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The Handbook of Investment Technology: A State-of-the-Art Guide to Selection, Implementation, and Utilization.

Reviewed by D. Kent Rock, city treasurer, City of Boise, Idaho, and member of GFOA's Committee on Cash Management.

One of the great imponderables of our time is how to know if one is going to receive what is expected from a major software acquisition and implementation process. The Handbook of Investment Technology attempts, through a compilation of articles by investment and technology professionals, to lead the investment professional to the appropriate system.

At first blush, the book seems to be written by and for computer programmers. Quite to the contrary, however, the editors have assembled a stellar cast of Wall Street investors, computer and business consultants, college professors, and attorneys to author chapters on practically every aspect of using technology to improve processes. The book is replete with the business jargon of the 1990s, such as business process reengineering, paradigm shifts, strategic technologies, and genetic algorithms.

The context for the book is set by the first chapter, which explores business process reengineering (BPR). Through use of anecdotes and analogies, the author discusses the strengths of BPR relative to such competing approaches at total quality management and holonics. She also includes a case study indicating how a private-sector company used BPR to address problems specific to the financial industries.

The book then walks the reader through several chapters on computer system selection. From the choice between mainframe and client/server technologies to evaluating and contracting with vendors, from the financial evaluation of transition technologies to legal considerations, step-by-step guidance is provided.

While those of us in the public sector have developed some level of expertise in the request for proposals (RFP) process, sometimes making the distinction between actual software capabilities and vendor sales pitches can be a pig-in-a-poke process. A chapter on evaluating and contracting with vendors gives some very useful hints. Drawing upon personal experience, the author presents ways to identify differences between RFP responses and the sales pitch. He also identifies methods to ferret out overselling of the system's capabilities. There is also a helpful discussion on the perennial buy-versus-build quandary.

The next section, focusing on electronic technology applications, is a bit narrower; however, there are some useful nuggets of information to be found, especially for larger jurisdictions. Using automation to cut paperwork relating to delivery of orders is a theme of the section.

Integrated order management is one process that is described in detail. The author of this chapter, a vice president with a securities corporation, delves into reducing paperwork between portfolio managers and their traders. He quotes a pension fund executive's observation that "we need to clean up the clerical morass that our traders have to go through to execute a trade, link them to our portfolio managers, and give them both decision-support tools to improve their efficiency." This observation carries beyond the relationship between portfolio managers and traders. It is almost a theme for the decade: reduce paperwork, develop decision-support tools, and improve efficiency. The author notes that those who ignore paperless trading will be at a competitive disadvantage.

A particularly beneficial chapter is on measuring trading investment performance and risk. Of particular interest is the section entitled "Lies, Damn Lies, and Statistics," which identifies the various approaches of measuring portfolio risk. This section compares the strengths and weaknesses of using average monthly return, standard deviation, Sharpe ratio, Sterling ratio, MAR ratio, compounded annual return and unit value, and percentage/number of months profitable. The authors make a point of panning the oft-used standard deviation method, arguing that this method does not distinguish between upside potential and downside risk but rather lumps them both into one number.

At the end of the book is a discussion of the Internet and its potential and, for the "techies," a discussion of object-oriented database design - the next step past relational databases.

A Latin phrase Deus ex machina, "God out of a machine," seems a fitting summary of what the editors and authors attempt in this book. They strive to give readers both the tools to reengineer their investment processes effectively and the knowledge to use them. Whether one works on Wall Street or Main Street, there is something everyone concerned with investment technology can glean from this book.

The Handbook of Investment Technology (ISBN 0-7863-0996-2) is available for $70, plus $3.25 shipping and handling, from Irwin Professional Publishing, 1333 Burr Ridge Parkway, Burr Ridge, IL 60521 (800/634-3966).
COPYRIGHT 1997 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1997 Gale, Cengage Learning. All rights reserved.

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Author:Rock, D. Kent
Publication:Government Finance Review
Article Type:Book Review
Date:Apr 1, 1997
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