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maintenance of existing systems versus growth of new product lines, and new (and
uncorrelated) trading/investment systems. Diversifying a portfolio of trading/investment
systems, either by market, timeframe, or trading strategy employed, reduces risk, even
when using the same basic trading rules.^13 Much in the same way that equity fund man-
agers optimize their portfolios, top management can optimize their research and devel-
opment investments—defining the right new trading/investment system strategy for the
firm, selecting the winning new trading/investment system projects, and achieving the
right balance of projects.1.5. Operational Risk
Understanding trading/investment system development processes and managing those
processes reduces operational risk, the probability that technology-related problems,
either internal or external, will interrupt a firm ’ s business.^14 (External disruption is a
stoppage of business processes due to systems failures outside the firm, including, for
example, failure of an exchange, administrator, credit provider, counterparties, or other
third-party provider. Systems maintenance is also a stoppage of business processes due to
the firm ’ s technological failures, including, for example, software problems, systems that
are outdated and unable to handle the firm ’ s needs, computer viruses, system integration
risks, and system developments being delayed or over budget.)
In The Six Sigma Way , the authors define Six Sigma as “ a comprehensive and flex-
ible system for achieving, sustaining, and maximizing business success. Six Sigma is
uniquely driven by a close understanding of customer needs, disciplined use of facts,
data, and statistical analysis, and diligent attention to managing, improving, and reinvent-
ing business processes. ” Several top firms in the financial markets apply best practices to
reduce back office and operational risk, including performance measures, analytics, and
improved capital and financial management techniques. Operational risk is an important
area of quality management research, but we prefer to think of operational opportunity.
That is, the opportunity for gain resulting from better internal processes, people, and sys-
tems. Six Sigma processes, applied in the front office, reduce operational risk and enable
firms to beat their competition.1.6. Project Risk
A subset of operational risk is project risk, the probability of loss due to events that
adversely affect the success of a project. Such adverse effects could be “ in the form of
diminished quality of the end product, increased costs, delayed completion, or outright
project failure. ”^15 Don Shafer ’ s project risk management plan defines 12 categories of
potential risk which can easily be adapted to trading/investment system development:1. Mission and Goals. All trading/investment system development projects must fit
within the organization ’ s mission and goals.
2. Organization Management. All selected trading/investment system projects
must be buildable within the current or planned organization. A primary risk in
trading/investment system development is a subset of this risk we call internal
team politics risk, where infighting between cross-functional product team mem-
bers may cause project failure.1.6. PROJECT RISK