Rob Newhouse is the chief executive officer of Victor Technologies, a provider of trading and risk management applications. The company was formed when the Gargoyle Group, an options market-making firm, spun off its technology arm in 2010. He spoke with Sarah Rudolph and Jeff Bergstrom of John Lothian News about a new infusion of capital for the company, their growth strategies, and their technology offerings for options traders.
Q: Victor IB Holdings received equity funding from a group of private investors and financial industry veterans. What will this new infusion of funding do for the company?
A: Well, for some background, the company started last year on the premise that introducing brokers are needed for an under-served community – hedge funds with between $10 million and $250 million in assets under management that are generally able to offer their own in-house trading tools, but lack access to enterprise level risk management. We saw a lot of mid-level hedge funds that didn’t have access to portfolio management tools like stress tests and professional margin calculators, which larger hedge funds do have access to. So, through our purchase of a suite of intellectual property from the Gargoyle group, we are offering small and mid-sized hedge funds access to a professional suite of risk management tools for the first time.
The capital part of this infusion will help us finish the transition of the intellectual property we acquired and focus on building a bigger team on the broker-dealer side. We are actively growing our sales team, having already made hires since our closing of investment capital.
Our management team is already in place. This is a different investment model from previous ventures I have been involved with, inasmuch as the R&D has already been completed through the acquisition of Gargoyle’s intellectual property and already has a team in place of people who have successfully built similar businesses.
Q: What are your product offerings for risk management?
A: The value proposition we offer is our use of the Nvidia GPU, a hardware chip used in video cards. These chips can parallel process hundreds of instructions at a time. We use this hardware to compute options and derivatives theoretical pricing very quickly. You can use the hardware card to calculate every single strike under Microsoft, for example, in less than three milliseconds.
A hedge fund with a billion under management can generally build very similar hardware, but a smaller fund has difficulty with such capital expenditures. We can effectively amortize the cost of such massive infrastructure to all of our hedge fund customers, who would not otherwise have access to such sophisticated pricing and margin calculations.
It is more economical because we only need to build the technology infrastructure once, and then we can share it with our entire customer base.
Q: So your customers use an API (application programming interface) to take your data and do something with it?
A: Correct. We sell a feed of multicast data containing risk data, stress testing output, and margin calculations. Many of our customers may lack the technological expertise to do anything with that feed, so we provide a mechanism that can do that for them via our DJALI Risk Management Workstation. However, if they are tech savvy they can have access to the feed and integrate that information into whatever proprietary system they maintain.
Q: What do you offer specifically for options traders?
A: The options community is a specific focus for us. Our value proposition is risk management. But whereas risk management for equities is not complicated – it’s easy to quantify the amount you will make or lose – options are far more complex. Our platform extrapolates market implied volatilities, borrow rates, and dividend information, and applies them to the theoretical pricing we then calculate for options.
We also offer a real time customer portfolio margin (CPM) calculator, allowing customers to leverage the OCC rules to offset their positions. Our real time CPM calculator is one of the few commercially available now.
So, our value proposition includes three main components:
- Real time theoretical values for derivative portfolio valuation
- The ability to stress test portfolios, products, and sectors across volatility levels and prices
- The ability to calculate Customer Portfolio Margin in real time
These are specifically designed for those who trade options. Our competitors generally offer more generic trading tools such as DMA and EMS platforms. Especially in light of how risk-sensitive hedge funds are becoming, we believe it best to allow our customers to use any execution platform they choose, with all of their executions and positions aggregated within the risk management software we provide.
Q: Why are hedge funds particularly sensitive to risk?
A: The period of financial malaise and crises over the past five years has led to a general aura of risk sensitivity. Because of the increased volatility in the marketplace, customers are much more comfortable investing with a hedge fund that can handle the volatility and risk.
Also, in light of the Lehman and MF Global disasters, we’ve seen interest on the part of many funds to have multiple custodians managing their capital. Our risk management tool can aggregate the positions held at several custodians into a single view. If a hedge fund is very sensitive to risk, and if they want to do business with Merrill Lynch, for example, or JP Morgan, we can offer a single aggregated view of their portfolio and offer risk management across their custodian relationships.
Q: Nvidia recently changed to the Kepler core from the older Fermi core, which is a fundamental re-design of how their cards work. Did this affect your hardware strategy?
A: We have not moved to the Kepler core for that reason. Kepler in current form actually offers a much slower clock speed. Therefore we are still using the previous generation Fermi core. Nvidia is bringing out the next generation of Kepler this fall, at a more enterprise level. At that time we plan to re-evaluate whether to adopt it.
One reason I came to the company is that I think the industry is reaching a point where there is simply no way to do real-time options calculations without leveraging hardware-based technologies.