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December 1, 2000

Merrill's Preventive Plumbing

By Steve Hagis

Also in this article

  • Merrill's Preventive Plumbing
  • Page 2

A Harvard Business Review case study describes the nightmare of every Information System (IS) manager. You arrive on Monday morning to find that a weekend conversion of your financial system has failed. "Imagine a water main has burst, and water is running through the halls," the IS manager says. "Now imagine that the water is money."

With billions of dollars of business at stake, Merrill Lynch & Co. devised a new information system to overcome the problems caused by converting from a fractional to a decimal system. That was our preventive plumbing.

Let me explain. The Firm Trading System (FTS) provides our balance sheet. When Merrill produces its financial statements and regulatory reports at the end of each quarter, FTS provides the data. When a broker executes a sale, Merrill decides whether it will hold the security, based on risk/return, cost of funds, available capital and other criteria. If the security is held as a house investment, it is accounted for by FTS. The system is also used to keep traders honest. That's because they must balance the firm's accounts with their books.

FTS processes more than 50,000 trades daily. The securities processed are complex. FTS reports Merrill's inventory of equities, preferred securities, corporate bonds, government bonds, municipal bonds, warranties, options and mortgage products. Each product has its own set of rules. FTS supports over 100 screens, more than 500 applications, and is used by 150 accountants. Even a small error in FTS might quickly accumulate into an offag, or discrepancy, totaling millions.

On a daily basis, the funds processed exceed the annual GNP of some countries.

In making the switch to decimal pricing, the first risk we took was converting our database from IDMS to DB2. Our concern, based on industry reports, was that IDMS (an older database technology) couldn't handle the eight places to the right of the decimal.

The second risk we took was converting to an eight decimal system in one step, rather than taking the phased approach, permitted by the Securities and Exchange Commission, of four decimal places now and four later.

Our reasoning? That the greatest work and the greatest risk were in the testing of the application. From our Y2K testing, we knew that to fully test the functionality of FTS would be a mind-boggling undertaking. A one-step conversion cut our testing costs by half.

To manage the risk, we partnered with TACT, (The "A" Consulting Team), a New York-based consulting firm. As specialists in conversions from IDMS to DB2, TACT had both tools and talent, from seasoned project managers to off-shore programming resources.

To prepare for this conversion, team leaders from TACT, in partnership with Merrill's technical staff, established project scope, analyzed, and inventoried the 500 plus applications dependent on FTS.

To further control risk, we made the critical decision of running the new decimal system in parallel with the old fractional system. The output of both systems was meticulously compared and reconciled by automation and, when necessary, by hand.