by Anam Alpenia
Fintech is one of the most technology-oriented sectors in the world, with a long history. At the same time when airline reservations systems transformed the airlines, Michael Bloomberg and
SunGard Systems, alongside with CATS or Infinity, revolutionized trading floors from 1985 to 2000. Today, most fintech companies blend software into trading, pushing the next frontier. Given the size of these banks and their clients, it comes as no surprise they could become billion dollar companies.
The financial crisis of 2008 caused devastation to many businesses–both to their bottom line and their reputations. One of the worst-hit sectors was finance, unsurprisingly, where only bailouts could save some of the largest financial institutions in the world. Others, like Lehman Brothers, disappeared entirely. In the aftermath of the crash most banks faced more regulations and pitfalls than ever.
For over two decades banks have engaged in selling new instruments that the man on the street could barely understand. Derivatives, synthetic options and other products created secondary markets among financial institutions without the traditional safety nets put in place by the 1933 Banking Act.
The warning signs were on the wall since the nineties. In fact, regulators’ permissive approaches until 2008 led to trillions of dollars of non-collateralized derivatives in Europe and America. The biggest challenge for some of these institutions was seeing the whole picture.
Bloated organizations lacked the technology, the will or the insight to truly appreciate what kind of mess they were in, and to protect themselves against the risks the future would hold. Regulators were caught off-guard, despite the warnings, with a problem of escalating magnitude.
Fortunately for financial traders, companies like Numerix have built the software to anticipate and monitor banks’ risk, trading, pricing and valuation. At its inception in 1996, a handful of researchers perfected stochastic models and adapted them to Wall Street banks.
A mélange of fundamental physics and mathematics cements its proprietary algorithms. Today, Numerix offers risk analytics software for the risk management, pricing, structuring, modeling and valuation of any derivative instrument or portfolio to banks, insurance and large hedge funds across three continents.
Numerix is born from a cadre of outstanding entrepreneurs and researchers. In 1996 founder Michael Goodkin teamed up with Mitchell Feigenbaum, an award-winning physicist and mathematician, to apply the Monte Carlo theory to trading floor instruments. Two years later they attracted Greg Whitten to bankroll the company. He single handedly poured $32M, acquired all assets, and gradually took over.
Whitten, employee number 17 at Microsoft and now executive chairman at Numerix, adds to the company’s unique pedigree. A Harvard PhD in applied mathematics under his belt, he has spent nineteen years at Microsoft in Seattle as one of the first three software architects.
Numerous photos show him with Bill Gates–then a fresh Harvard College dropout. There Whitten built the company’s Basic compiler named after him, according to legend. Three years after leaving the software giant he intuited that the intersection of physics and mathematics could lead to invaluable esoteric modeling opportunities in financial markets.
“The company has always managed to foster a rare intellectual contribution,” he says. “And even the best banks would find it difficult to replicate our software foundations.”
The road to success, so often the case, means trial and error. In 2003 Whitten replaced Craig Bouchard as CEO. He named Steve O’Hanlon President & COO. O’Hanlon becomes CEO nine years later in 2013.
O’Hanlon, like Whitten, shares the same software DNA, with scant Wall Street expertise. O’Hanlon join with fifteen years of success under the belt at Cabletron (acquired by Network Express) and more importantly at Banyan, one of the star tech IPOs of the nineties.
The transition after Bouchard was wrought with a few rough patches. The product portfolio was bloated. Numerix eradicated 17 of them and boiled the company down to one core offering. “We shut down 17 products in six months, and pushed ahead with three products that could be merged into our pricing platform in Excel,” recalls O’Hanlon.
Then the Lehman crisis hit, leaving the banks with sanguine memories. “We’ve emerged as a true fintech company,” says O’Hanlon. Numerix was the company that worked with Lehman to value their portfolio, resulting in billions returned to their creditors. “We’re on a different journey now,” he adds. “We are becoming the company that helps banks transform their business and solve their most challenging problems.”
Eight years removed from the crisis, the situation is not a great deal easier for the finance sector. Regulations such as Basel 2 and Basel 3 are arcane and often updated to most banks’ dismay. “It’s such a changing landscape in the financial world. Banks have been worried for a while. Regulations are forcing them to change their businesses and constantly cut costs,” says O’Hanlon.
The company has enjoyed some big successes in recent times, not least a five-year agreement with Bloomberg that is currently in its third year. Numerix is now present on five continents in 16 offices with over 700 clients. It is growing fast–above 25% per annum–and expanding thanks to a 90-partner network and an increased market footprint. “The difference now,” says Whitten, “is that we have gone from a ‘nice-to-have’ to a ‘must-have’ solution.”
Numerix is eyeing new acquisitions, mainly premier products aligned with the company’s software approach. Both Whitten and O’Hanlon assess that it is a natural step for a company that has grown organically to this point. “We think we can pick up gap fillers that will become integral to the platform,” says the latter.
The company also continues to release new applications for its core platform Numerix Oneview, and as recently as the end of November unveiled a solution helping banks meet the challenges of the Fundamental Review of the Trading Book (FRTB) market risk regulation.
FRTB is set to be introduced in 2019 and will change the way that banks are required to calculate risk. Over 40 banks are using Oneview already and management expects no less than 150 new accounts by 2018. Numerix is well ahead of the game in introducing a solution based on its advanced mathematics DNA.
The financial world is changing rapidly and Numerix seems already positioned for that. Banks must be able to determine the health of all their business units at once. They need to know what to shut down and what to bet their future on. “We’re in a perfect position to solve their problems and become their key partner for the future,” O’Hanlon says.
Numerix’ success has been long in the making. The brand is catching momentum. Its offices, on Park Avenue, in the midst of the action, leave no doubt about its achievements and, as importantly, its intentions. The challenge now is to keep up that pace and deal with the issues success brings. Numerix looks to be in good hands as it handles that enviable problem.
“We’re a force to be reckoned with but we will go much further,” says O’Hanlon.