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Derivatives Model Vendor Shifts Business to the Net

When Savvysoft launched www.freecreditderivatives.com-a Web site with free data for use in pricing credit derivatives in late August, it was a thinly veiled attempt to drive traffic onto its Web site and sell more of TOPS 2000 Credit, the firm's credit derivatives models. But Rich Tanenbaum, president of Savvysoft, didn't anticipate theresponse-thousands of users from more than 30 countries logged onto the site to access the free data-closing prices on 2,500 corporate bonds, which is updated daily at the close of U.S. financial markets.

The data covers implied default rates for credit derivatives in four industries, namely financials, industrials, banks and utilities, with 10 credit ratings that range from AAA down to BAA3. Savvysoft hooked up with MCM Watch, a fixed-income market data provider, which supplies it with the live broker quotes. The default probabilities are derived from the bond spreads.

Tanenbaum also discovered there's a wider range of applications for the data beyond credit derivatives traders and salespeople, that includes bank loan officers, rating agencies, equity analysts, risk managers, insurance, re-insurance companies, bond portfolio managers and hedge fund managers.

Though the data is currently for investment grade instruments, Tanenbaum is working on getting data on junk bonds as well. Next, Savvysoft plans to put up default data for the individual issuers, such as Citicorp or GM, but it would charge for this data. To pave the way, Savvysoft began asking visitors to register who click on a single A or lower credit rating. A password is generated, stored in a database and e-mailed to the person.

The Internet experience has not only propelled Savvysoft into the market data business, but it's caused it to consider shifting its entire software business onto the Net, possibly changing the way it charges from a five figure one-time licensing fee to a smaller per month usage fee.

"It's a new distribution model," says Tanenbaum, a pioneer in options modeling who was head of derivatives research at Bankers Trust Co. in the 1980s.

While Savvysoft, founded in 1993, has been in the analytics business, because the data drives the analytics, Tanenbaum saw an opportunity to bundle the data with the analytics. Customers have always had to scramble to get the data from various suppliers, such as Reuters, Bloomberg and Knight Ridder, he notes. But with the Internet, Tanenbaum plans to get the various data feeds, such as Eurodollar futures, OTC swaption, caps and floor volatilities, as well as FX spot data, from brokers, run them off a server, and sell the combined analytics and data package. "That to me is the true value of the Internet-the customer only has to deal with one vendor for everything it needs."

Sometime in October, Savvysoft had plans to offer the firm's software models running on a server via the Internet. Instead of using a browser as the user interface, a customer would build a formula inside an Excel spreadsheet cell, which would seamlessly, run the calculation over the Internet.

Going forward, Tanenbaum would like to offer a VaR or Value-at-Risk type of calculation service for back offices and middle offices. "This means we could do all the VaR or mark to market calculations for them on our server without having to worry where to get the data from," he says adding, "now, that's the big headache for them."

Ultimately, Tanenbaum's dream is to come up with a general mass market investment product over the Internet. It would not be ambitious in terms of functionality but in distribution reach. "Right now what we do is a high margin, low volume, niche business," says Tanenbaum. The total number of people that work in credit derivatives is about 1,000 worldwide, he estimates. "But there's wide open opportunity," he adds. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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