Computational Finance

The most significant trend in the manner in which financial transactions take place and the financial implications of this change comes from an overlap between financial engineering and computer engineering, called computational finance. Portfolio engineering and computerization have become very closely interconnected.

As the calculations related to financial decision-making are becoming ever more complex, doing them manually is no longer efficient. Instead, the process has been automated. The financial management is more related to computer programming, and pre-setting action triggers is more related to the portfolio strategy than to actual trading.

That’s only one aspect of computerization, however. In addition to portfolio management, computerization has also significantly changed the dynamic of trade as a whole, changing how transactions take place. Since the manner of transactions has changed, so have the methods used in order to gain an advantage. Those methods are now focused on the nature of computing.

The success of a financial manager is increasingly becoming intrinsically linked with his computer skills. Every corporation should absolutely be linking its finance and IT departments, regardless of the range and scope of their financial functions.

More than anything, this aspect of financial engineering has completely reshaped the world of finance, and this trend inevitably will continue to have implications for all corporations around the world. Those who don’t adapt are destined to get spanked by their competition.

Financial engineering is about continuously assessing the current methods and finding new methods in order to gain an advantage, increase returns, and customize products. People are very serious about their money and will stop at nothing to revolutionize the world in order to make more. Financial engineering is a bit like the science lab of the finance world.

Change the face of trading

With regard to corporate investments, nearly every aspect except capital investments and the setting of strategies is done by computers now. The stereotypical image of the trading floor of any stock exchange is ancient history, as the trading floors are now set up with rows or circles of computers where all exchanges take place. The shouting matches between traders are rare and becoming extinct.

This shift to e-trading has opened the door for amateurs, casual traders, retirees, and just about anyone else on the planet to become nearly as effective as the professionals. Not only do they have access to fast transactions using some of the same networks, or at least similar ones, but these transactions are very cheap.

Discount brokers often charge less than $10 per transaction, and people no longer have to go through a professional for these transactions to take place; it’s all done on the computer now.

Computerization has very much changed what makes a trader competitive compared to others. Traders and portfolio managers are now becoming more competitive based on the effectiveness of their automated algorithms and the speed of their computer network.

The speed of orders and trades is measured in milliseconds as traders attempt to ensure that they’re the first to get their orders through, before other automated systems have a chance to drive up or down the price of a particular asset.

Those who are fastest can take advantage of this by instantaneously reselling at the higher or lower price, making extremely high volume trades within seconds of each other and generating revenue by doing this seemingly countless times throughout each day.

Offer online banking

The scope of computerization extends beyond corporate investing. It’s rare to find a bank or credit union that doesn’t offer free online banking, transfers, and bill pay. Not only does this make banking much faster but also cheaper.

One of the services that’s available as a result of computerization is automated bill-pay and invoicing — one of the few services in which a corporation would not want to participate.

Consider a corporation that makes thousands of purchases each month, or even just a few very expensive purchases consistently. It can pay the bill immediately, as automated bill pay sometimes requires, or it can wait until the very last moment to pay the bill in order to keep the money in an account that generates interest.

Now reverse this scenario: A corporation is owed money, and the sooner it gets its payment, the sooner it can begin to generate interest. Of course there’s a conflict of interest and no vendor can force its customers to pay before the due date.

The vendor can, however, benefit by offering automated bill pay to its customers, while neglecting to automate bill pay itself or ensuring that its automatic bill pay is timed to make the transaction after a specified time interval. There may even be potential for services that provide intermediary automation that generates interest off the spread between interest rates paid and received in short-term repayments. Just a thought.

Look at logic programming

Another trend in computerization is logic programming. This concept isn’t new at all. In fact, all computer programming is based in logic to some extent. Over time, the programs have become far more mathematical, however, and now these programs are starting to be used for such things as tax management and even executive management.

Automated systems that either directly track a corporation’s financial activities or integrate with other financial computer systems make decisions based on tax law or other more advanced algorithms related to business decision management.

As with most jobs, computerization and computer engineering is being applied to corporate finance at the functional level as well. Computers are supplementing or replacing multiple financial roles within corporations.

Here is a list of some of the more common financial software packages:

  • Hyperion: Financial management

  • JD Edwards: Several financial software packages

  • Peachtree: Basic financial recording and reporting

  • Quicken: More basic functions of recording, reporting, and invoicing

  • ERP Financials: Comprehensive financial management

  • SAS: Modeling and analytics

  • STATA: Modeling and analytics

  • SPSS: Statistical analytics

Because computerization is easily the most dynamic, comprehensive, and most quickly changing aspect of financial engineering, these software packages are very prone to being outdated at any point. Still, most of them are well integrated into the financial community and have been around, in one form or another, for quite a while.

For example, SPSS changed its name to PASW for a period of time, then changed it back when it was bought by IBM. This particular area of financial innovation is quickly changing and corporations must continuously review it in order to remain competitive.

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