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Hedging bets on hedge funds

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Calypso Technology - one of the handful of multi-asset trading platforms for capital markets - has tapped Platform Computing to provide the grid backbone for its Galapagos risk analysis and hedging applications. Unlike other parts of the Calypso trading platform, Galapagos is only being sold as a service, and that means Calypso has to set up a compute and storage grid suitable for scaling up and down dramatically as the markets move up and down around the world.

Supercomputing and financial services grid have slightly different needs, and that is why Platform Computing, the pioneer in grid computing, sells two types of products: the closed source Load Sharing Facility (LSF), arguably the first commercial grid computing platform for static infrastructure dating from the early 1990s, and now its open source analog, Infrastructure Sharing Facility (ISF), which went into production last November and which can schedule resources and applications on a virtualized grid of servers (what some people call a cloud). You can read all about ISF here, but that is not important right now.

That's because Calypso isn't going to base its Galapagos risk analysis and hedging service on either LSF or ISF, but rather on Platform's Symphony grid software, which is a tuned to run all of those Java-based, SOA-style applications banks and other financial services companies have created over the past 15 years. You could, in theory, plunk an operating system and a Java or .NET stacks onto server nodes managed by ISF, but Symphony is geared specifically for the kind of high-throughput, low-latency transactions that financial services companies demand.

But Symphony can scale up to 20,000 cores, supporting Windows or Linux operating systems and C/C++, Java, and C# applications, and driving up processor utilization toward 99 percent. With Symphony 5, announced last fall, the grid middleware has useful features such as data affinity (spreading large datasets over a large grid and moving calculations to the nodes where the data is located instead of trying to move data to where a server is tasked to running an application) and multicore optimizations (reducing memory and I/O contention in multicore and multithreaded processors).

According to Charlie Jarvis, vice president of European financial services at Platform, some of the big banks in the world already use a mix of the Calypso multi-asset trading system and the Symphony financial grid middleware, including Citigroup and Landesbank Baden-Württemberg, so Platform was in the running once Calypso decided to create its own grid and sell the Galapagos risk analysis and hedging system as a service. (It's not clear why Calypso is not letting the Galapagos code out of its hands, but it may have something to do with protecting the intellectual property in the so-called Darwinian evolutionary algorithms that Galapagos uses).

But the choice of the Platform Symphony grid backbone was not a foregone conclusion, since Calypso's trading platforms also support grid software from DataSynapse, which was acquired in August 2009 by financial services middleware maker Tibco Software for $28m. But the optimizations made in Symphony to boost performance and CPU utilization seemed to be a deciding factor, given that the evolutionary risk analysis algorithms are very compute intensive, according to Jarvis.

The reason why Platform is excited about the Calypso win is not that it has bagged one customer, but that it has bagged a customer that itself has a huge potential customer base it will chase with the Galapagos service, and it stands to benefit financially if that happens.

Jarvis estimates that before the credit market collapsed in late 2008, there were something on the order of 10,000 hedge funds worldwide, and that somewhere between 10 to 20 per cent of them had to do some sort of risk analysis on their trades. He is not sure how many hedge funds have evaporated, but the number is still probably pretty large, and none of them want to set up systems to do their own risk analysis.

The 200 or so biggest banks and brokerages in the world already have grids, and they are already running their trading and risk analysis systems on those internal grids. But they may decide to outsource this in some cases if the Galapagos service provides results and better bang for the buck.

Under the partnership between the two companies, Calypso is paying for Symphony on a utility-style license per month and the two companies will engage in joint marketing. Other financial details of the deal were not announced. ®

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