28_Introduction_to_financial_techno_2006_365

338 Index

Amsterdam Stock Exchange (Continued) Backwardation definition, 163
identifying market makers and, 156 Bandwidth definition, 213
messages, 143 Bank of International Settlement, 316
transaction protocols, first, 4, 5 Banks

Analogies, system, 287–294 identifying, 145–151
auction house, 290–291 what are, 31
between diagrams, 288 Batteries, 209
gambling, 288, 289–290 Bell, Alexander, 161, 215
from physics, 295–299 decibel and, 213
regulation and surveillance of fraudulent demonstration of telephone, 23
activity, 291–294 first patent of, 215
lawsuit against Western Union, 215
Annuities and perpetuities, 128–131 multiple frequencies patents by, 214
ANSI. See American National Standards photophone patent by, 27
three-way telephone conversation (1915)
Institute
Arbitrage, 1, 6 with, 23
Bell-shaped curves, financial technology of,
in 1830s, 21
in 1990s, 23 311–316
definition, 6 Bignum arithmetic, 73, 88
Jim Fisk and, 10 Blanc, Louis
AREC. See American Railway Express
Chappe telegraph and, 21
Company Monte Carlo and, 7, 290
Arpanet. See Advanced Research Projects Bloomberg, 223–224, 245, 329
Bloomberg on Bloomberg, 224
Agency Network Blue Sheets, 159
Arrays definition, 73 Bookkeeper term coined, 78
Association of National Numbering Bootstrapping, 321, 323–324
British Bankers’ Association (BBA),
Agencies (ANNA), 154, 155
AT&T versus Western Union, 215 177–178
Auctions, 290–292 Brokers, identifying, 157–159
Bucket shops, 164, 173, 193
English, Dutch, and sealed-first price Butterfield, John, 11, 199
systems, 291
C programming language, 80–81
game theory and, 292 continuous compounding program in, 83
jargon, common, 291, 294 development of, 80
William Vickrey and sealed second-price on UNIX or Linux, 81–83

type of, 291 C++ on Windows, 83–86
Automated Clearing House (ACH), 152 development of, 83
Avian-based networks, 13 exception handling, 262
program from Windows command prompt
Babylonian diagram, 85
compounding example, 54 program to compute future value, 84, 86
contracts, 34 Windows command prompt screen shot, 85
Euclidean algorithm, 51
financial technology, 49–51 Caesar Cipher, 14
interest computation, 49, 50, 51–54, 58 Calendar conventions, 61–65
interest rate convention, 58 Capping, 294
interest rate tables, 50 Carnegie and Morse telegraph, Andrew, 202
interpolated year pattern, 61 Carrier pigeons, 13
linear interpolation, 55 CAS. See Computer algebra systems
price representation, 49 Casanova, Giacomo, 6, 8, 289
spreadsheet, most famous, 75 Cash flows
tally sticks used, 37
water clocks, 61, 62 bonds and mortgages and language of,
110–112
Bachelier’s model, 310, 311, 312, 313,
325, 333

Back office, 206, 223, 275, 277

Index 339

discounted cash flow sums and stable prices based on standard clearing
sigmas, 107 arrangements and, 3

Laplace transforms of, 131–132, 133 symbology, 144, 226
mortgages, vivgages, and bonds, 111 trade execution date, 5
specifications of discounted cash flows, paperless, 5
Clearing house definition, 31
general, 108–112 Clearing House Interbank Payments System,
technology of, 105–112
valuations and interest rates, 105–107 152, 284, 285, 295
Cauchy density, 313, 314, 316 Coins and currency, what are, 31–33
CBOT. See Chicago Board of Trade Collars definition, 320
Central Registration Depository, 157, 158 Commercial versus financial systems. See
CFTC. See Commodities Futures Trading
Financial versus commercial systems
Commission Committee on Uniform Security
Challenge-Handshake Authentication
Identification Procedures, 152, 153,
Protocol, 5 154, 161, 162, 173
CHAP. See Challenge-Handshake Commodities Futures Modernization Act
(CFMA), 164
Authentication Protocol Commodities Futures Trading Commission,
Chappe, Claude, 17–20 8, 164, 172
Chappe control messages, 241 Commodity Exchange Authority (CEA), 164
Chappe telegraph network Communication and delivery technologies,
8–9; see also Nonphysical
abbreviation usage, 143 communication and delivery
innovations in, 18–21 Compliers definition, 74
newspapers and, 199 Compounding
repeaters, 204, 210 Babylonian, 51–54, 58
routing, 204, 205 continuous, 56–60, 61
Check-21, 149, 204 infinitesimal, 56
Chicago Board of Trade, 162, 164, periods, 56
return-based compounding, conventions
166, 320
CHIPS. See Clearing House Interbank of, 54–60
Computer algebra systems, 88–89
Payments System Computer time conventions, 65–67
CINS. See CUSIP international numbering Consolidated Quotation Plan, 222
Consolidated Tape Association, 222
system Contango definition, 163
Circuit breakers, 319–320 Coordinated Universal Time, 62
Clearing and settlement, 284–285 Copula definition, 308
Copyright, 195
as actions associated with trading, 1 Cornering the market, 291
American Bankers Association and, 153 Corporate earnings, estimating and reporting,
auction house analogies and, 291
broker-dealer ERD diagram, 280 136–137
brokers’ knowledge requirement of, 158 Coupon rate definition, 110
Check-21, 149 CQ. See Consolidated Quotation Plan
critical services and disaster recovery, 190 CRD. See Central Registration Depository
data flow diagram of, 282 Credit cards, identifying accounts, 148,
definitions, 31
financial algorithms and, 71 150–151
financial network infrastructures and, 189 Credit failures and defaults, 307–309
financial system diagram, generic, 275 Credit reporting, credit ratings, and social
gambling system analogies and, 289
netting, 33, 287 networks, 120
market maker identifier and, 157 Credit swaps, 6
New York Clearing House, 152 Cryptography, 14
onion diagram, 278 CTA. See Consolidated Tape Association
reconstructing time events, 61 Currency and coins defined, 31–32
Society for Worldwide Interbank Financial

Telecommunication and, 246

340 Index

CUSIP. See Committee on Uniform Security Dutch East India Company, 3, 4, 132, 147
Identification Procedures Dutch West India Company, 3, 4

CUSIP international numbering system, Earnings per share definition, 132
155–156 Edison, Thomas

Data flow diagram (DFD) definition, 281 as consultant for market data vendors, viii
Data modeling definition, 160 currency subscription service, 218
Database, names and financial, 144–145 Doctor Laws and, 217
Database Management Systems (DBMS), electromagnetic amplifier and, 23
excerpts from improvement to printing
145, 160
Databases for past, present, and future telegraph apparatus patent by, 217
financial terms and, 29
prices, 135–139, 140 as General Electric founder, 161
estimating and reporting corporate as Gold Indicator Company employee, 216
on interpreting telegraph messages, 203
earnings,136 quadruplex repeater invention by, 22, 214
financial database definition, 135 ticker innovation, improvement, and
forward prices versus future prices,
standardization and, 218, 220
138–139, 140 as Western Union employee, 215
historical, 136–138 Electronic data gathering, analysis, and
tick data versus time series, 135
de la Vega, Joseph retrieval system (EDGAR), 290
on Amsterdam Stock Exchange, 4, 161 Electronic financial communication
on financial terms, 29
handshake protocol discussed by, 4 networks, origins of, 196–208
hypothecated loans discussed by, 111 consolidated, network, 202–203
limit price and, 235 Fedwire, 204, 205–206
on merchants and brokers, 233 intellectual property of American
Decibel (db) definition, 213
Decimal point first used, 39 Electromagnetic telegraph, 196–198
Decimal-hyphen convention, 48–49 Morse social network, 206–208
Declarative versus procedural semantics, 90 Morse telegraph as Internet, 203
Defaults, 117, 119, 120–121 payment for electronic messages,
Delivery and communication technologies,
200–202
8–9; see also Nonphysical real-time messages demand, 198–200
communication and delivery virtual delivery early examples, 203–206
Delivery technology comparison Electronic Recording Machine-Accounting
(prerailroad), 9
Depository Trust Clearing Corporation, 4, (ERMA), 148, 149
246, 284, 285 Electronic systems basic properties, 208–209
Depository Trust Company (DTC), 284–285 Electronics Payment Network (EPS), 152
Derivative securities, 164, 258–259, 285; see Ellipsis, evolution of, 42
also Credit swaps; Futures contracts, Entity relationship diagrams
exchange-traded; Hedging and risk;
International Swaps and Derivations (ERD), 279–281
Association (ISDA); Options contracts, Equal weighting definition, 184
exchange-traded; Swap definition Equities, dividend discounts, and Laplace
Dibdibbu, 62
Direct current (DC), 209 transforms, 127, 128–135
Disaster recovery and critical services for annuities and perpetuities, 129–131
financial network, 189–190, 191 cash flows, Laplace transforms of,
Discrete Markov chain, 309
Dow Jones Industrial Average (DJIA) and 131–132, 133
circuit breakers, 320 Euclid’s geometric series, 129, 130
DTCC. See Depository Trust Clearing valuation of equities, 132, 134–135
Corporation Equity research analysts definition, 135
ERMA. See Electronic Recording

Machine-Accounting
Euclid’s geometric series, 129, 130
Euclidean algorithm, 51, 73
European-type option definition, 166
Exchange communication technology, 2

Index 341

Exchange ticker symbols, 161–173 dimensions of, 1
definition, 161 discounted cash flow general
NYSE, AMEX, and Nasdaq, 161–162
option payoff diagrams, 167–169, 170, specifications, 108–112
175–176 discounted cash flow sums and sigmas
options on futures, 169, 171–173
physical delivery versus cash settlement, technology, 107
164 equities, dividend discounts, and Laplace
traded futures contracts, 162–165
traded options contracts, 165–167 transforms, 127–135; see also
Equities, dividend discounts, and
Fair prices, 2 Laplace transforms
Fedwire Euclid’s geometric series, 130
forward prices versus prices in the future,
backup and, 295 138–139, 140
creation of, 204 historical price databases, 136–138
dependence on, 278 mortgages, vivgages, and bonds, 111
Funds Service, 284 tick data versus time series, 135
Society for Worldwide Interbank Financial valuation of equities, 132, 134–135
yields, technology of, 112–122; see also
Telecommunication and, 246 Yields, technology of
virtual delivery, early example of, 203, zero coupon bonds, 122–127; see also
Zero coupon bonds
204, 205–206 zero credit risk, 122–127; see also Zero
Financial algorithms, 71–74 coupon bonds
Financial systems, systems of. See Systems
developers, 71 of financial systems
implementation, 71 Financial technology
notational rules and language, 72–74 algorithms and, 71–103
pragmatics, 74 defining, 1–28
semantics, 73–74 Financial terms, 29–38
syntax, 72–73 abacus, 35, 36
uses, 71 agency trading, 37
Financial and operational combined uniform ask price, 36
banks, 31, 32
single report (FOCUS), 289 bid price, 36
Financial computation in antiquity, 49–51 bookie, 36
Financial database brokers, 36
buy side, 37
definition, 135 calculus, 35
schematics, 160 cashier, 32
Financial exchange, first, 3–4 check, 31
Financial information exchange, 239–253 clearing, 31, 33
Financial Information Services Division clearing house, 31
coins and currency, 31–32
(FISD), 226 commission, 36
Financial messaging network (FIN), 246 compound interest, 34
Financial network infrastructures, 189–196 dealers, 36
Financial networks, physical aspects of. See demultiplexer, 33
eponyms, 29, 30, 71, 177
Physical aspects of financial networks equity, 34, 35
Financial objects, identifying. See fee, 36
institutional jargon, 37
Identifying financial objects interest, 33
Financial products, 105–142 investment and speculation, 33–36
letters of credit, 31
annuities and perpetuities, 129–131 long position, 33
cash flow valuations and interest rates,

105–107
cash flows, technology of, 105–112; see

also Cash flows, technology of
corporate earnings, estimating and

reporting, 136
databases for past, present, and future

prices, 135–139, 140

342 Index

Financial terms (Continued) Fixed Income Clearing Corporation
market participants, financial, 36 (FICC), 284
metonyms, 29, 32, 35, 36, 78
money, 29–31 Float definition, the, 149
multiplexer, 33 Floaters, 178–182
netting, 33 Floating point numbers definition, 73
offer price, 36 Forward contract definition, 162
proprietary trading, 37 Forward prices versus future prices,
quotation, 36
recording stock purchasing and sales, 138–139, 140
36–38 Forward rates, 98, 99–102
Repo, 38 Franklin, Benjamin
security, 35
sell side, 37 Advice to a Young Tradesman, Written by
settlement, 33 an Old One by 30
short position, 33
sides of a trade, 37 combining voltage and current sources
soft dollar expenses, 37 and, 211
spread, 36
synecdoches, 29 on credit measurements, 31
tally stick, 36–37, 38 electronic signaling system, first, 208
two-sided markets, 36 on “money begets money,” 31
vigorish, 36 paper money standardization and, 32
Wall Street, 29 on time and credit as money surrogates, 30
on time and money and evaluating loans,
Financial versus commercial systems, 1–5
fair prices, 2 51
first financial exchange, 3, 4 on time value of money, 45
futures, 2 Front running, 318
risk reduction using different products, 3 Futures contracts, exchange-traded, 162–165
stable prices based on standard clearing Futures exchanges
arrangements, 2–3 contracts, 163–165
support for buying and selling, systems, 2–3 examples, 162, 163
trading technology, 1–2 financial versus commercial systems, 2
transaction protocols, first, 4–5 options on, 169, 171–173
physical delivery versus cash
Financial versus gambling systems, 5–8
martingales and arbitrage, 6 settlement, 164
risk management technology, 7
surveillance, regulation, and compliance Gambling system analogies, 288, 289–290
technology, 8 Gambling versus financial systems. See

Financial versus military systems and Financial versus gambling systems
physical delivery, 8–14 General Algebraic Modeling System

avian-based networks, 13 (GAMS), 73, 322
delivery and communication Glitches, 297
GNU Compiler Collection (GCC), 74, 81
technologies, 8–9 Government Securities Clearing Corporation
delivery companies prerailroad, 9
express companies, 12 (GSCC), 284
physical information security and privacy, Graphical user interface

13–14 definition, 74
from Pony Express to American Express, embedding, 82
Excel display commands, 78
10–12 Visual Basic for Applications and, 86
public networks and toll roads, 9, 10 Grid computing, 90
secure physical carriers, 13 GUI. See Graphical user interface
First Call, 136
FIX. See Financial information exchange Handshake protocol, 4, 5, 143, 241
Hedging and risk, 325–334

delta gamma hedging, 331–332
delta hedging, 330–331
with duration example, 331
with four or more products, 332, 334

Index 343

partial differential equations, 333 options on futures, 169, 171–173
price sensitivities, 325, 328–330 products, 151–156
regression and method of least SEDOL, 153, 154, 155
symbology, 143–156
squares, 328 Inductors and capacitors act like
technology, 330–334
with three products, 331–332 filters, 215
with two products, 330–331 Information exchange, modeling, 281–284
Heuristic definition, 96 Information Industry Association (IIA), 226
Histogram definition, 311 Infrastructures of financial
Homing pigeons, 13
Hypothec, 111 network, 189–196
Hypothecation, 4 copyright, 195
critical services and disaster recovery,
Identifying financial objects, 143–188
accounts, 148, 150–151 189–190
American Bankers Association, 151, 153 financing services, 193, 194
American Bankers Association routing intellectual property laws, 194–196
numbers, 145–147 license, 196
banks, 145–147, 149 patents, 194–195
brokers, 157–159 payment for, 190, 191–192
Check-21, 149 soft dollars, 192
Committee on Uniform Security trademark, 195–196
Identification Procedures, 152, transmission lines and power, 191
153, 154 Initial pubic offering, Dutch East India
credit cards, 148, 150–151
CUSIP international numbering system, Company and, 3
155–156 Insider trading, 302
Electronic Recording Instant messaging, 245
Machine-Accounting, 148, 149 Integrals definition, 109
exchange ticker symbols, 161–173; see Intellectual property laws and financial
also Exchange ticker symbols
exchange-traded futures contracts, networks, 194–196
162–165 Interest and loans. See Loans and interest
exchange-traded options contracts, Interest defined, 33
165–167 Interest rate products, identifying, 176–177
International Securities Identification International Organization for
Number, 154, 155
ISO 15022, 159–160 Standardization, 81
issuers and owners, 143–156 ISO 3166-1, 155
market markers, 156–157 ISO 6166, 155
metadata approach to identifying fields, ISO 8879, 253
159–160 ISO 15022, 159–160, 261
names and financial database, 144–145 ISO/IEC 7812, 150
New York Clearing House, 152 ISO/IEC 9899, 81
nonexchange traded products and ISO/IEC 14882, 83
portfolios, 173–184; see also International Securities Identification
Nonexchange traded products and
portfolios Number, 154, 155, 161, 173
North American Securities Administration International Swaps and Derivations
Association (NASAA), 158
NYSE, AMEX, and Nasdaq symbols, Association (ISDA), 258
161–162 Internet Assigned Numbers Authority
option payoff diagrams, 167–169, 170,
175–176 (IANA), 242
Internet Control Message Protocol

(ICMP), 241
Internet Protocol, 5, 241–246
Interpolation

linear, 53, 55
of prices and rates using spreadsheet

algorithms, 90–102
spot rates and, 92–93
technology, 93–95

344 Index

Interpolation (Continued) Leyden jar, 208, 209
technology of spline interpolation, 99 Liber Abbaci, 77
yield curves and spline interpolation, LIBOR and LIBID, 177–178
95–98 License, 196
Line-of-sight communication, 15–16
Interpreters and compilers for procedural Linear interpolation, 53, 55
languages, 80–90 Loans and interest, 51–60

C on UNIX or Linux, 81–83 Babylonian interest computation, 51–54
C program for continuous compounding compounding conventions of return-based

example, 83 compounding, 54–60
C programming language, 80–81 compounding periods, 56
C++ on Windows, 83–86 continuous compounding, 56–60
C++ program to compute future value linear interpolation, 53
rates and prices, 60
example, 86 spot interest rate, 51
computer algebra systems, 88–89 Long position, 33
declaration versus procedural semantics, Luhn’s algorithm, 150, 151, 153, 155

90 Macros definition, 74
MuPAD session for future value Magnetic Ink Character Recognition, 147,

computation example, 89 149
Visual Basic for Applications, 86–88 Magnets and alternating currents, 211–212
Investment advisor registration depository Management information systems, 77
Market data definition language (MDDL),
(IARD), 157, 158
Investment and speculation defined, 33–36 226, 260
Investment evaluation and bond pricing Market data technology, 214–226

conventions, 44–48 competition and consolidation, 223–224
discount factor, 45 price recording, 216–217
notations and conventions for comparing price reporting with quote boards and

investments, 47 indicators, 214, 215–216
timescale, 46 Quotron and Ultronics, 220–221
IP. See Internet Protocol system plans, national, 222
IPO. See Initial public offering Teleregister, Bunker-Ramo, and Nasdaq,
ISIN. See International Securities
221
Identification Number Teleregister’s quote boards, 218, 220
ISO. See International Organization for ticker innovation, improvement, and

Standardization standardization, 217–222
Al-Khowarizmi, 71, 116 from ticker to consolidated tape, 214–226
from ticker to national market system,
Laplace transforms of cash flows,
131–132, 133 224–226
Market data vendors, 135
Latency, communication Market Maker Domination System
automated repeaters in Morse system and,
22 (MMD), 293
Chappe telegraph network and, 18, 20 Market maker identifier, 155–157
demand for real-time messages and, 200 Market participant identifier, 156
in financial communication networks, 204 Markup languages, 253–262
measuring, 20
Morse versus Chappe telegraphs and, 203 advantages and disadvantages, 262
network consolidation and, 202 Association for Cooperative Operations
Quotron and, 221
signal traveling across United States and, Research and Development
66 (ACORD) XML, 260–261
time synchronization and network time Common Object Request Broker
protocol, 66 Architecture (CORBA), 261
virtual delivery and, 208 Document Type Definition (DTD),
254–256
Letter of credit, 14, 31

Index 345

Extensible Business Reporting Language social network, 206–208
(XBRL), 259, 290 Morse telegraph, 20, 21–22
Mortgage Backed Securities Clearing
Extensible Markup Language (XML),
253–255, 256–258 Corporation (MBSCC), 284
MPI. See Market participant identifier
Extensible Stylesheet Language (XSL), Multex, 136
254–256, 257–258 Multiplex communication protocols and their

FinXML, 259 acronyms, 244
financial products Markup Language Multiplexer, 22, 33, 214
MuPAD, 73, 74, 88–89, 93–94, 98
(FpML), 258 Mutual funds
FundsXML, 259–260
Interactive Financial Exchange (IFX), 259 closed-end, 183
Market Data Definition Language ticker symbols, 183

(MDDL), 260 Names and financial database, 144–145
Object Management Group (OMG), 261 Napier’s Bones, 72
Open Applications Group, Inc. (OAGi), NASAA. See North American Securities

260 Administrators Association
Open Financial Exchange (OFX), 259 NASD. See National Association of
Really Simple Syndication (RSS), 259
Research Information Exchange Markup Securities Dealers
NASD Automated Quotations system. See
Language (RIXML), 260
RosettaNet, 260 Nasdaq stock market system
Standard Generalized Markup Language Nasdaq Stock Market System

(SGML), 253, 254 backup, 191
Straight through Processing Modeling as collection of markets, 23
creation of, 221
Language (STPML), 261 order audit trail system (OATS), 158
Treasury Workstation Integration symbols, 161–162
time to report trades, 234
Standards Team (TWIST), 260 National Association of Securities Dealers,
Unified Modeling Language (UML),
23
261, 279 broker database, 157
Vendor Reporting Extensible Markup on clock synchronization, 62
as implementer of SEC
Language (VRXML), 260
XML Metadata Interchange (XMI), 261 recommendations, 221
Martingales, 6 National Institute of Standards and
Messages and orders. See Orders and
Technology (NIST), 62
messages National Market System, 214
Metadata approach to identifying fields,
plans, 222
159–160 from ticker to, 224–225
MICR. See Magnetic Ink Character National Securities Clearing Corporation,

Recognition 156, 284–285, 293
Military systems and physical delivery versus National securities identifying number

financial systems. See Financial versus (NSIN), 155
military systems and physical delivery Natural logarithm, 59
MIS. See Management Information Systems Nearby contract definition, 163
MMID. See Market maker identifier Netting, 4, 33
Money, what is, 29–31 Network Time Protocol, 66
Money in 1704 America, 30 Networked computers
Monte Carlo and the Blanc Brothers, 7
Monte Carlo methods, 7 clusters, 296
Monte Carlo simulation of portfolio returns, grid and utility computing, 244
321, 322 latency, 204
Morse, Samuel TCP/IP and, 241–246
origins of electronic financial New York Clearing House Association,

communication networks and, 196, 151, 152
197, 198, 199, 200

346 Index

New York Stock Exchange (NYSE) percent sign, 41
circuit breakers and, 319, 320 point symbol, 39
identifying brokers, 158 programming languages and numbers,
identifying financial products, 151
on program trade, 320 40–41
subscription to first ticker, 216 punctuation, prices, and mathematical
symbols, 161–162
technology (1885), 219 notation, 38
representing decimal prices, 43
NMS. See National Market System representing numbers, 39–41
Nonexchange traded products and portfolios, representing prices on other bases, 43–44
slide rule invention, 41
identifying, 173–184 superscript numbers, 40
computing portfolio weights, 184 times sign first used, 39
floaters, 178–180 x as symbol for unknown
interest rate products, 176–178
LIBOR and LIBID, 177–178 quantity/variable, 39
options, 174, 175–176 NYCH. See New York Clearing House
products of products, 182–184
SuperShares, 174 Association
valuing floaters example, 180–182
valuing swaps with floating rate Object-oriented (OO) constructs, 83
On margin, 4
bonds, 182 Onion diagram, 278
Nonphysical communication and delivery, Optimization. See Portfolio, optimization
Option payoff diagrams, 167–169, 170
14–17 Options Clearing Corporation (OCC), 285
line-of-sight communication, 15–16 Options contracts, exchange traded, 165–167
semaphore protocol, 15 Options on futures, 169, 171–175
symbol encoding protocol, 17 Options Price Reporting Authority (OPRA),
synchronous communication protocol,
166–167, 222
16–17 Orders and Messages, 233–271
North American Securities Administrators
acronyms, 233–234, 238, 254–256,
Association, 158 257–258
Notational rules and language, 72–74
Notations and conventions for comparing anatomy of orders, 233–239
building TCP/IP-based communication
investments, 47
NSCC. See National Securities Clearing protocols, 241–246
canceling orders, 239
Corporation characteristics, properties, and conditions
NTP. See Network Time Protocol
Numbers and prices, 38–51 of orders, 235–236
communication of, flowchart for, 240
addition and subtraction symbols first details, codes, and parameters of orders,
used, 39
236–239
asterisk as multiplication symbol, 40 dimensions of orders, six, 235
decimal point first used, 39 financial information exchange protocol,
decimal-colon notation, 44, 48
decimal-hyphen convention, 48–49 247–252
dotted decimal, 44, 48 financial markup languages, 256, 258–261
ellipsis symbol, 41–42 FIX and FIX markup language (FIXML),
equal sign, 41
exponents, 40 252–253
financial computation in antiquity, 49–51 identifying executed orders, 239
fraction separators by country, 43 identifying routed orders, 237
fractions and bar symbol, 40 inference and decision trees, 265–266
hexadecimal, 44 instant messaging, 245
investment evaluation and bond pricing markup languages, 253–262; see also

conventions, 44–48 Markup languages
middle dot as multiplication markup languages advantages and

symbol, 39, 40 disadvantages, 262

Index 347

methods for combining uncertainty in electronic systems basic properties,
rule-based systems, popular, 267 208–209

multiplex communication protocols and financial technology of business
their acronyms, 244 continuity, 191

new orders, 237 financing, 193–194
processing rules, 263 infrastructures, 189–196; see also
processing technology of orders, 239–253
protocol standards, 240–241 Infrastructures of financial network
from Q-codes to FIX, 239–253 intellectual property laws, 194–196
representing conditions with logic latency in communication, 204
license, 196
operators, 264 market data technology, 214–226; see also
representing rules, 262–269
special order handling commands, Market data technology
Morse social network, 206–208
instructions, and acronyms, 238 Morse telegraph as Internet, 203, 205
Society for Worldwide Interbank Financial ownership of quotes and market data

Telecommunication, 246, 261 question, 193
uncertainty and need to handle, 266–269 patents. See Patents
Over the counter (OTC) market, 162, 166 payment for, 190, 191–192
payment for electronic messages, 200–201
Pacioli, Luca real-time messages, demand for, 198–200
accounting, spreadsheets, and, 77 soft dollar expenses, 192
on balance sheets, 78 telecommunication networks existing
clearing (netting) system and, 33
on denoting variable, 39, 71–72 technology, 199
as “Father of Accounting,” 76 ticker to consolidated tape, 214–226
Fibonacci’s methods and, 39 trademark, 195–196
nature of systems and, 274 virtual delivery, technology of, 208–214;
on secant method variation, 116
spreadsheet-based accounting and see also Virtual delivery, technology
financial reports standards and, 76 of
virtual delivery early examples, 203, 204,
PAP. See Password Authentication Protocol 205–206
Par swap rate definition, 182 Physical carriers, secure, 13
Password Authentication Protocol, 5 Physical information security and privacy,
Patent(s), 194–195 13–14
Ping, 241
caveats and provisional, 194 Plimpton 322 spreadsheet, 75
definition, 194 Pony Express to American Express, 10–12
examples, 195 Portfolios
telegraph, 196–198 bootstrapping, 321, 323–324
Perpetual annuity, 129–131 component selection considerations,
Philadelphia Stock Exchange (PHLX), 10 183–184
Chappe telegraph system, 20 computing weights, 184, 319
stock options, 166 controllability, 304
Physical aspects of financial networks, definitions, 182, 183, 319
mean variance technology, 324
189–231 Monte Carlo simulation of portfolio
caveats and provisional patents, 194 returns, 321, 322
competition and consolidation, optimization, 324, 326–327
risk and, 319, 321
technology, 223–224 Pragmatics of a language, 74
consolidation, 202–203 Price fixing, 318
copyright, 195 Price recording, printing telegraphs and
critical services and disaster recovery, tickers, 216–217
Price reporting with quote boards and
189–190 indicators, 214, 215–216
electronic financial communication

networks, origins of, 196–208;
see also Electronic financial
communication networks, origins of

348 Index

Price weighting definition, 183 standards for order and message, 240–241
Prices, databases for past, present, and symbol encoding, 17
synchronous communication, 16–17
future. See Databases for past, present, transmission, 19–20
and future prices Transmission Control Protocol, 5
Prices, interest, time, 29–69 Transport Layer Security Handshake
days, months, and years, 61–67; see also
Protocol, 5
Time User Datagram Protocol (UDP), 242
financial terms, 29–38; see also Financial Public networks and toll roads, 9, 10
Punctuation, prices, and mathematical
terms
loans and interest, 51–60; see also Loans notations, 38

and interest Quote painting, 318
numbers and prices, 38–51; see also Quotron, 220–221, 223, 224, 240

Numbers and prices Real-time messages demand, 109–200
Probabilities, basic properties of, 309–319 Rebalancing definition, 184
Regulation
cheating, fairness, best execution, and
compliance risk, 318 1929 crash and desire for, 164
brokers required knowledge of, 158
circuit breakers, 319 CC by Board of Governors of the Federal
financial technology of bell-shaped
Reserve System, 146
curves, 311–316 compliance, 25
measuring sample statistics for Gaussian financial system of systems diagram and,

returns, 315 generic, 275
quantiles and value at risk, 316–317 hedge funds, 183
statistics and parameters, 314 NASD Regulation, Inc. (NASDR), 157
Procedural versus declarative semantics, 90 order characteristics and, 235
Programming languages and numbers, 40–41 performance of financial systems activities
Project ERMA and Check-21, 149
Protocol(s) by, 1
building TCP/IP-based communication representing rules and, 262
Sarbanes Oxley regulations and costs of
protocols, 241–246
Challenge-Handshake Authentication building databases, 226, 245
surveillance, compliance technology,
Protocol, 5
data, 18–19 and, 8
definition, 4 and surveillance of fraudulent activity,
File Transfer Protocol (FTP), 243
financial information exchange protocol, 291, 293–294
time, financial technology, and NASD
247–252
first transaction protocols, 4–5 (and SEC), 62
handshake, 4, 5 Regulation National Market System (NMS),
HyperText Transfer Protocol (HTTP), 245
Internet, 5 173, 214
Internet Control Message Protocol, 241 Reuter, Paul Julius
Media Gateway Control Protocol
avian-based networks and, 13
(MGCP), 245 Carl Friedrich Gauss and, 328
multiplex communication protocol and Risk, 303–336
bell-shaped curves, financial technology
their acronyms, 244
Network Time Protocol (NTP), 66, 243 of, 311–316
Password Authentication Protocol, 5 bootstrapping, 321, 323–324
repeater, 19 capital ratios, adjusted, 305
router, 19 cheating, fairness, best execution, and
Secure HyperText Transfer Protocol
compliance risk, 318
(HTTPS), 245 circuit breakers, 319, 320
semaphore, 15 credit failures and defaults, 307–309
Simple Mail Transfer Protocol (SMTP), currency fluctuation, 3

243, 246

Index 349

hedging and, 325–334; see also Hedging identifying brokers and, 157
and risk National Market System creation by, 224
on ownership of quotes and market data,
loss frequency, 306
loss severity and, 305 193
management technology, 7 options trading and, 166
mean variance technology, 324–325 regulation of financial markets by, 8
measuring, 305–306 XBRL documents and, 259
measuring sample statistics for Gaussian on “The Watcher,” 23
Securities Industry Automation Corporation
returns, 315
model, 305 (SIAC), 222, 297
Monte Carlo simulation of portfolio Securities Investor Protection Corporation

returns, 321, 322 (SIPC), 293
partial differential equations and Greeks, SEDOL. See Stock Exchange Daily Official

333 List
portfolios and, 319–325; see also Selling short definition, 2
Semantics
Portfolios
price fixing, 318 declarative versus procedural, 90
price sensitivities, 325, 328–330 of syntactical constructs, 73–74
properties of probabilities, basic, 309–319; Semaphore protocol, 15
Separate Trading of Registered Interest and
see also Probabilities, basic
properties of Principal of Securities (STRIPS), 54,
quantiles and value at risk, 316–318 123, 124, 126, 138, 139, 180
quote painting, 318 Shad–Johnson Accord, 164
reduction using different products, 3 Shell scripts definition, 74
reliability and risk events, 306–307 Short position, 33
statistics and parameters, 314 Snafus, 298
systemic, 304 Sockets, 242, 243, 245
tape painting, 318 Social networks, credit reporting, and credit
types in financial systems, 305–309 ratings, 120
uncertainty calculus and copula, 308 Society for Worldwide Interbank Financial
value at, 305–306 Telecommunication (SWIFT), 246,
Rothschilds, the, 13, 143 278, 295
Rules, representing, 262–269 Soft dollars definition, 191
conditions with logic operators, 264 Software & Information Industry Association
inference and decision trees, 265–266 (SIIA), 226, 260
processing, 263 Software Development Environment
technical analysis and, 269 definition, 74
uncertainty, need to handle, 266–268 Software Publishers Association (SPA), 226
Solvers definition, 73
SDE. See Software Development Speculation and investment defined, 33–36
Environments Spot interest rate, 51, 91, 92–93, 101
Spreadsheets, 74–80
SEC. See Securities Exchange Commission accounting, Pacioli, and, 77
Securities Exchange Commission algorithms for interpolating prices and

auditing rules of, 245 rates, 90–102
blue sheets, 159 Cobol for, 76
on clock synchronization, 62 computations for continuous compounding
Consolidated Tape Association and, 222
CQ Plan and, 222 diagrams, 78, 79
on day traders, 23 definition, 74
electronic data gathering, analysis, and evolution, 75–76
Excel as most popular system, 74
retrieval system, 290 Excel system photograph, 77
establishment of, 164 forward rates, 98, 99–102
financial and operational combined grid lines, 74
headers, 74
uniform single report and, 289

350 Index

Spreadsheets (Continued) gambling system analogies, 288,
interpolation technology, 93–95 289–290, 292
Pacioli’s, 76, 77–78
“sheet” in, 76–78 generic flowchart, 275
spot rates, forward rates, and prices, 101 glitches, 297
spot rates and interpolation, 92–93 hierarchy models, 276–277
syntax, 75 information exchange modeling, 281–284
technology of spline interpolation, 99 investment fraud, system consequences
using technology, 78–80
yield curve heuristics, 96 of, 293
yield curves and spline interpolation, layers and interfaces models, 278
95–98 nature of, 274
onion diagram, 278
Stable prices based on standard clearing physics analogies, 295–299
arrangements, 2–3 properties of, emergent, 295–299
regulation and surveillance of fraudulent
Static electricity definition, 208
Statistics and parameters, 314 activity, 291–294
Steganography, 14 snafus, 298
Stock Exchange Daily Official List Systems support for buying and selling, 2–3

(SEDOL), 153, 154, 155 Tally stick, 36–37, 38
STP. See Straight through processing Tape painting, 318
Straight through processing, 5, 208 Tappan, Lewis
Strike Price Table, 171–172
SuperShares, 174 Journal of Commerce and, 120, 196, 207
Surveillance, regulation, and compliance social networks, credit reporting, and

technology, 8 credit ratings and, 120
Swap definition, 176 TCP. See Transmission Control Protocol
Symbol encoding protocol, 17 Technology of cash flows. See Cash flows,
Symbology: identifying issuers and owners,
technology of
143–156 Technology of spline interpolation, 99
Synchronous communication protocol, 16–17 Technology of virtual delivery. See Virtual
Syntax of language, 72–73
System definitions and word origin, 274, delivery, technology of
Technology of yields. See Yields,
295–296
Systems of financial systems, 273–302 technology of
Teleregister, 220
analogies, 287–294 Terms, financial. See Financial terms
arbitrary relationships and collaboration Threads definition, 73–74
Thrift institutions definition, 146
between systems modeling, 279–281 Tick data versus time series, 135
auction house analogies, 290–291, 292 Ticker
broker–dealer ERD, 280
characteristics of systems of systems, characteristics, 224–225
to consolidated tape. See Market data
294–299
clearing, settlement, and payment, technology
definition, 214
284–286 innovation, improvement, and
clearing and settlement data flow
standardization, 217–222
diagram, 282 to national market system, 224–226
clearing house hierarchy flowchart, 276 printing, 216–217
control flow models, 277–278 Ticker symbols. See Exchange ticker
description, 273–286
diagram of, 274–276 symbols
electronic data gathering, analysis, and Time

retrieval system, 290 30/360 day count, 63–64
entity-relationship diagram (ERD), 279 30E/360 day count, 64
functional versus operational actual/360 day count, 64, 65
actual/365 day count, 64
characteristics, 294–295 actual/actual day count, 64
calendar conventions, 61–65

Index 351

computer time conventions, 65–67 voltage and current sources, combining,
days, months, and years, 61–67 210–211
financial technology and NASD (and
Virtual Private Networks, 246
SEC) regulations, 62 Visual Basic for Applications, 86–88, 98
Gregorian calendar, 62, 63 Vivgage, 111
interpolated years, 61 VOC. See Dutch East India Company
ISO 8601 standard, 67 Volume weighted average price (VWAP),
leap years, 61
synchronization and Network Time viii, 234
Volt definition, 209
Protocol, 66 Voltage and current sources, combining,
water clocks, 61, 62
Time series definition, 135 210–211
Trademark, 195–196 VPN. See Virtual Private Networks
Trading technology, 1–2
Transaction protocols, first, 4–5 Water clocks, 61, 62
Transmission Control Protocol, 5 Wells, Fargo & Company, 10, 11, 12
building TCP/IP-based communication Western Union versus AT&T, 215
Whisper numbers, 136
protocols, 241–246 WIC. See Dutch West India Company
financial information exchange messages Wireless network, first, 17–24

and, 240 arbitrage in 1830s, 21
port and, 9 arbitrage in 1990s, 23
port numbers, 240 innovations in Chappe telegraph network,
Transport Layer Security Handshake
18–20
Protocol, 5 Morse telegraph as competition, 20,
Transportation technology business, 10–12
Triggers definition, 262 21–22
need for repeaters, routers, amplifiers, and
Ultronics, 220–221, 223, 224
Unlisted Trading Privilege Plan, 222 multiplexers, 20–24
U.S. Treasury Strip, 45
UTC. See Coordinated Universal Time XML. See Markup languages
UTP. See Unlisted Trading Privilege Plan
Yield curve heuristics, 96
Value at risk, 305–306, 310 Yield curves and spline interpolation, 95–98
inequalities for, 317 Yields
quantiles and, 316–318
algorithms, 114, 116–117
VaR. See Value at risk computing yields and inverse functions,
VBA. See Visual Basic for Applications
Virtual delivery, technology of, 208–214 118
examples, 113–114
alternating current, properties of, 212–213 price, credit, and, 122
alternating current and transmission of prices, defaults, and, 117–122
social networks, credit reporting, and
multiple voltages at same time, 214
batteries, 209 credit ratings, 120
duplexing, 214 as surrogates for price, 112–113
inductors and capacitors act like technology of, 112–122
using, 115
filters, 213
magnets and alternating currents, 211–212 Zero coupon bonds, 122–127
multiplexing, 214 definition, 122
properties of electronic systems, basic, interest rates, 123–124
term structure, 124–127
208–209
resistance, 210 Zero credit risk. See Zero coupon
bonds

This Page is Intentionally Left Blank