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A brief history..: Derek Watson, co-founder, N2

The Secret Sauce

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From a very young age, I have had a strong passion for statistics and probabilities, rolling dice and taking note of the outcome and then trying to predict the next roll; little did I know about independence at the age of 9, but hours of fun, really, I swear.

So, when I received a ZX81, wow, my world changed, but boy, was it slow and longwinded just to print my name on the screen.

I quickly upgraded to a Commodore 64, and the world of programming opened up; however, it was difficult to get further than sorting a bit of data. Even after installing a third-party compiler and library, the time spent versus the result was not really worth it.

Now, aged 13, I chose computer science as an option at school, a totally new course on the curriculum, and it seemed like the future. I had such a passion and curiosity for computing. It was an obvious choice, man, was I disappointed with the first 6 months, writing code on paper and then transferring it onto punch cards to send it to the local data centre. A week later, I would receive a ream of green and white striped computer paper with my code neatly printed out and the words “this is my first program” emblazoned across the bottom. The feeling was totally underwhelming; computers were meant to make complex tasks more straightforward and faster, so what was this all about?

Welcome to the BBC model B. The school raided its coffers and bought 5 brand new gleaming Model B’s, luckily very few people who attended the class displayed any interest. I was free to use it and study programming in Basic, of which I already had some knowledge. The schoolmaster was learning as well, as it was all very new, and it was not very long before we were tapping into the sound and graphics cards (frame buffer) and exploring machine code.

As part of the examination, each pupil had to submit a programme. I set out with the idea of using the computer as a polyphonic synthesizer. Using the qwerty keyboard and graphically displaying a piano keyboard on the screen, users could play an electric piano, although limited to just over an octave, using the arrow keys to move up and down the octaves. The project was written and delivered way in advance of the submission date, (later I would realize that what I was doing in terms of staying up all night to write code would be the norm.) I added several cool features such as ADSR and an oscillator but still was not satisfied. I wanted to expand the project into, as I saw it then, a tool that could be used to try different keyboard brands; by centralizing the other sounds, people could try them all out and then decide which one they would like. Obviously, it was impossible to get additional sound files and much more to replicate them using such a primary sound card. The final build ended up as a store for keyboards, with data and graphics of many models and the names and addresses of all the local retailers. It’s a shame the internet did not exist then my store was a decade ahead of a little-known online bookstore. This also became a little business for me as I wrote several other students final projects. The art of programming in modules, called procs (procedures) in Basic back then, showed how quickly DevOps could happen.

 I started my career in financial markets with Daiwa Europe, quickly moving to Salomon Brothers as a trader on the Japanese Warrant desk. Salomon’s was a great house who were not technology shy. Most systems were just information terminals for the likes of ReutersBloomberg and an obligatory Quick machine for Japanese stocks, but as we advanced through the ’90s and started issuing Warrants as a house, we needed to have desktops in order to model these positions.

I was issued with a Sun systems Sparc workstation; the proverbial mother had genuinely over-delivered. In-house developers had written many models that could be accessed, and although hugely powerful, it was not the right environment for amateurs. We moved onto Windows-based systems across the trading floor, and with that came the possibility to explore what was available. Armed with my new desktop, visual basic, web connectivity, a great boss with vision and a great IT team, we set about creating an online exchange for Japanese warrants.

The project progressed well as we worked together on the system specification, database integrations, pricing models and the UI/UX. We went live and had good client take-up. Unfortunately, the warrant market was coming to an end and with it, our exchange.

I was sponsored by a group to start a convertible arbitrage Hedge fund as the portfolio manager. In the package came 1 quant and 1 programmer. It was the early noughties; full connectivity and great 3rd party software were now available. My quest for the automation of processes started at this point. Buying in portfolio management and valuation software, we then set about to build a fully integrated front to back-office solution. Connecting to our Prime Brokerage accounts allowed us to audit and monitor all positions live. We then set about building valuation tools that would use live prices to calculate portfolio Greeks and run revaluations of the entire portfolio. This was just the beginning.

In 2002 I set up my own shop and launched a convertible arbitrage fund. By 2007 the assets under management had reached USD 500 million and with leverage, gross market exposure was north of USD3b. . There was a lot of individual lines and exposures that needed to be managed. Convertible bonds have exposure to pretty much every main segment of financial markets; Equity, Bond, interest rate, FX, volatility, and credit, to name the primary ones. Building the models that accurately valued and calculated the risks whilst considering the cross-correlation risk was a mean task. Not only did we manage to build this architecture, but we also integrated trading algorithms that would re-hedge our exposure in liquid markets on the fly and turned Hedgeable risk centres into hedged tradable profit centres.

We also developed a sophisticated platform to generate our global opportunity list. Sucking in pricing information on multiple assets from multiple sources, we cleaned and verified these prices, built models to extrapolate pricing where actual prices were not available, and then displayed the results according to search filters. The search filters allowed us to view the market of converts by geo, sector, overall cheapness to fair value and on and on. This gave us a massive advantage as no name would slip through our net, being able to scenario test potential candidates within the current portfolio allowed us to enter into positions that could also hedge other risks, add necessary diversity and enhance returns.

On having achieved this and having brought so much automation to the process, we set about a deep dive research project into the prospectus language of issuers, finding that there were many event-related mechanisms incorporated into these offering documents we wrote models to value these hidden golden nuggets of optionality, (long nights locked in my office with a prospectus and excel) it had spectacular results, the embedded value was nuts. This was then written into the main valuation models, once again raising our efficiency levels through automation. The job of “portfolio manager” was coming to the point of monitoring any warning flags, executing OTC transactions and meeting investors, new and old.

With every cloud comes a silver lining. The need for liquidity solutions post-08 led me to develop Wake2o, a specialist firm for matching buyers and sellers of illiquid assets, primarily hedge fund assets. I designed and had built an online exchange named Wake-x, and over 18 months, we managed to have over 1000 users register. This experience taught me many valuable lessons about creating a networking platform, know your audience being the main one. Wake-x was based on a very narrow vertical, Hedge fund side pockets. The market had a limited number of buyers who were very happy with the asymmetry that existed; this led them to abandon the platform as they did not want a competitive arena and preferred operating in the shadows. On the other hand, sellers were strong users of the system, mainly because they could see the price history and volume of different assets. It was an excellent tool for Wake2o and led us to run some significant processes for Tier 1 financial institutions.

The culmination of my career in finance and my passion to utilize the best technology have at last collided. Technology has exploded over the last decade. Although this is not really fully appreciated at the frontend experience level, it’s the backend that has really seen the major changes that allow us, to only now, embark on the building of N2, our private markets platform. For the first time, it is now possible to build a truly intelligent platform that digitalizes mundane human processes, literally in real-time and all factual. I am so excited and truly passionate about this new project, using the amazing tools we have to make the processes that make our lives slow and laborious a thing of the past. I see N2 as a pure enhancement to our work lives, not a replacement, human capital will always, and should always, remain central to important decision making.


I felt it was important to share these personal snippets of my background if only to serve as self-reflection it has been an enjoyable and motivating thought process. But moreover, since starting on this journey, one of the most amazing parts has been engaging with so many interesting and energetic people that have shared their illuminating ideas and helpful knowledge. This encouraged me to share with you my story. I very much look forward to continuing these great exchanges and hope that not only will you follow the next chapter but actively share and play a role in it!
Derek Watson.
Follow Derek on LinkedIn. Derek is the co-founder of N2 Technology Limited.