this talk, the mutual information between a
signal and an observation process of the signal is given explicitly as an
estimation (filtering) error. Another description of the observation
process has the signal multiplied by a positive parameter. For this model
the rate of change of the mutual information with respect to the
parameter is given explicitly as an estimation (smoothing) error. Two
noise models are considered in the observation process. The first model
is fractional Brownian motion. Fractional Brownian motion is a family
of Gaussian processes that includes Brownian motion as well as other
processes that can often be justified empirically as models of random
phenomena. The observation process is the sum of a fractional
Brownian motion and a signal. The second model is a pure jump Levy
process which is a stationary, independent increment process with purely
discontinuous sample paths, for example, a Poisson process. An
observation process is a pure jump process where the rate function for
the Levy process depends on the signal.
Charles S. Tapiero and Konstantin Kogan, Risk-Averse Order
policies with random prices in complete markets and retailers’
private information. European Journal of Operations Research,
2008.
A. Grando and C.S Tapiero, co-editors of a special issue of Risk
Measurement and Assessment, Fall 2008.
www.poly.edu/fe • 4
Student Activities
Breaking the Ice with FRE Students
FRE students gathered for festivities, music, fun and games at
the Financial Engineering Ice Breaker in Polytechnic’s Silleck Lounge.
This amazing night filled with fest and fun provided an excellent
opportunity for Financial and Risk Engineering students to meet fellow
students and Financial Engineering Association (FEA) members, share
their unique experiences and program information with classmates and
benefit from networking opportunities. The party was hosted by the
Financial Engineering Association, the student group at NYU-Poly
in the Department of Finance and Risk Engineering.
FRE @ POLY News
Department of Finance and Risk Engineering
Polytechnic Institute of NYU
Six MetroTech Center
Brooklyn, NY 11201
For more information about the Power of PolyThinking and the Department of Finance and Risk Engineering, please visit: www.poly.edu/fe