Using Virtual Reality [VR] In Bond Market Analysis

To many, VR for business purposes seems to be no more than “eye candy”, but let me use a scenario taken from Michael Ridpath’s 1995 novel ‘Trading Reality’ to illustrate the power of using virtual reality to show data relationships in seconds, that would not be interpreted in hours in the bond trading environment.

Scenario

For the past two years, the US interst rates had fallen month after month. Bond prices had risen month after month.

Unexpectedly, Alan Greenspan issues warning that US interest rates are abnormally low and will move up shortly.This means bond prices will fall, even more when people started selling to protect their profits, to hedge their positions or just through a mixture of fear and panic.

As bond traders frantically seek to sell their exposed bonds and find hedge cover, little time is given for any in-depth analysis.

Our bond trader Mark Fairfax dons his VR Headgear, picks up the wand pointer and proceeds to explore the international bond landscape.

The headset emulates a pair of sunglasses with two liquid crystal displays rather than sunglass lenses.
The wand is a six inch pointer with control buttons on the handle.

VR Representation of Worlds Bond Market

The international bond market is represented in VR as a landscape of rolling green hills stretching away to brown and then grey mountainsides.

The hillside is made up of a series of ridges. Each ridge represents a bond market. The higher the ridge, the higher the yield.

The hillside is sloped from left to right, with the shorter maturity, higher yielding bonds to the right. By looking at the landscape it was possible to see immediately how the yields in the different markets related to each other.

The plains in the foreground represented the Japanese market with yields of only 4%, rising through Americal, Germany, France, and the UK to Italy towering int eh background at a yield of 9%.

The hills are dotted with clusters of buildings of different sizes and colors, and national flags. An eagle flying over a group of tall buildings, halfway up the hillside.

At the foot of the hills was a clock tower.

On a normal day, the whole landscape shifts gently.

AND THEN THE ANNOUNCEMENT

Waving the wand moves the viewer over the landscape. Pointing on the clock tower, and making a few clicks, I can move the time back over an hour, a few minutes before the announcement. I then press the fast forward icon and watch.

For the first few seconds, everything is still. Then suddently the hillside begins to heave and buckle. First one ridge, then another moved upwards as the whole landscape rises, reflecting the sudden rise in yields and fall on bond prices all over the world.

In amongst this overall rise, I look for sections that move up more than those around it.

Then rewind the simulation positioned at this point at ground level. The portion that rises the fastest indicates a bond that is incredibly cheap. Each building on the hillside is a particular bond issue. Once again, the height of the building represented the yield, the higher the building, the higher the yield. The aim is to buy a bond whose yield had suddenly increased in the market turmoil for no good reason.

Rewinding for the third time, in amongst the buildings I can see which bonds thrust up the most from the lowest previous levels. The insigna on the side of the building gives me the name of thebond.

So now I have found and brought bonds that are cheap.

I now scour the hillside for bonds that were too expensive.

The eagle is the intelligent software agent, which can be programmed to search data according to certain criteria. With a couple of clicks, I program the eagle to find bonds that have become significantly more expensive in the last two hours.

The eagle flies swiftly up the hillside to circle the Dutch flag. I followed to find it hovering over a five year Dutch government bond, whose yield was so low it had created a hole in the ground.

This is the bond to sell.

On normal days, the long term US government bond hillside would be a smooth gentle slope, scattered with similar one storey bungalows. Today it looked like a Tuscan hillside with a jumble of different buildings of different sizes and shapes, perched on a jagged hillside.

By overlaying a color sheme you can see what positions you hold, which ones are long and which ones are short.

Once the landscape stops shifting , this indicates the market has calmed down.

Checking again in a few weeks showed that a number of bond relationships that had been shaken out of line after Greenspans announcement had slowly worked their way back to their pre-crash levels.

The Renault building was back down to its original height. That represented a profit for us.

Fanciful? Absolutely not! Valuable? Incredibly so. There is no way that the complexity of data could have been represented in 2D; nor could the relationships between data groups be analyzed in time to make the necessary bond trades to avoid a major disaster in our bond trades.

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