Bear, Stearns Securities Corporation, the clearing arm of Bear, Stearns & Co., has installed SciFinance 1.1 derivatives pricing software by SciComp Inc. for quantitative analysis. The multi-year contract was announced in September for the licensing of SciFinance in Bear, Stearns Securities' risk control department. Bear, Stearns Securities selected the SciFinance product after evaluating at least 10 other products, says Raymond Hawkins associate director in Bear, Stearns Securities' risk control department, although he would not discuss which products were reviewed.
The risk control department performs risk analysis for clearance client portfolios on a daily basis. "We re-price every single security within a portfolio and do a variety of stress tests of the portfolio to determine what the risk of the portfolio is," says Hawkins. In order to do this, the department uses the SciFinance product to build a model for each security and then develop a pricing tool. Hawkins says when creating a model, it must incorporate the terms and conditions of the security which are translated conceptually into a mathematical model which is then translated into source code for the security pricing tool.
SciFinance uses partial differential equations, or PDEs, for the financial modeling. "The PDEs are almost always more accurate than other methodologies being used right now such as Lattice or Monte Carlo," explains David Johansen, vice president of sales and marketing for SciComp. "PDEs aren't used as much right now because they're considered difficult to program, but our software eliminates the need to program, so they're easier and faster."
Johansen describes the SciComp product as "software that writes software" eliminating costly, time consuming programming of the models into pricing tools. "The user describes the financial model in a terse, short specification and then our software takes that brief, say 20 line description and figures out how to program it and do the math," adds Johansen.
Bear, Stearns Securities was previously depending on proprietary models for the pricing tools, but moved to SciComp's product after looking at about 10 other products, says Hawkins. "We felt that this would be an extremely cost effective approach," he explains. " It would enable us to focus energies more on translation of models into math specification and let the SciFinance product generate the code, rather than dedicating our human resources."
Although Hawkins would not comment on the pricing or details of the contract, he says Bear, Stearns Securities has licensed the software on an annual basis for multiple years. Bear, Stearns Securities Corporation is a wholly owned subsidiary of The Bear, Stearns Companies, with over $20 billion in total capital.