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Data Quality Essential for Hedge Fund Success
According to a recent article in the Money and Business section of The New York Times, hedge funds like Long-Term Capital Management often fail because their computer risk models are not adequately "stress tested" with data that reflect extreme and rare events (e.g., market crashes). Not only must the risk models have exact market data for day in and day out trading under stable conditions where money is moved ever-faster among global markets, but they also must be extensively tested under "extreme" market conditions.
According to the Journal article, "stress testing" hedge fund models is not often done. The article's sources called Long-Term Capital Management "gamblers" and "a mutual admiration society." Wall Street's fasincation with computer models of market behavior is almost 40 years old. There has been almost no direct regulation of hedge funds since their inception. According to the Journal article, many hedge funds threaten to unglue world markets both because their models may not be able to keep up with the immense strains of world-wide trading and because the models have evolved into another form of gambling. And hedge fund models appear to particularly bad at predicting random and severe stresses on financial markets. The article was written by Timothy O'Brien and appears on page 4.
SEC to Report Corporate Y2K Progress
According to a report in the October 5th issue of The New York Times, the U.S. Securities and Exchange Commission is trying to close the wide gulf in Y2K information between computer consultants, who say that many companies are dangerously vulnerable to Y2K crashes and Wall Street analysts, who have been telling investors that there is little to worry about.
The SEC is requiring that corporations report Y2K progress in their quarterly 10-K reports. The first Y2K information should begin to appear later this month. In response to various SEC proddings, a majority of the 10,000 publicly traded companies that file quarterly and annual reports started mentioning Year 2000 concerns in filings earlier this year. Alarmed at how vague and limited most Y2K disclosures have been, the SEC issued specific reporting guidelines in August.
The SEC's Y2K guidelines have been viewed positively in Congress, which sent President Clinton a bill on October 1st allowing corporations to exchange information about their Year 2000 readiness without fear that the information could be used against them in a lawsuit if the information proved to be wrong.
The SEC wants corporations to discuss specifically how much they expect to spend to cope with the Y2K problem, assess how much they expect to spend to cope with this problem, assess how far along they are in dealing with the problem, and describe what, if any, contingency plans they are making.
According to the Times, there is fear throughout the federal government, and among corporations, consultants, investors, and Y2K advocacy groups that whatever Y2K data corporations publicly release will be too little and too late. The article was written by Barnaby Feder and appears on page C2.
Wal-Mart Increases Sales Through Data Quality/Data Sharing
A report in the "Marketplace" section of The Wall Street Journal on October 6th discussed Wal-Mart's plans to share data from its massive consumer preference databases with suppliers, its own buyers, and its customers. Wal-Mart plans to use the "data sharing" to help customers in its new "Neighborhood Markets," which are slightly smaller than typical suburban supermarkets.
Wall-Mart discovered that customers have difficulty navigating its Supercenter stores, which are about the size of four football fields. To address customers' frustrations, Wal-Mart dug through purchase data to find ways of helping customers find items. Since January, Wal-Mart has opened its databases to its corporate buyers and outside suppliers. This move gives both sides direct access to some of the same data. Sales managers at big suppliers can check Wal-Mart's sales of their products from their own office computers. Wal-Mart's buyers can analyze market-based data to see what else people who buy product x or product y tend to buy. For example, Wal-Mart managers use handheld computers that scan bar codes on shelves to report inventory by shelf position.
Together with other data, this allows Wal-Mart to position related items that people tend to purchase at the same time (for example, coffee and packaged breakfast rolls) in the same location. This cuts down on time customers spend wandering around the store looking forvarious items.
The data also help Wal-Mart time merchandise deliveries so that its shelves stay stocked - but not overstocked. The data help keep inventory levels leaner and turning faster. And transaction data help Wal-Mart move shoppers from areas stocked with low-margin household goods to higher-margin areas stocked with electronics. The article was written by Journal staff reporter Emily Nelson and appears on page B1.
Airline Passenger 'Unruliness' - Significant Data Quality Problems
A report in the October 4th issue of The New York Times questions whether "unacceptable behavior" among airline passengers has reached a level demanding significantly more attention by the airlines than the airlines have historically dedicated to the problem.
Times reporter Laurence Zuckerman examined a number of airline passenger "incidents" and concluded that the data not only don't support the charge that bad behavior by airline passengers had become a significant problem but the airlines' data is dubious because each airline defines "passenger misbehavior" according to its own criteria. During 1997, the FAA reported a total of 196 incidents in which passengers interfered with flight crews. Airlines in the United States alone carried 600 million passengers last year.
Another question is whether the airlines' concerted crackdown on passenger violence in the last two years has resulted in an increase in reported incidents. Many airlines now encourage employees to report incidents. Previously, airlines discouraged employees from reporting incidents for fear of offending customers. And the news media's interest may also contribute to making the problem appear more severe than it really is. There appears to be no good explanation for the alleged rise in air passenger misbehavior. Some say it is due to excessive on-board drinking. Others say incidents occur when passengers are denied alcohol. The report appeared on page 3 of the "Week in Review" section.
[Editors Note: Media editors and journalists might profitably ask similar questions about other reported crimes, such as child abuse, spousal abuse, stalking, and date rape.]
WSJ: Perjury Common in U.S. Courts
According to The Wall Street Journal, perjury (defined as the intentional misrepresentation of a material fact) is common in United States civil and criminal courts. One U.S. Federal District Judge - Samuel D. Kent - in Galveston, Texas, told the Journal "it happens all the time." Last month Judge Kent prevailed upon the plaintiff in an insurance case to drop his case after it became clear that the plaintiff had a history of filing suspicious fire claims. Judge Kent reports that "lying is becoming a remarkably common aspect of modern litigation." Last year, the National Law Journal, a newspaper for the legal professon, identified "spoilation of evidence" - hiding or destroying crucial documents - as one of the top new litigation trends of 1997.
According to U.S. legal experts, lying has become so generally accepted in U.S. courts that perjury prosecutions aren't often undertaken. Rather, courts sanction lawyers, plaintiffs, and defendants. According to the Journal, there is now at least as much lying in civil cases as in criminal cases. Perjury is now so common in the United States that it would be impractical to prosecute everyone caught lying under oath in a U.S. court. The article was written by Journal staff reporter Richard Schmitt and appears on page B1.
Will Speech Recognition Standards Push Electronic Commerce?
According to a report in the October 6th issue of The New York Times, a group of communications, software, and financial services corporations plans to announce an alliance aimed at creating standards for speech recognition that will push electronic commerce and the Internet beyond the boundaries of the personal computer. The alliance, which includes Motorola, SAP, Visa International, Broadvision, and SRI International describe their effort as virtual commerce and argue that telephone commerce (wire or cellular) will break down the last barrrier remaining between the mass of consumers and the Internet.
Currently access to the Internet is limited to those with personal computers and Internet capability, but computer and communications executives envision a new Internet platform that will be controlled by voice and will display information on a small portable screen. Over the past year speech recognition systems have improved significantly. Now companies are making an effort to integrate voice systems with Internet and corporate databases. In the future, it will be increasingly easier to make voice queries via the telephone and then receive data in a variety of different ways, including via telephones, cell phones, pagers, or personal computers. Currently, gaining access to mundane information via a Web browser can take up to three minutes and require up to 15 mouse clicks.
Motorola recently introduced a new voice Internet standard called Voice Markup Language, or VoxML, to allow software developers to add speech to their Web applications. One of the strengths of VoxML is that it would permit responses to voice queries to be displayed on a variety of existing Web devices, from pagers to browsers. The article was written by John Markoff and appears on page C1.
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