They say something is only worth what someone is willing to pay for it, yet this is not the case in the sexy world of mutual fund, ETF, and synthetic financial product unitized-pricing.
Prices (NAVs) are calculated daily by software and investors rely on being told these prices.
Things turn pear-shaped very quickly if prices cannot be accurately and quickly calculated.
This is what happened this week, triggering frantic activity within affected companies and also drew regulator attention as groups sought to assess how much damage had been caused.
The players involved were Sungard (software provider), BNY Mellon (custodian) and a whole heap of asset managers. A software upgrade by Sungard fell over and with it creating a domino-like tumble further along the food chain.
In the world of mutual funds and ETFs, it turns out something is only worth what the custodian of an asset manager tells them it’s worth… and the pricing is only made clear to the custodian by what the software provider tells them the price is.
Confusing, eh? Yes, particularly if the software falls over.
It’s meant to arm the software provider with the knowledge of what something is worth. In this situation the software provider cannot accurately relay the pricing to the custodian, the custodian cannot tell the asset manager, the asset manager cannot tell the broker/fund platform, and these folks cannot tell the client, or at least they can’t provide an accurate price.
Incorrect pricing creates mayhem.
The added complication is that this happened right in the middle of the most volatile few days of market activity since the financial crisis, and surely has exacerbated the extent of the mispricing and the subsequent trading that was conducted.
It really hammers home the extent to which technology drives our world today, and reinforces just how damaging a significant cyber attack phenomenon would be if one were to successfully cripple the industry.
This is just a minor software blip, but because the industry engages in trillions of transactions every single day, a medium sized event or bigger would create a ripple many times the magnitude of the initial problem.
Probably time to upgrade our Norton Anti-virus software…