A Shot in the, Arm for Derivatives Software.

When retired Microsoft executive Gregory Whitten recently coughed up $32 million in late-round financing for derivatives quantitative and modeling firm NumeriX, a flurry of attention rippled through the derivatives software world. Whitten had been Microsoft's chief software architect and the single most important person in developing Microsoft's Windows application. Where his dollars now flow could well be an indication of yet another software success story.

NumeriX has long been known for its state-of-the art derivatives risk modeling capabilities. The company's first claim to fame came in 1996, when it released an extremely fast Monte Carlo pricing and stress-test simulation source code within its 'Time-Library Toolkit." Merrill Lynch & Co. quickly bought this latter product and became NumeriX's initial customer.

Today, the company has 50 of the world's top physicists, mathematicians and software engineers working to solve further mathematical inefficiencies in the derivatives market. This is the area where someone has to grapple with the manner to appropriately price every new structured product Wall Street wants to invent. Is it better to use certain models, or is a combination of different models best in specific circumstances?

Paying attention to the robustness of one's derivatives pricing software can be important. According to Alexander Sokol, chief technology officer of NumeriX, "Use the wrong model with overly simplistic assumptions, and you risk ending up with a derivatives valuation that is 10 bid- offered spreads away from their true fair value." NumeriX's mission is to help its customers avoid such mistakes, and perhaps most importantly, to allow clients to properly house and account for new derivatives without having to rely on any stopgap spreadsheet solutions.

NumeriX's primary customer list features sophisticated banks and other software vendors. Like the "Intel Inside" concept, NumeriX's source code has already been integrated as a premium service within the systems of derivatives risk management providers Fenics Ltd. (now part of GFI Group) and Murex, among others. The firm has also partnered with major accounting firms such as Arthur Andersen and KPMG, and more recently arranged an alliance with global broker Garban Intercapital.

But why does a company in this niche software space need $32 million to expand? And what does Whitten see in NumeriX that is so special?

"I increased my investment because NumeriX is positioned to make a major difference in how Wall Street does business," offers Whitten simply. But NumeriX chief executive officer Craig Bouchard expands: "We have a vision that the services we provide to the sell-side of Wall Street today should increasingly be in the hands of buy-side clients as well. It's truly silly that many corporate treasurers don't have these sophisticated tools and models already. It's like allowing them to fly an airplane with a broken altimeter."

Bouchard specifically envisions that, among other delivery channels, NumeriX will soon be reaching the buy-side world via the Internet as an application services provider (ASP). Clients will be able to upload or maintain their positions on a NumeriX ASP platform, and be charged a palatable access fee either by the time they spend on the system or by the size of the portfolio being examined. He promises full FAS 133 accounting compliance as well.

Of course, other firms are trying to conquer this derivatives risk management ASP space, including Algo-Source and Reval.com. But, says Bouchard, "We have far more sophisticated derivatives price models than any of our competitors offer. We also handle a far wider array of underlying market segments than any other ASP effort currently out there."

Whether or not Bouchard's bravado proves correct, look to hear far more about NumeriX in the months to come. The derivatives pricing and risk management world may well be chock full of competition, but, courtesy of Gregory Whitten, NumeriX is going to among the firms actively fighting for market share.

Barclay T. Leib is president of Sand Spring Advisors LLC, a financial consulting and alternative asset management firm in New Jersey.