By Andrew Webb

The small family firm that sticks close to its area of expertise seems an anachronism in these days of big multinational system vendors. May Consulting has nevertheless prevailed in the teeth of vicious competition by keeping the product tightly focused on index and equity options-and turned their MicroHedge product into something of an industry standard. The company was started in 1989, when Dennis May, an OEX trader, left the floor and teamed up with his brother Dan, a programmer. Their product provided specialists with basic position management, theoreticals and Greeks.

Early versions, which ran on hand-held Ataris and HP Palmtops, were replaced by a Windows version in 1991. And the addition of real-time risk analysis functions opened the product up to a wider global trading market. Some DAX traders on the floor of the DTB in Frankfurt even use the program to feed positions to risk managers in Chicago.

The slogan "Designed by traders for traders" is much-abused by a lot of marketing departments these days, but I found that selling proposition accurate. The interface isn't the most glamorous I've seen, but it's clear. That's all that counts when you consider the huge number of expiries and strikes some options have. It's not just the big features (like the two-way exchange of data with Excel) that are impressive, but little details that show that someone realizes that you might be using this product under a lot of pressure. Things like automatically recognizing what type of security the underlying is, so you don't waste time having to fill in dialog boxes.

The amount of flexibility offered is remarkable: 140-plus possible data columns that cover every conceivable possibility. I can't believe there are many traders who will actually use all the available functionalities, but at two hundred and fifty bucks a month why should they care? It takes a little while to figure out how to set your workspace out, but it's not something you're likely to have to do that often. Once you have set it up, actually working with it is fast and pretty intuitive.

I was impressed by the "real world" feel to the product. May Consulting has started from the assumption that data vendors occasionally screw up. When they do, you aren't going to be screaming for support, because they've built in the ability to work around these little problems. Missing a strike? You can add your own. Stock splits can be a major hassle for specialists, so there's a way around that using Excel. Some of the solutions may not be pretty, but they work.

There's things I'd like to see added, such as serious support for interest rate and bond options, but that's like complaining that your Ferrari is no good at hauling concrete blocks. The "small is beautiful" philosophy allows May Consulting to be highly responsive to the client base. Several users have commented on the speed with which new features they had requested appeared in the program, sometimes within 24 hours.

Rupert Cox
Prudential Investment Advisors

"When we first looked at MicroHedge over four years ago, it was the first product I'd seen that got serious about implied volatility curves. The ability to pull out a volatility surface into Excel, manipulate it and then poke it back into MicroHedge was something special. It was one of those things that gives it the feel of something put together from a trading rather than an academic viewpoint. One of the things I'd like to see added is the ability to screen a database of different stocks for a particular scenario, like a buy write that met certain criteria."

Jim Doughan
Susquehanna Investment Group

"We were one of the first people to use MicroHedge in a small way, but now we have over 100 installations. It's a very focused product with features that have a practical application. For example, we use the Excel data interchange facility a lot. If there are any problems May Consulting are very responsive and quick to sort things out. The only weakness I can see is that it sits on top of a big pyramid-data manipulation, data and hardware-so there's more things to go wrong. But that's not really a problem with MicroHedge itself."

Tom Jackson
Global Equity Derivatives, Barclays de Zoete Wedd

"We've used it for around seven years, since the Atari version. It's ideal as a complement to our own risk management tools for a quick synopsis. It's very user friendly and flexible, and the Excel interaction is very useful. It's also very stable when used on the AT Financial platform. As a quote server and for dealing with listed options it's fine, but I would like to see more OTC functionality added."

Luke White
Fimat Futures, Société Générale Group

"We started using MicroHedge in November of last year. The things I like are the ability to calculate and update fair values in real time. It takes the value of the underlying from the data feed, you put in the value of the volatility at which you think each strike will trade and it does the rest. It's a very good, cheap way of keeping track of the market.

"You'll find now increasingly that clients tend to go to brokers who can give them a good understanding of where the fair value of an option is. Business tends to concentrate particularly around people who can do this in the less liquid markets, such as some of those on LIFFE and the MATIF. Down in the pit when you ask for a quote, in say the BTP options, they'll give you a fifteen-tick spread. If you go back to a client with that he'll laugh you off the line. If you have something that can track where the skew is, and you know where the at-the-money volatility is, you can move the skew to correlate with that and obtain the fair value for the option.

"The other thing that's very useful is having the real-time implied volatilities from the last trade, so that when a client rings up you can give him that as well as the price of the last trade. One thing that I asked for, that's now been included, is a graphical representation of the volatility skew. This gives you both where you have set the skew for your fair values and where it's currently trading. I'm using MicroHedge all the time; it's as important as my Reuters price feed for the futures underlying, and compared to the competition it's pretty cheap. I use the Excel feature mainly for producing things like three-dimensional volatility surfaces, which clients particularly like."

Tony Pag
Equity Derivatives Desk, Citibank

"We've had MicroHedge for around six months and find it pretty straightforward and easy to use. The only thing that could really be improved is the user interface for setting up a layout. By Windows standards it could be a bit more user friendly. The volatility skew feature is good. As I concentrate on trading long OTC positions, I don't use the poke feature that much. When I do it's only one way, to push interest rates from Excel into MicroHedge. I don't run OTC positions in MicroHedge but use it a lot for pricing and finding the implied volatility of exchange-traded options."

Tom Waller
First Options

"A couple of things make the product stand out: one is the way you can import and export combos for risk analysis and the other is the overall flexibility. You can include symbols that are missing from the data feed and at the same time exclude any erroneous ones that are present and shouldn't be.

"I think the reason that the product is so popular is that when a trader decides what's important for him in terms of values, Greeks, etc., he can set MicroHedge to deliver those to him as he wants them. He can then save it in a profile so it looks the same to him every day of the week. Updates are continually being put out to cope with developments in the market, such as a very lengthy list of strikes and complex reorganizations/splits. This flexibility usually addresses it; it may not be perfect but it's usually best case. The traders realize that and seem happy with it. They find their own ways around any residual problems.

I'd like to see some technology upgrades. They use a Btrieve database which will run with Novell, but it would be nice if it was a truly relational database. It's not popular among the technicians on the network so they're not real keen to jump in and deal with it. Most of the problems traders have are in learning to use it as a flexible kind of sophisticated tool. Many of them were used to some older systems where hot keys were very important and they didn't have all the variables they could fill in. Once they get that done, then they seem much happier."

Contact: Jim Harkness, May Consulting, 401 LaSalle Street, Suite 1400,

Chicago, Illinois 60605.

Phone: (312) 786-5065

Fax: (312) 786-5070

Pricing: $250 per unit per month in the U.S., $400 per unit per month elsewhere.

Demo: A free 30-day demo is available by phoning or faxing a request to Mr. Harkness.

Highlights

MicroHedge poke

This was the feature that May's clients really rated highly. A DDE API allows common items to be manipulated in Excel and then poked back into MicroHedge. One of the most popular items seems to be volatility skews. If you prefer to use your own, you can calculate them in Excel and fire them back. It's also ideal for getting round the hassle of stock splits. Obviously MicroHedge can only price off one underlying, while some issues (Viacom is a popular example) are fragmented into five or more. With the poke feature you can work out your own weightings for each component, combine them and reinsert them as one number in the MicroHedge underlying field.

Do-it-yourself models

If you prefer to use your own proprietary pricing models, MicroHedge allows you to do so. Models can be written as DLLs and called by the program, instead of using the default ones provided.

OTC options

This looks as if it's still in its infancy, and currently seems to get more use as a means of working around data problems such as missing strikes. Having said that, it's perfectly capable of handling simple OTCs with odd strikes or expiries. May could start to rock a few boats if they get serious about this feature and expand it for things like exotics.

Wireless trading from the floor

A popular use for MicroHedge has been for a team of floor traders working in conjunction with an upstairs position manager. Floor traders use hand-held computers with Proxim's wireless technology already built in. Trades are transmitted from the floor in real time to the risk manager, who can monitor exposure and advise the team on the floor accordingly. At the same time trade confirmation can be sent down to the floor from the back office (a typical delay is 5­10 minutes). Apart from providing real-time position risk, the other obvious benefit is that traders can catch their out trades virtually immediately.