Capital Markets Enter New Era of Data
Capital markets are at the dawn of new era in the history of data where, for some firms, their information might become more valuable than their core business offering.
Consultancy Celent said in a report, Emerging Trends in Emerging Data, that the explosion in the amount of of data together with the decrease in costs of storage costs and advances in machine learning raise the question of whether data is a new commodity, or whether the same piece of data in two different hands, or prepared in two different ways, has different value.
Brad Bailey, Research Director at Celent’s Securities and Investments Group, said in the report: “In a time when the incremental value of investment alpha is life or death the ability to glean insight from data is the essential role of the capital markets. Many techniques that are being leveraged to unearth and utilize alternative data will define the market data of tomorrow.”
He added that while a few quantitative firms have already taken advantage of this new reality, many buyside and sellside firms are in the learning phase, similar to when the world of low latency trading emerged. “For most, from a value potential, compliance, legal, infrastructure to leverage perspective, we are at the dawn of new era in the history of data,” said Bailey.
Celent said market data will include new data points, harvested from IoT, satellites, wearables, web interactions, and crowdsourcing, and will yield unique information and sentiment. “For other firms, the value of their data might surpass the value of their core business offering,” added the report.
This view was echoed by Tom Doris, chief executive of OTAS Technologies, who said in a presentation this month that the ability to mine trading data created by new regulations will become financial firms’ most valuable asset.
Doris spoke at a RegTech Forum event in London on regtech and the buyside. He said: “MiFID II can be a catalyst as firms will be creating a huge database of post-trading activity. Few people appreciate that the ability to mine this data will become a firm’s most valuable asset. ”
MiFID II, the regulations coming into force in the European Union at the start of next year, creates new transparency and reporting requirements for trades across asset classes. OTAS was founded in 2011 to analyse market data and highlight actionable information for equities trading to fund managers in an easily digestible visual format and was acquired by Liquidnet, the institutional trading network, this year.
“Firms with best data will emerge as the winners and this is the new frontier” added Doris.
Celent said the broader asset management universe, beyond quant funds, will consider using alternative data to add overlays to existing strategies or to review alternative timeframes for investment. Many will consider investing with, or partnering with, specialized data firms receiving insights and factors, while others might take an API delivery.
The consultancy added that while many sellside firms are making their clients aware of this space, they are generally far behind in using new data sets for their own trading, or in support of clients, especially if they need months to provision servers.
Oliver Wyman, Celent’s parent company, said in a report on research unbundling this month that banks are working to leverage new technologies and shift their efforts from low value activities, such as commoditised stock reports, towards more valuable research activities, such as providing investment managers with proprietary data sources and access to analysts and the corporates they invest in. “Unbundling will accelerate this trend, in part by requiring research teams to better articulate and demonstrate their value to end-clients,” added Oliver Wyman.
MiFID II requires fund managers to either pay for research themselves from their P&L or to use a research payment account, where the budget has been agreed with the client. Asset managers can designate a third party to administer the RPA on their behalf but still have to track their consumption of research and assess its quality.
Celent concluded that investors and traders who thought alternative data was a distraction a few years ago are now very eager to invest.
“It is just a question of whether they are going to build an alternative data team and infrastructure for $20 million or work with a specialized partner in the space,” said the report. “We expect to see considerable strategic changes as the road to success in emerging data is around a robust infrastructure for using an always changing data stream.”
However, the consultancy also warned there are important compliance and legal considerations in considering new data sets which are being examine by regulators.
“General Data Protection Regulation (GDPR) will profoundly impact this space as it shifts most data discussions,” added Bailey. “Innovative firms in privacy engineering and automated data privacy will have clear opportunities to play a role in the processing, delivery, security and audit moving forward.”
GDPR comes into force in the European Union on May 25 2018 and changes how businesses and public sector organisations can handle the information of customers. Consumers get new rights to access the information companies hold about them and there fines are fines for companies that do n to comply with the regulations.
Institutional investors are increasingly considering opportunities in the digital asset class.
The consolidated quote system for corporate bonds has raised funds to expand outside the US.
SEC's proposed rule could result in dissemination of incomplete, inaccurate and misleading data.
SEC requires a review of data on non-listed securities before initiating or resuming quotes.
Broker-dealers will be able to meet the new SEC requirements.