Regulations Point to Increased Big Data
Regulatory risk is reshaping the ways firms collect, store and manage data.
The requirement for firms to have all information available to provide transparency after a trade has occur has led to the need to collect mass amounts of data that document trade routing decisions.
This has led to an explosion of the quantity of data being stored by financial firms, with a new focus on items like ‘big data’ within the financial services sector.
“Data collection and retention have been hugely affected by regulatory risk, as well as the increased rate of regulatory changes within the marketplace,” said Robert Newhouse, chief strategy officer at Victor Securities.
As an introducing brokerage/prime brokerage firm, Victor assists its client base of hedge funds and proprietary traders in navigating the regulations relevant to their business, and offers advice on how to successfully implement newly crafted regulations, or ensure that trading operations fit squarely within the existing regulatory landscape.
Victor Securities views regulatory risk as an opportunity to assist its customers with understanding new rules, and create an even greater value proposition to its customer base by acting as subject matter experts on impending regulation change.
“In general terms, regulatory risk is the risk that a change in the current legal and regulatory regime may impact current business,” said Newhouse. “Interestingly, Victor Securities views regulatory risk as both a driver to our business, as well as an opportunity to service our client base.”
From a tactical standpoint, one of the major pain points associated with regulatory risk is the need to rationalize execution costs.
With the rise of electronic trading and regulatory mandates for best execution, trading desks are working with an increasing number of execution venues and, in turn, are faced with managing trade execution expenses across a growing number of partners.
“Trade execution costs are one of the largest expense items for capital markets firms,” said Chris John, chief operating officer at Bonaire Software Solutions, a provider of revenue management software for investment managers and capital markets firms.
Many firms still manage trade execution expenses on Excel spreadsheets and as a result are incurring higher trading costs because of insufficient operational control and visibility.
“Tight payment deadlines and an ever-growing mountain of data leaves firms with a daunting task—reconcile as much as possible,” said John. “With a constant flow of incoming bills, the task of manual reconciliation is prohibitively expensive and time consuming.”
Today, expense managers are forced to choose between investigating invoices with simple fee structures and selecting invoices that are more likely to contain errors.
“This perpetuates a backward-facing cycle, wherein accounting staff are in a constant game of catch-up with an endless stream of vendor data,” said John. “The core focus becomes paying bills on time, typically with a low degree of confidence, instead of validating trade fees, leaving scant time for macro-level strategic decisions such as competitive cross-vendor pricing.”
Bonaire has implemented new functions within its Revport fee-calculation platform that automates the trade execution expense calculation and vendor payment recompilation process.
Utilizing Revport’s “rules engine”, the system can calculate and allocate trade execution expenses back to the appropriate cost centers, thereby minimizing “fee leakage”.
Data collection and retention have been hugely affected by regulatory risk, as well as the increased rate of regulatory changes within the marketplace.
Firms now collect and retain not only mandated order and trade record activity, but have also started to collect ‘meta’ information including market snapshots to defend order routing decisions, as well as liquidity snapshots to allow for back-testing of developed strategies.
“As such, data collection has grown into a major initiative within the industry, sparking new paradigms such as big data usage and parsing,” said Newhouse at Victor. “The amount of new data points being collected, coupled with the ever increasing amount of quote data, has led to a major explosion in both data collection as well as data retention technologies.”
Regulatory risk forces the financial services market to implement technologies that not only address specific regulations, but make it easy to shift workflows based on regulatory change. As such, there have been advances in the flexibility built into technologies such as order routing mechanisms, to ensure that those technologies can survive regulatory change.
“In order to ensure our customers maintain their productivity levels, we can assist with meeting Form PF reporting requirements [designed to provide greater disclosure and transparency], or to better understand the Jobs Act [intended to encourage funding of U.S. small businesses by easing various securities regulations] and its effect on the firm,” Newhouse said. “Furthermore, brokers have become increasingly relied on for their subject matter expertise so that firms can design innovative workflows that fit within the current or proposed 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.