Quantifi founder Q&A on 20th anniversary of firm

Quantifi, the provider of risk, analytics and trading solutions, recently celebrated its 20^th anniversary. Founder and ceo Rohan Douglas started the firm from his attic in New Jersey in 2002, after prior senior credit derivatives research positions at Citigroup and Salomon.

Structured credit has been at the heart of what Quantifi does and SCI caught up with Rohan to talk about the changes he has seen and what he thinks we might see in the future.

SCI: Rohan, nice to meet you and thanks for taking the time to talk to us. Technology is central to what Quantifi does. How did technology help rebuild the structured finance markets after the financial crisis of 2008/2009, and what is still needed?

A: I’m afraid to say that in my view the financial markets are a fair way behind the rest of the general business world in terms of technology, and the securitized market is a long way behind the rest of the financial markets. If I were being cruel, I’d say it’s not going anywhere at the moment. The dominant players in the securitized space are based on technology that is 30 years old, perhaps even older. Their adoption of technology is way behind.

Obviously, the financial world has been transformed by technology with key changes such as the use of the cloud, machine learning, data science and what is generally expected from software. In the bank of the future, everyone, whether they are a trader or a risk manager, will do a bit of programming. But this world already exists outside finance.

A big part of the puzzle is the availability and coherence of key data. Lack of access to this makes entry by new players difficult and expensive.

SCI: You were around for the financial crisis – as was I. What were the key bits of data that were missed or overlooked at the time?

A: I remember going to the SFA conference in Las Vegas when things were beginning to melt down. The general message of that event was that people expected a correction, but then the market would start up again. What people didn’t understand were the connections between different parts of the credit markets. People didn’t grasp how many institutions were on the same side of a trade, and what the connections between them were. The problems were less about fundamental credit and more about transparency and complex interactions. Everyone saw little pieces of the market but not the totality of it. There was no understanding of the concentration of risk.

SCI: What has been learned?

A: I'm afraid to say that some of the challenges that were revealed by the crisis haven’t been addressed. While there have been big improvements, in such areas as bank capital and transparent trading venues, the role of ratings, for example, has not been tackled. While the securitized markets have come back strongly and have an important function, there is still far from optimum transparency in this sector. This is especially true of private label securitized mortgage products.

There has been a lot of discussion about improving the transparency of structures, making the documentation standardized and available in electronic format, but they haven’t gone anywhere. Lots of these types of discussion were started and never finished.

SCI: Are there other failings in securitized markets?

A: It would have been nice to see a real secondary market develop. Products with no secondary market are marked to market, which I think presents contradictions. The market would benefit from greater transparency but there are probably some inherent incentives for some players in this space to not actively support this.

SCI: There has been a great deal of regulation of securitized markets and indeed of markets in general since you started Quantifi. What are the pluses and minuses of this trend?

A: The biggest problem with regulation is that of unintended consequences. There is a lot of regulation, yet still no open and free discussion of the consequences of regulation. Regulation has in some cases increased concentration risk, like, for example, in the greater use of central clearing houses in the derivatives markets. This creates the potential for a smaller number of really bad events. In other cases, regulation has fragmented the market and decreased liquidity.

Regulation tends to become highly politicized and is done without careful thought or the right kind of discussion. If you asked anyone in financial markets what is most important about regulation, they’d say consistency and clarity. It is difficult to provide both of those things if the process is too political.

SCI: What new areas of the securitized market do you find exciting and what are the possible avenues of new growth?

A: I think the securitization of alternative assets is very interesting. There are a lot of traditionally under-capitalized areas which could benefit from securitization, such as music royalties.

I’d also like to see some of the challenges about the transparency of data in securitized markets addressed.

SCI: Thanks very much for your time today Rohan – and here’s to the next 20 years!

Simon Boughey