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Catch Me if You Can: Risk Hidden in Plain Sight
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Becca L
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Becca L,
User Rank: Author
7/31/2014 | 5:14:08 PM
Re: Scary


This article is rather scary, and to Ivy's point, at WS&T cover great enhancements in this area all the time, but there a lot of corners of the offices have been overlooked by both us and the firm! Somewhere at a major firm, right now, some one is keying away into a TI trying to hit a deadlin.



 
IvySchmerken
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IvySchmerken,
User Rank: Author
7/21/2014 | 1:50:41 PM
Re: Scary
It is scary to think that risk management was in the hands of basic calculator but then Mitchel upgraded to the IBM XT and VisiCalc, which was state of the art at the time.  Fast forward to today and banks have very sophisticated software to monitor risk in real time, at a point when markets are moving much faster and with exponential volumes of data. But it sounds like the gaps are in the surrounding departments- legal, compiance, marketing, sales. Since we endlessly write about compliance systems and CRM, I thought these areas had gone somewhat electronic.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
7/21/2014 | 6:28:07 AM
Scary
Mitchel, great back story on how quickly risk has gone from a back office afterthought to something that all firms should be thinking about right from the start of the trade. It's scary to think that large banks were "guesstimating" risk for years and the only tool they were using was an HP 12c.

 

HP 12c Calculator
IvySchmerken
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IvySchmerken,
User Rank: Author
7/19/2014 | 2:28:42 PM
Re: Opportunities in plain sight as well...
This is very interesting, Perry. I didn't realize that structural changes in a financial filing as compared to industy peers can merit further analysis can point to hidden risks. It seems like the amount of space devoted to discussion of certain items can be as informative as the actual data.
pbeaumont
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pbeaumont,
User Rank: Apprentice
7/18/2014 | 11:08:29 AM
Re: Opportunities in plain sight as well...
Sometimes the more interesting elements relate not so much to the particulars of content (though the evolution of financials and related specifics are certainly worth monitoring) but rather the structure of documents.  For example, how much space is a firm devoting to management discussion and analysis (MD&A), and what level of detail is being provided on current or forward looking risks relative to peer group? Also of interest is the pattern of filings, such as whether a firm is timely or late, or if a filing is subsequently amended. There is also the consideration of non-financial elements like abrupt changes in management, auditors, accounting methods, and so forth.
IvySchmerken
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IvySchmerken,
User Rank: Author
7/18/2014 | 9:24:45 AM
Re: Opportunities in plain sight as well...
Thanks for your comments, Perry. Reading the footnotes in 8k and 10k reports has proven to be very valuable. Wasn't it Enron that buried its holdings of OTC derivatives in the footnotes? But this type of granular analysis can be very time consuming and many people probably don't do it. As you point out, XBRL can help firms mine thousands of data points. What kinds of nuggets are you finding buried in these data elements?
pbeaumont
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pbeaumont,
User Rank: Apprentice
7/17/2014 | 5:44:22 PM
Opportunities in plain sight as well...
Just as Mitchel correctly states that many risks can be avoided by digitizing paper documents, there are many opportunities that can be captured with a methodical analysis of financial documentation as well.  Nearly one in five public company documents filed with the SEC are subsequently amended, and all manner of key data are embedded within footnotes, fine print, and cross-referencing resources (as with "incorporation by reference").  Our research shows there are appreciable rewards that can be achieved with a proper mining of relevant data elements, especially today when public firms are required to file information using machine readable formats (XBRL and other), which in turn facilitates the analysis of thousands of datapoints at a time.    

Perry Beaumont, Ph.D.


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