Phil -

Financial Information Layer

Version 1.0
Nagler & Company

Abstract:   Financial institutes take advantage of diverse data sources including external data vendors and internal databases. There is a demand for well tuned interfaces between different systems and operational units. It is a serious challenge to master the integration of diverse applications and numerous programming dialects. This article suggests a technical infrastructure aiming for a coherent system where all functionality can be nested into one another.

What is Phil?

Phil is a technical platform to rapidly develop applications which integrate various data sources and integrate well into existing environments. Its infrastructure is focused on the financial industry where it supports traders and risk controllers in their daily work. It is based on standardized technologies to efficiently implement flexible user interfaces and a simplified environment for the development of new computational modules. Thereby the development of the entire application can be reduced to only the most specific functionality.

This concept covers the development of flexible user interfaces and the rapid integration of algorithms and external software. Based on common Internet standards user interfaces can scale from simple forms up to complex interaction features which create structured XML documents. Thereby users can be enabled to configure simple queries or even define complete programs. The generated queries are stored on a central database and made searchable by keywords. A set of common and stable operations can be stored or be developed cooperatively here. These documents can be sent to a server where they are interpreted by a computation engine. The components of the query are mapped to certain information on databases or to other modules which are made available by any integrated software package. The development of custom made packages is also considerable simplified by a set of design patterns optimized for common financial problems.

Phil features:
storage of reusable modules
easy combination of various modules
convenient access to functionality of installed software
multiuser platform and developing environment
no installation effort at the users desk
easy enlargement of functional spectrum

How does Phil work?

The Phil framework can be viewed by its technical components or by its development units. Technically, Phil consists of a database and a computation engine with access to the company's data sources. It can be installed on any server that is wired to the network. Phil is designed to allow continuous extention with additional features whenever new data sources are connected or new analytic methods are requested by the users. The Phil development team can be divided into distinct sections. Each has a clear scope of duties and a well defined communication line. This alleviates the combination of stable and reliable components with fast integration of new or experimental parts.

Technical view

A Phil query defines a computational task that has to be performed by the system. They are stored in an XML database with intelligent search facilities on its content. Queries are also associated with an internet address that can be sent by email or linked from other internet resources.
As far as the user is concerned there is a four step interaction process to evaluate a Phil query. Initially queries are searched by keywords or taken from the bookmarks in case of frequent use. Then a form is presented that allows further configuration or, depending on the forms flexibility, to completely change its content. The query is then submitted to the computation engine installed on the server. The evaluated result is finally displayed on the screen. Users can now further manipulate the query or export the results to their preferred application.

Architectural sketch of the Phil infrastructure.
Four step user interaction: 1. Keyword search 2. Fill in form 3. Submit form 4. See results

On the server side there is an XML database which stores Finance Phil queries and appropriate forms encoded in PhilML and XForms respectively. PhilML is a dialect of XML describing a Finance Phil queries. XForms is the W3C certified standard for user interfaces allowing dynamic generation and manipulation of XML documents. Together these can be displayed in an HTML browser as a form with default values and a set of interaction features allowing different degrees of flexibility. The computation engine parses the PhilML document and instantiates appropriate Java classes. The development of additional classes is made straightforward by code wizards and predefined design patterns. Programmers fill in algorithms to perform specific computations or to pass the request to either one of the connected data sources or any of the available computational packages. The PhilML interpreter cares for the combination and configuration of individual classes. Multi step server interactions can be implemented by embedding XForms into a resulting web page. This connects the result to other queries a user might perform on the result.

Experience fields

The maintenance and development of modules is separated into three experience fields: design of graphical user interfaces, configuration of data sources and the connection to computational packages and the implementation of the core library containing mathematical algorithms or access to data sources.
User Interface   The first level consists of a form database with automated search facilities. New entries are made by mapping query components to their graphical representation or by assigning any of the XForms interaction features. User interfaces are maintained by web designers with close insight into the users environment. They have to explain the query features in terms of the users vocabulary, write help texts and apply corporate design.
Query Definition   When a request for a new query is specified the second level can configure existing functionality to solve the problem. It is maintained by people skilled in the area of market data and with good knowledge about the companies data sources and their peculiar properties. Hence they are capable of providing qualified configuration of queries. Here a set of reference modules is constructed to provide suitable and tested data for usage in stable environments.
Core Library   The third level develops the core library of computation modules, which are integrated into the query definition. Mathematical and statistical methods are developed by mathematicians with good knowledge of programming languages and various computational packages with predefined algorithms. Good understanding of financial models and database interfaces belong to the virtues of this section.

The development process is divided into three sections.

Communication case study

Trader J. requested a module to compute correlation matrices with quantile information on the lower triangle for a given set of stocks. Since his search on "quantile" produced no results, he addressed his request to the person responsible for query definition and market data. There it was detected, that the current scope of functionality was exceeded. A list of necessary improvements was passed to the programers responsible for module implementation. The mathematical methods for quantile computation were added. Then a person trained on the banks market data infrastructure configured and connected them to the data sources. After some negotiation J. was satisfied with the configuration. Now he wants to have a user interface allowing him to recompute everything with some simple possibilities of reconfiguration. He refers to the user interface designer and requires a visually appealing presentation of the existing module.

Phil in action

In the Hypovereinsbank Phil is utilized by traders and financial analysts at the department for equity derivatives (MED). It's capabilities currently cover functions to store, maintain and access mathematically enhanced data for financial research and market analysis. Phil acts as a data broker by providing access to several underlying data sources through complex and highly configurable modules. It memorizes meaningful descriptions and such minimizes any effort spent on finding existing modules. A number of examples demonstrate the flexibility of this approach.

Implied volatility surface

Keywords: ABN Amro, volatility surface, regression

A volatility surface represents the expectations for future stock price movements into a certain regions. It is extracted from market prices of exchange traded put and call options. Every trade has the coordinates time, strike and volatility. The cloud of trade points is approximated by a non parametric regression surface that smoothes outliers and interpolates the surface in areas where no trades were available.

Regression surface through a cloud of implied volatilities.

Historic and implied volatilities

Keywords: ESTOXX, historic implied volatility, Comparison realized vs implied volatility

Another view at the implied volatilities is demonstrated by the following plot. The expected volatilies with different times to maturity are plotted against the realized volatility. The plot shows regions of increased volatility starting at September, 11th and lasting until the end of November. In mid of October when the implied volatility collection starts the large difference between short ranged and long ranged expectations demonstrate the markets belief into falling volatilities. In late November a massive peak in the the timeseries is most probably an error in either the raw data feed or in one of the numerical implementations.

Historic implied volatilities vs. realized volatility. Sudden vola increase at the September 11th and recovery in December.

Moving average and convolution kernels

Keywords: kernels, convolution, moving average test

Due to the random character of market prices, smoothing timeseries data is commonly part of the analysis. This technique is known as moving average and is often plotted against the original chart. Statistical parameters like volatilities and correlations are essentially moving averages over logarithmic returns or products of returns. There are different methods to weigh past values. Instead of just averaging a fixed number of recent values, it is generally more advisable to assign different weights according to the values age. The plots below demonstrate this feature and show how easily this concept is expressed with the PhilML query language.

The first example shows the definition of a most simple generic time series with one single peak at the specified position. Time series can also be retrieved from the database with queries containing the connection parameters.
The second example shows the impact of an exponential moving average operator. It is constructed just by placing the <Ema> and the <Decay> tag around the original time series. All elements in the PhilML Code can be referenced by their id or by an XPath expression. The picture shows how the peak fades into later values, i.e. into abscissae with higher time stamps.
The third picture visualizes a more sophisticated moving average, defined by its decay and its window form. This kernel offers additional control over its width and its window form.

Output XML Query

 <DeltaFunction id="delta">

   <Include ref="delta"/>

   <Include ref="delta"/>