NEW YORK - The expanding investment bank Deutsche Morgan Grenfell/C.J. Lawrence Inc. might be showing Wall Street how to get the most from its rocket scientists and software.
The bank's physicists, mathematicians and engineers are writing powerful computer programs to analyze or model complex securities, then are putting that power in the hands of traders in minutes or hours, instead of the weeks or months it usually takes.
The investment bank is doing that by being the first to use systematically the powerful number-crunching software MatLab, best known for its work in development projects like the Hubble space telescope and the F-14 jet fighter, and new Applix Link software that links MatLab to a spreadsheet.
Deployment of customized programs in the low-cost, off-the-shelf but fast and flexible MatLab software at a major Wall Street investment bank is unusual, if not unheard of, according to several investment sources.
Many investment houses including Salomon Brothers Inc., New York, and Morgan Stanley & Co., New York, that create their own software are not using the Applix Link, MatLab combinations, sources said. However, sources said, fewer than a dozen other investment operations, including one other investment bank, are following Deutsche Morgan Grenfell's lead in using the software.
Some professionals investors think the math software - along with new software linking it to spreadsheets that automatically accept securities data - could catch on quickly on Wall Street and among money managers.
"Everybody is scrambling for product technology today on budgets that are a lot leaner than they were in the 1980s and early 1990s," said Marc Freed, an econometrician at the bank. Mr. Freed is in charge of a development group using MatLab at the bank, an arm of Deutsche Bank A.G., Germany's largest bank with $450 billion in assets.
MatLab was modified for the New York-based investment bank so that it works seamlessly with the spreadsheet program Applix - which can import live data from electronic securities pricing sources. MatLab soon will work that way with the spreadsheet program Microsoft Excel.
Deutsche Morgan Grenfell is using MatLab, Applix and Applix Link in its government bond, corporate bond, swaps and risk management departments, said Mr. Freed.
MatLab, in combination with Applix, can be programmed in minutes. Then, the programs are distributed so quickly through departments that Deutsche Morgan Grenfell may have some advantages over investment banks using proprietary software that costs millions of dollars more, believes Mr. Freed.
MatLab's entry into finance and investment mathematics follows the move into those areas by physicists, engineers and academics.
Wall Street companies leading financial research are "hiring academics and true rocket scientists, people who have Ph.D.s in physics or engineering from quantitative schools like MIT or CalTech," said Peter P. Carr, an assistant professor of finance at Cornell University, Ithaca, N.Y.
These scientists use software to build their own market models, predict behavior of securities and measure risk. They are at home with high-level mathematical theory. They also can write programs quickly in more easily used interpretive computer languages and have been using MatLab for themselves.
The problem for Deutsche Morgan Grenfell was how to get the math and programming knowledge of its mathematical whizzes into the hands of its traders and analysts as fast as Wall Street invents new securities. Many traders are more at home with the comparatively low-power number crunching of spreadsheets and are less comfortable with math theory and programming.
Deutsche Morgan Grenfell, through Mr. Freed, asked The Math Works Inc., MatLab's maker, to link MatLab and spreadsheets, and Math Works did. Now, Deutsche Morgan Grenfell's physicists, engineers and econometricians write new software programs in minutes or hours in MatLab and then distribute them to traders and investment personnel in spreadsheet form.
The traders and analysts work only with the spreadsheets, but harness the programming and number crunching power of MatLab that works invisibly behind the spreadsheet.
"The beauty of MatLab is that we can throw together a solution literally in minutes sometimes, certainly in hours or a day. If we had to farm it out to a programming group, it wouldn't come back for a week or two," said Mike Wolf, general manager of financial products at The Math Works, which is based in Natick, Mass.
Programming in what most everybody else uses, the non-interpretive C programming language, can take weeks or months before it can be used because it generally requires specialized C programmers.
New securities are developed quickly on Wall Street, but some software models built in C language to analyze them are a year old, Mr. Wolf noted.
And the efficient use of the inexpensive software at a major investment bank could lead to its widespread adoption among money managers.
"Many money managers don't have in-house programmers who can build for them the software they want for number crunching and securities modelling," said Peter Knez, an assistant business professor at the University of Wisconsin, Madison.
"A lot of the investment banks already have (the programs), but the buy side of the industry hasn't done nearly as much," Mr. Knez said.
"My guess is that if you can buy a piece of software with integrated features like MatLab and Applix together, that is potentially quite powerful for (money managers). It could prevent a lot of in-house software development," he said.
Using off-the-shelf software could mean substantial savings. MatLab costs $1,795 per copy. It sells financial add-ons called the Financial Toolbox for another $895.
Mr. Knez intends to evaluate the software in combination with Applix for use at Lincoln Capital Management Co., Chicago, for whom he is building investment models.
Although he just heard about the MatLab and Applix combination, Alexander Eydeland, a vice president for the structured products group at Fuji Capital Markets Corp., New York, said he intends to use it at Fuji Capital for building prototypes of investment models.
"The great advantage of MatLab is that it allows you to test your ideas extremely quickly and build prototypes and models you have in mind," said Mr. Eydeland.
Math Works is developing software so that it can work with Excel for Windows as it now does with Applix.
Excel is the most commonly used Windows spreadsheet and is frequently mentioned by many money managers as the spreadsheet they use.
MatLab has about 260,000 licensed users worldwide and is popular with physicists, mathematicians, scientists and college graduate students in the sciences. But until recently it has had little use on Wall Street.
Last October, Mr. Freed attended with more than 500 others a MatLab conference in Cambridge, Mass. When The Math Works President Jack Little asked how many people were using MatLab in finance, "only four arms went up," said Mr. Freed.
Mr. Carr thinks an Applix MatLab combination is likely to be "the dominant package in its category, which is a fourth generation language dealing with numerical methods."
MatLab had a rough version of the connecting software needed. Mr. Freed said Math Works executives "spiffed it up" and made Deutsche Morgan Grenfell the beta test site for it.
"For sheer number crunching power, I don't think there is anything that beats MatLab out there," said Mr. Freed.
The resulting product has been important for the quickly growing investment bank that is moving into new business areas, he said.
"Prior to the middle of last year, we really didn't have much in sophisticated technology except for individual users who built it for themselves," said Mr. Freed.
He said Deutsche Morgan Grenfell has long term projects to develop comprehensive in-house systems. But those projects won't be completed this year and may not next, said Mr. Freed.
A former employee of Salomon Brothers Inc., New York, Mr. Freed said investment banks like Salomon have "the best technology in the world."
But referring to the power and the quick programming capabilities of MatLab and Applix Link, Mr. Freed thinks the off-the shelf products are competitive. "Tools like this have made it possible for us to get up to speed very quickly and be competitive," said Mr. Freed.
