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Risk Management and the Tour de France

17 July 2013  |  3785 views  |  0

A professional cycling team's captain is not unlike a big bank's risk manager

It’s July, and to many that means just one thing: the100th edition of the Tour De France!

Established in 1903, ostensibly to sell a cycling based sports-paper, L’Auto, the ‘Tour De France’ has become the annual pinnacle in sports endurance, teamwork and strategic planning. At its inception, teams were actively discouraged as originally tour organizers fought to maintainits status as the ultimate test of each individual’s will and determination. This was a short lived battle though, and being a member of a well-organized team became the only way to take on France’s grand tour by the early twenties.

It is in the structure and running of this team that we can compare professional cycling with the internal set up of a Wall Street bank. To understand the similarities, it’s first worth breaking the cycling team down by the award aspirationsof each type of rider:

  • The Maillot Jaune– The rider who has individually finished in the quickest time overall. This is the equivalent of the head trader, looking to maximize opportunity across the spectrum, and with success determined purely by the highest purchase and ledger (P&L)
  • The Maillot Blanc – The rider, under the age of 25, who achieves the fastest overall time – the young rider’s equivalent of the Maillot Jaune. Here the junior traders with sights on future success and progression are the obvious comparison.
  • The Maillot Vert – The rider withthe most points, which are awarded by stage and incline level, and therefore differfrom the overall winner on timings. This would very definitely resemble the flow trader, concentrating on the more unsophisticated areas of trading, and looking to amass P&L by performing at a very high frequency.
  • The Maillot à Pois Rouges– The king of the mountains who cumulatively reaches the accredited peaks in the fastest time. The direct parallel here is the structured or ‘quantitative’ trader, who confidently analyses and navigates highly complex trades, understanding the nuances and specificities of each.

Based on their own individual agendas, if every team in the tour consisted of just these types, there would essentially be no teams. However, underpinning these agendas is a support infrastructure that includes:

  • Team manager –responsible for selecting the team, rule infractions, team aims and strategic planning. This is the CFO/CRO within a Wall Street Bank.
  • Support riders –  ‘Domestiques’ as they are known in the race support theirjersey hunting teammatesby  motivating and helping set the pace,providing food and instructions and even giving up their bikes in cases of breakages. These are the equivalents of the desk analysts, trader support staff and number crunching members of the risk team, who provide risk taking staffers with as much up to date, verified information as possible regarding market situation, risk appetite and risk adjusted impact analysis of trading strategies.
  • Team Captain –provides real time, strategic analysis and planning to ensure team goals are met, whilst adjusting to situational changes. This is the job most akin to that of the modern risk manager, who increasingly sits in the trading environment, providing subtext and strategic overlay to the risk numbers themselves. They do not curtail risk taking, but ensure that risks incurred are done knowingly and in the pursuit of agreed team goals.

Similarities to Wall Street

Now that we have outlined the responsibilities of a typical Tour de France team, the similarities between this unique sporting event and Wall Street should be even more apparent. The team captain manages the team on the ground, ensuring every breakaway, every attack or even the choice to stay with the pack is in line with the ambition of the team, as well as the risk it is willing to take to achieve that aim.

Being the front rider, well ahead of the main ‘peloton’ has rarely been a route to success. This usually indicates a significant miscalculation of energy usage or stage difficulty, and most often leads to burn out before the end.

Each team is exposed to the same weather, road condition and geographical layout throughout the tour. Each team has its climbers, sprinters and generalists, and training, bike sophistication and technology are equally democratic.

All these things being ‘equal’, the main group of teams represent the consensus of a ‘right’ way to approach each stage. They may be wrong, but they are the consensus. To elect to be an outlier means placing trust inyour interpretation of the same data, or in the abilities of your collective riders to make a ‘tail’ strategy work.

This is exactly the situation faced within the trading markets, with choices and decisions being made that cause an underlying market momentum. Bucking trends, front running or holding back from market opportunities may represent the right thing to do, but questions are raised by senior management as soon as there is distance between the bank and the market consensus.

The role of the risk manager, on the ground, is the same as the role of the team captain, which is to view, in context, decisions being made by their team and others and to make calls as to whether those choices are outside the tolerance of risk. Ultimately the goal is to win, but short term and long term success are two different things. Understanding this leads to better risk management and better long term results.

Of course, the modern dayTour De France uses a vast array of technology to collect data on weather conditions and the state of team riders. Bikes routinely carry equipment that monitors heart rates, cadence and power outputas well as speed. This information can beanalyzed in such a way that contextual strategy can be communicated to the team in real time. In many ways this too mirrors the increasingly diverse and advanced use of technology in the financial markets where firms can now capture, analyze and map vast amounts of information against business plans, and communicate this back to the risk takers and senior management. This process is the beating heart of modern risk management which enables firms to:

  • Understand the risk appetite/tolerance of the bank
  • Clearly communicate risk boundaries to the risk takers View situational risk as it happens and map it against the risk tolerance
  • Monitor the risk being taken in pursuit of the goal
  • Shape the ongoing risk appetite/tolerance of the bank in light of situational changes

The right personnel, a well-thought-out strategy and ambition are the key elements for a successful Tour de France. Teams that boast all of those elements are equipped with the best chance of joining the ranks of the Tour’s racing greats. The same can be said for trading banks where active, on-the-ground risk management, backed by intelligently deployed and utilized technology, is the key to success.

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