IN TRADING, AS IN life in general, hindsight is 20/20.
"It's easy to see your mistakes after you've madethem," said Scott C. Benner, director of fixed-income trading at First Interstate Bank, Los Angeles. "The hard part is catching them beforehand."
To improve the foresight of its traders, the $50 billion-asset bank uses a Pc-based tool to analyze fixed-income portfolios and determine the brightest investment strategies.
The software, called Bond- Edge, helps traders stay on top of the markets, putting the latest information and a wide variety of data base management search and scan functions at their fingertips.
First Interstate uses the system to analyze the full range of its holdings. Currently, the bank has $7.2 billion in fixedasset instruments under management.
Developed by Capital Management Sciences, Los Angeles, the software helps Mr. Benner and his traders pinpoint the information they need to make decisions quickly. The tab for the system is $1,500 per month, plus an initial $1,200 setup fee.
"In the markets you can either go with a gut feeling or you can make bets backed with the confidence that you know what you're doing," Mr. Benner said.
"Banks are scrambling to look for ways to make their trading areas more efficient and profitable. The best way to do that is to give traders the tools they need to keep up with the market," said William M. Saubert, a director of financial and information industry consulting at Arthur D. Little Inc. in New York.
Before Bondedge, First Interstate relied on a slew of proprietary spreadsheet models to analyze investments. But the rise of global investment products and the stepped-up pace of bond issues in recent years made it too costly for the bank to maintain its data base.
The new system gives traders at First Interstate the flexibility to analyze and compare up to 1,000 portfolios, and perform
complete portfolio return sim- ulations and "what if' analyses.
"Traders need to be alert to quickly determine what looks attractive and what doesn't," Mr. Benner said. "Bondedge allows us to look for those op- portunities and see what sectors we are underweighted in or overweighted in so we can adjust things accordingly."
The system places a vast amount of data at traders' disposal. Bondedge contains a data base of over 30,000 securities, including Treasuries, agencies, corporates, assetbackeds, mortgage-backeds, and collateralized mortgage obligation bonds. All offerings are priced daily.
It is also a modeling tool. Bondedge includes multiple models designed for calculating price and retum curves, average life, convexity, option adjusted spreads, and accurate cash-flow profiles for securities and portfolios in both static and dynamic interest rate environments.
"We can try out a buy or sell order on the software and see what impact it has on the port-
folio," Mr. Benner. "It also allows us to view and evaluate our portfolios to stay away from the trade-by-trade and not lose track of where we want the portfolios to go with the fund."
With color graphics and so- phisticated reports, Bondedge illustrates the benefits or risks of transactions and shows traders how their positions compare with the rest of the market and the long-term direction of the fund.
At the portfolio level, the system maintains information on up to 1,000 portfolios, offering numerous possibilities for appralsals and simulations. The bank relies heavily on the system's portfolio appraisal report function, which provides a detailed analysis of securities - including price, yield, optionadjusted duration, and convexity values - as well as summary statistics, tables, and graphs of distributions.
The performance measurement feature is also significant. This provides daily timeweighted rates of retum, both with and without cash, and returns by sector. Mr. Benner and
his trading staff incorporate indexes for performance compar- isons, along with a transaction report listing buys and sells for a given period.
"We can get an idea of how successful our efforts have been at any time, which helps us make sure we're on the right track," Mr. Benner said.
Various types of simulations are perhaps the functions most widely used by First Interstate's bond desk. As the bank's traders consider various investment strategies for its customers, the portfolio simulation level quickly tests altemative portfolio structures. The system's on-line testing capability allows for rapid changes and simulations before a trade is executed.
The simulation function allows Mr. Benner to pose an endless number of what-if questions to readily determine the effect of a proposed trade on a portfolio.
"We can compute portfolio rates of retum under multiple interest rate scenarios, including a change in the shape of the yield curve," Mr. Benner said.
But aside from the big pic-
ture, First interstate also uses the svstem to examine and simulate an individual security or a few securities at a time. Mr. Benner and his traders can execute everything from one-onone swaps to complex optionvalue simulations.
The bank has also found the system to be a valuable sales tool. It has helped polish First Interstate's reputation among clients. "We encourage our customers to come in and kick the tires," Mr. Benner said. "We give them a demo of the system and show them their portfolio and prospects for buying securities."
"People are buying the orgae7MYnization," Benner continued. "They come in and start looking at the bank and the technology we use, and it helps reassure them that we're on top of things." With overhead costs down and trading profits up, the fixed-income traders at First Interstate rarely look back in anger. "Our trading strategies are now crystal clear," Mr. Benner said.