David Gershon, founder and chief executive, SuperDerivatives
You are more likely to find a theoretical physicist pondering the origins of our universe than working on Wall Street. At least that was true until 12 years ago, when David Gershon—a currency options trader frustrated with a lack of transparency—founded SuperDerivatives, a market data and risk management software company that would change the way people price derivatives.
Theoretical physicists are envied for their brainpower and lofty goals as much as they are poked fun at—“How many theoretical physicists does it take to change a light bulb? Two: One to hold the bulb and one to rotate the universe.” And sure enough, Gershon’s PhD in theoretical physics may have had more in common with Albert Einstein than JP Morgan, but his MBA and MSc in finance placed him in a unique position to be able to recognize a yawning gap in the market, and to be able to respond to it. But substitute an options pricing model for the light bulb and market data for the universe, and that’s how Gershon created a way to price derivatives in real time, and then went out into the universe of market data in order to make it work.
After completing his education, Gershon went to work on Wall Street, where he began trading emerging markets at Deutsche Bank, before moving to Barclays. It was while trading foreign exchange options at Barclays in London that he realized people simply didn’t know how to price derivatives, which led to the idea behind SuperDerivatives.
“When I was at Barclays, I realized that there was a strong need to invent a model to price FX options; without it, I had to be constantly calling brokers to find out the prices,” Gershon says. “As I worked on the model, I saw that it could help solve one of the industry’s biggest problems—transparency.”
The idea behind SuperDerivatives—which Gershon founded in 2000—was to offer an online calculator for real-time options. There was just one problem: there was very little publicly available information upon which to base its pricing, so the company had to invent something that didn’t exist—a means to collect data for use as inputs to its calculations.
As an example, if the vendor needed prices for 25 delta risk reversals and 25 delta butterfly options, it had to call around to brokers. “With the model I invented, we could not do without these. We had to find a source for the data…. [So] from day one, SuperDerivatives was a market data company. We had to find the raw real-time data in order to do the derivatives pricing,” Gershon says.
But obtaining that data doesn’t come without its own challenges: “Our number one challenge is to find the data. This is data you cannot find on Bloomberg, like illiquid stocks, commodities, energy products, rates in emerging markets. We sometimes have to journey far to find data,” he says.
To find it, SuperDerivatives maintains a large data department, where staff contact brokers from around the world to gather rates and prices. Some of it is electronic, but a significant part has to be gathered by email or phone.
However, the effort paid off: When Gershon first explained his concept to his friend Lew Ranieri—the former bond trader and Salomon Brothers vice chairman, known as the godfather of mortgage-backed securities—Ranieri predicted: “You’re going to be the next Telerate.”
The model was so accurate that within two years of its launch, “all the banks had our system,” he says. And after five years, when the company conducted a survey of clients, asking what they considered SuperDerivatives’ most important service, the clients overwhelmingly cited the vendor’s market data.
As the firm grew, so did its model, encompassing new asset classes and geographies, enabled by the model’s applicability to all asset classes. “Options are options,” Gershon says. “We did extremely well in areas where there were no solutions. In emerging markets, we were the leader. Turkey, Indonesia, the Philippines, Poland and Israel—they hardly used options. We were the tool that traders used to penetrate these markets.”
And when clients wanted to trade their own currencies, SuperDerivatives began gathering illiquid FX rates. As these emerging markets enter the modern world of electronic distribution, the data becomes more available. And with better data comes better transparency, which Gershon says is being driven not by regulators—as one would expect—but by the buy side, frustrated at trading assets without knowing the accurate price.
The sell side—long considered a barrier to transparency because of the fat profit margins it gets from creating opaque over-the-counter derivatives deals—is slowly coming around. “Banks are starting to understand that transparency is not a bad thing, that they may generate even more revenue,” Gershon says.
The next new thing for SuperDerivatives will be to deliver live trading prices coming from its front-office dealing platforms. The vendor has agreements in place with banks, and will begin providing real-time traded prices “within months,” Gershon says.
In the Big Bang Theory of physics, the universe started from a singularity and expanded into what we know today. Likewise, SuperDerivatives created a new universe of derivatives pricing from a black hole of market data. Using theoretical physics and applying it to pricing models was an easy leap, Gershon says. “It’s the perfect thing for a theoretical physicist to do—both are very mathematical,” he adds.
It’s a trio of problems: Mifid II’s data problem; blockchain projects stalled; and data quality issues for machine learning.Subscribe to Weekly Wrap emails