After 8 years of deployment in Fortune 50 enterprises and constant refinement by developers, S3′s TeraMatch® 2.0 has moved a significant step closer to eliminating false positive matches when comparing large databases. TeraMatch® combines a series of proprietary and publicly available algorithms to calculate a “similarity score,” which approximates the choices of human intelligence.

TeraMatch® 2.0 is presently deployed to prevent fraudulent providers from enrolling in Medicaid and has been used to identify and match telecom circuits and asset databases to create more accurate inventories and billing.

“Our software and our people do the difficult and complicated data work that is needed in the back office by every business,” said S3 CEO Jack Holt. “I’m proud that S3′s employees have created products and provide a level of customer service that have become critical to success for global brands. We do things like keeping thieves from defrauding Medicaid or protecting investors against unnecessary losses in the stock market.”

S3 is expanding its product line in the last quarter of 2010 to launch Canaryâ„¢, a new analytical service that accurately evaluates devices on enterprise-class networks to predict and avoid potential failures. Canaryâ„¢ enables network operators to replace faulty hardware before it goes down and results in a loss of revenue or brand damage from a lack of service to customers.

“Our financial services developers are also finalizing work on a new web tool that simplifies and improves the electronic trading of stocks and options,” said S3 CTO Mark Davies. “Innovation is how we’ve kept growing and we’ve got some really bright people designing interesting products that are certain to provide S3 a bright future.”

S3′s technology processes and reports on every equity and option trade on all U.S. financial markets and assesses trade execution performance on an estimated 16 billion financial transactions daily.

“These jobs are going boys and they ain’t coming back” – Bruce Springsteen

8 million jobs have been lost. Where did they go? Who should we blame? Did they go to China? Were they taken by illegal immigrants? Is it the fault of Obama? Or Pelosi? Or Bush? Or Gore? Maybe global warming?

Unfortunately, the truth is far more disturbing. Those jobs are no longer needed as almost every sector of our economy has figured out how to provide more and more products while relying on less and less people. Not only do we have the ability to make many times more of everything than we can possibly buy, but each item has more features and costs less than the previous year.

These scenarios of selling more for less exist across almost every industry. Flat screen TV’s cost a fraction of what they did 10 years ago. A top of the line Apple iPhone retails for $599, the same price Motorola sold their then cutting edge RAZR for 5 years ago. BMW has kept the price of their new and improved 3 series sedan the same as the one they sold 10 years ago. Adjust these numbers for inflation and the declines are even more staggering.

There is simply no way that BMW or anyone else can sell a product for the same amount as a decade earlier without significantly reducing employee costs. Each year they do not raise prices, they receive less in total value. But each year each employee costs more and more because of inflation related wage and benefit increases. It doesn’t take a Gordon Gecko to see the only possible response is to reduce the number of employees it takes to produce their products in order to maintain profitability.

This trend is being amplified by newer companies like Amazon and NetFlix that are able to generate the same amount of revenue as Barnes & Noble and Blockbuster while only requiring a fraction of the number of employees. According to their most recent annual reports, Amazon generated $24.5 billion in sales with 24,300 employees while Barnes & Noble had $5.8 billion in sales with 40,000 employees. Amazon is generating over $1 mm in sales per employee while Barnes & Noble is generating less than $150,000. Put simply, for every million dollars in revenue Amazon takes from Barnes & Noble, Amazon hires one person and Barnes & Noble lays off seven.

It is these incredible increases in efficiency driven by new and old companies that are responsible for the huge reduction in American employment. The US economy is so efficient now that it can support a significant amount of economic growth with minimal additional hiring. Even a return to pre-recession growth rates will barely make a dent in the number of jobs that have been lost.

These are structural changes that government programs cannot reverse. No amount of tax credits, investment incentives, or retraining programs is going allow companies to be able to remain competitive while employing the same number of people they did in the past. For better or worse, the world has changed and the traditional link has been broken between economic growth and employment growth. The sooner we accept this and stop waiting for the jobs the come back, the sooner we can work on real solutions for the disastrous aftermath of the Great Recession that are based on something other than hopes and prayers.

“Businesses can no longer accept the nearly 9 hours of downtime a 99.9% service level assurance allows. An imminent degradation of redundancy needs to be addressed right away,” said S3 CEO Jack Holt. “We live in the era of social media where customers can now complain loudly in front of the world. The impact of low performance or an outage for online stores or funds transfer networks go way beyond the loss of revenue.”

S3′s software, which is named Canary, runs calculations every two seconds examining trouble ticket systems, provisioning, logical scan data, in-service dates, port capacities, manufacturer updates, and numerous other factors to generate a Calculated Life Expectancy Report (CLER) for every device on a network. A “watch” is issued if conditions exist for the failure of a device configuration and a “warning” is prompted when an actual failure occurs on a configuration somewhere within S3′s managed cloud. Warnings are sent to users of all devices similar to the one that has failed. The devices and the overall network are given a score that is easily accessed through a portal or wireless phone that shows a simple, visual gauge for remaining life expectancy of each device scanned. Replacements and repairs can be prioritized based upon the criticality of an application to the business.

“There is no tolerance for network failures in the financial services industry and the markets,” said Rod Taylor, Vice President of Financial Services for S3. ”But there are still outages that harm critical data collection and analyses for exchanges, market centers, and broker-dealers. Reducing that probability has great value and we’ve shown we can improve network uptimes about 80 percent.”

Because S3 manages logical models for networks that span the globe, data collected elsewhere can be used for analysis and issuance of warnings. This is even done against similar devices on other networks without sharing or revealing proprietary business information. The S3 Managed Cloud allows Canary to spot a failure on one network and warn another that might have a similar issue because of a comparable device configuration.

S3 Canary Dashboard

Another week brings another round of political theatre on capital hill. This week’s topic was the stock market “crash” of last week and had all the trappings of a game of “Clue”. Who crashed the market? Was it the high frequency trading firms with their cadres of supercomputers? Maybe it was secretive dark pools with their “hidden” quotes? Or it could have been an individual trader who in between browsing the latest Ferraris online accidentally substituted “millions” with “billions”. And if none of those turn out to be true, there is always Santa Claus and the Easter Bunny as they have yet to be called for Congressional testimony.

Congress desperately wants one these scenarios to be true for it would then provide them with a new bogeyman on the scale of a Goldman Sachs or British Petroleum. Consider the relative sound bite value of “High Frequency Traders are not only a parasitic tax on our financial markets but pose a grave and immediate threat to the very stability of our public markets” versus “The market declined because there were more sellers than buyers”. Yet the latter is exactly what appears to have occurred and is the very definition of a market.

Contrary to Congressional belief and desires, markets were not designed to only increase in value. They are only supposed to rise when there are more buyers than sellers. This was not the case last Thursday and led to large but by no means unprecedented declines. In fact, even at the lowest point during the decline last Thursday, the S&P 500 was down less than 5% for the year – hardly a repeat of 2008.

Most publicity was focused on the trades for select large cap stocks and ETFs (Exchange Traded Funds, many of which hold diversified baskets of stocks) that occurred at or near $.01. A value that was clearly erroneous on the large cap stocks and that did not at all reflect underlying net asset values of the ETFs in question. These individual scenarios appear to have been the result of a high number of sell at market orders for these symbols being routed to destinations that did not usually trade many shares of these symbols. Because they were not the usual destination for trading in these symbols, when the sell orders arrived there were simply not any corresponding buy orders to trade against.

Think of a ticket scalper trying to sell tickets the day of the Super Bowl in Miami while standing outside of Yankee stadium. Do these tickets still have value? Absolutely, but all the potential buyers are in Miami, not in New York. Once routing resumed to the primary destinations, the values of the stocks and ETFs in question quickly rebounded as the sell orders were able to be matched with the corresponding buy orders.

These specific trades and symbols impacted by the above did not account for all of the overall index declines. Those were simply a result of a large amount of selling occurring at the same time. There were more sellers than buyers. Why? It does not matter. There are always numerous news items that can be pointed to – trouble in Greece, concerns about the Euro, rumors of liquidity issues in European banks, etc. All that matters is that more people wanted to sell than buy and that drove the prices down.

The irony in all of this is that less than 96 hours after the “crash” we had almost the exact same move but in the opposite direction as the Dow opened Monday morning nearly 400 points. Why? Same as before – more buyers than sellers. I’m still waiting for the Congressional investigation as to how the market could move almost 400 points at the open and who is to blame for it. Maybe the Tooth Fairy?

“We processed over a terabyte of data in options and equities trades last Thursday,” said Rod Taylor, vice president of financial services for S3.  “This type of volume and volatility is a great challenge for all of us in the financial services industry.  We hadn’t seen these conditions since ‘Black Monday’ in 1987.”  

According to Taylor, S3 was processing about 150,000 orders per second and was providing best execution reports and analysis in real time and managed millions of trades for financial services clients.  Activity in the markets placed great strains on infrastructure and technology.  Quotes were lagging and there were unexplained anomalies and market registrations as a result of the volatility, and some trading platforms were bogged down.  

“Every S3 customer has customized algorithms and business rules,” said John Standerfer, S3 partner and markets analyst.  ”These variations lead to us performing numerous calculations on each individual order.  I was pleased our systems worked seamlessly under these historic conditions.” 

S3’s technology compares each option or equity quote to millions of actual orders and trades and provides a real time report on the quality of any trade and overall price improvement.

As details of Senator Dodd’s financial reform bill began to emerge, it became clear that the complex financial engineerings of Wall St. have migrated to Washington. The Dodd bill to prevent future collapses in the financial markets basically creates a federal version of the complex and toxic Credit Default Swap, which helped get us into the original mess.

A Credit Default Swap is basically an insurance policy that guarantees that the purchaser of the policy is paid out in full in the case of a financial default. In this case, the financial services industry is the purchaser and the US taxpayers are the providers. US taxpayers will be asked to insure the future failures of our largest financial companies and those companies will provide a $50 billion bailout fund. For this unlimited guarantee of financial solvency, the big money firms are only being asked to fund less than 5% of the amount used in the current bailout and participate in the appropriate oversight boards and regulations. And this, my fellow taxpayers, is a hell of deal. But not for you and me.

The financial industry has made a history of using campaign donations to prevent the addition of even the most innocuous regulation. In the past 10 years, they have spent over $2.5 billion on these efforts and are undoubtedly gearing up to spend even more. As always, they will argue that any additional regulation reduces their competitiveness worldwide and increases the cost of credit and capital to American consumers and corporations. What they fail to mention is that without the insurance policy provided to them by the same government they complain restricts them, they would have failed multiple times in the past hundred years.

The benefits of this type of policy have already been demonstrated for the industry over the past 18 months. That trillion we spent on the recent bailout was simply used to stabilize the industry and there were promises of even more money if needed. The crisis we are still managing has made explicit what the US government guarantees and what it does not. There used to be implicit guarantees around Fannie Mae and Freddie Mac but those were certainly made explicit by the fact that the near collapse occurred and the government came to the rescue, adding hundreds of billions to an already swelling federal deficit.

Government guarantees have an incredible amount of value to these businesses. Being able to borrow cheaply from the Federal Reserve reduces their cost of capital. Having access to inexpensive FDIC insurance allows them to pay lower interest rates on customer balances. Government guarantees on their bonds further reduces the interest rates they must pay on their debt.

Historically, all of these guarantees have been provided essentially for free to the financial industry. FDIC insurance was supposed to be paid for by the industry, but as of late 2009, the fund was over $20 billion in the red. The only reason that number is not closer to $1 trillion is that the US Government bailed out the largest of the banks, preventing their failures from making the FDIC fund look like a finger in a large dike. This negative balance is, of course, again being covered by the US tax payers.

If the Dodd bill proposes nothing else, it ought to offer more protections against excessive leverage and greater strength in the protective funds. None of the benefits provided to our financial institutions by the government are inexpensive and each one offers a competitive advantage in the industry; especially against foreign companies. This is worth a great deal to financial services companies that are being protected by American taxpayers. Essentially, we are talking about a government Credit Default Swap in the Dodd bill. And in a capitalistic economy, it only makes sense that the provider of the insurance would expect a form of payment for guaranteeing the risk; the risk takers also ought to expect they are subject to additional oversights to reduce the odds of another catastrophic default.

The financial services industry may not like this deal. But this is a free market, (at least in theory), so I would encourage them to shop around and see if they can get a better offer. Chances are good they won’t find another entity interested in providing over a trillion dollars of coverage for an indefinite amount of time for a modest upfront payment of $50 billion, and a little regulatory oversight. But if they can find a better deal, they ought to take it. Taxpayers aren’t going to lose any sleep over losing this contract.

If you are unable to attend the event, live updates on topics and news from the forum will be provided via S3′s social media network. To check in regularly, follow us on Facebook at http://www.facebook.com/pages/Austin-TX/S3/149244661392?ref=ts and on Twitter at http://twitter.com/S3_cscott . We will be posting information and insights on the markets and technology solutions directly from the ongoing conference discussions. If you log on late to Twitter, you can search all updates and topics using our hashtag #S3forum.

If you need further information, please contact Carol Scott at 512.296.9344 or at cscott@s3.com or James Moore at 512.300.9232 or at jmoore@s3.com.

“We’ve been working on easy technology fixes to this transition since we first heard this might be coming,” said Rod Taylor, Vice President of Financial Services for S3 in Austin. “The test runs we’ve been making for S3 clients using our software on their options data feeds indicate that this might not be as troublesome as everyone has feared. But there are challenges in making this kind of massive change.”

On January 23rd, OPRA will begin sending select options symbols to trading firms to familiarize them with the format. Anywhere from 20 to 50 symbols will be tried out with options traders on February 12th and the permanent transition is scheduled to begin on April 7th starting with “A” symbols; the switchover will be completed with the “Z” symbols in May. These will constitute an entirely different methodology for reporting the symbol root, date, put, call, and strike.

“The challenge for people writing new algorithms and changing routers is to make certain the new symbols map properly to the old options data,” said Jason Perkins, financial services sales executive for S3. “All of the trading systems out there are built on old symbology so options firms have a significant amount of work to move over to the new methods.”

S3 is managing the transition to new options symbology for some of the largest options trading firms in the nation and the company has been working on technological adaptations for more than a year.

“This is the first time that the $150 billion outsourcing industry has been able to find everything it needs for its global clients at one location, through one vendor,” said Jack Holt, CEO of S3. “Because we’ve been working with the world’s biggest outsourcers on their major projects, we’ve been able to experience first hand the challenges of running these large networks, and that has enabled us to deliver this unique suite.”

“Our technology is the first to catch up with the needs of the complex and changing outsourcing industry,” said S3 CTO Mark Davies. “Our expertise begins with data management and the application of our comprehensive network outsourcing suite of tools to our current capabilities which means our technology and experience can give an outsourcer a huge advantage in both pursuit of a contract and implementation.”