Financial technology: big data, greater expectations
In an age of big data, investors are making increasing demands on their managers, who are also faced with rising security and regulatory challenges, writes Vanessa Drucker
It is easy to forget just how quickly information technology has become central both to corporate life and to life in general. It was only in the late 1970s – within the lifetime of many of our readers – that personal computers started to take off. And in the mid-1980s many mobiles were still about the size of a brick yet could only make and receive phone calls. Text messaging did not come in until 1992, let alone the legions of applications that are now available on the average smartphone.
The information revolution has clearly brought both enormous advantages and difficult challenges. It is hard to imagine pension funds or asset managers being without access to the rapid data communications, huge data storage capacity and immense number-crunching power that has become routine. But such developments have inevitably raised questions about appropriate regulation and agreed standards. On a more sinister level, the danger that dishonest competitors or even terrorists can gain access to corporate systems is causing increasing concern. As a result, cyber security is climbing up the priority list for financial institutions.
In practical terms, asset managers are having to describe holdings on a more detailed basis than ever before if they are to maintain a competitive edge. For example, it would no longer be sufficient to report an allocation in a long/short hedge fund; today, one might report it broken down into a 75% long stake in China A-shares with a 25% position in Chinese debt, and enumerate the reasons why. “They [managers] must go way beyond Microsoft Excel charts, to aggregate on a big-data scale,” says Josh Smith, CEO of the US software and analytics company Solovis.
As a consequence, endowments and pension funds are demanding more from their fund managers, “seeking to influence investment approaches and obtain lower fees, especially for larger, concentrated positions”, says Smith.
He adds: “It requires the right internal systems to be able to drill down to underlying details and report to investors on risk and exposures.” Newer technology can provide any degree of transparency and aggregation. In technospeak, the ability to aggregate data through application program interfaces (APIs) between systems, and more modern approaches to communication, allows for a faster and more streamlined flow of data.
At the same time, regulatory requirements are driving firms to increase oversight. The list of new regulations and directives is daunting: FATCA (the US Foreign Account Tax Compliance Act); Mifid II (EU rules on financial markets); Basel III (international rules on bank regulation); AIFMD (for alternatives); and Form PF (a huge reporting burden for US investment managers). They all spell headaches and cost. Correct reports must be filed electronically, on a scheduled basis.
In the past, firms built the necessary infrastructure themselves, and only outsourced functions such as audit and accounting. “Today’s firms are no longer just looking for a technology solution, but a holistic platform for the entire back office, which marries technology with services,” says Martin Sreba, senior director of business development at Advent Software. They are inclined to switch from the fixed costs of in-house employees, such as salaries and training, to a less expensive, variable-cost structure, dependent on outsourcing.
“Today’s firms are looking for a holistic platform for the entire back office, which marries technology with services”
In a world that is vulnerable to large-scale hacking, the protection of personal and proprietary information is imperative. The recent development of ‘chat wars’, the battle over the use of instant messaging systems between the Bloomberg and Symphony platforms, illustrates the paramount importance of messaging. It has become the primary means for employees of financial institutions to communicate both with each other and with clients.
Conventional thinking suggests a David and Goliath relationship between little Symphony, and giant Bloomberg. David Weiss, senior analyst at Aite Group, hastens to explain that Symphony represents far more than an instrument to beat down the rival platform. “If Symphony waved a magic wand and captured all Bloomberg’s 300,000 subscribers, Symphony would consider that a gross failure. It wants 30 million.”
At present, chat and instant messaging are the weakest elements in Google’s portfolio. Symphony is backed by about 30 powerful investors, including Google itself (rather than Google Ventures, which is the entity that normally invests in start-ups). Bloomberg terminals perform well in a front-office context, where traders appreciate the functionality, despite the hefty price tag. However, as a secure messaging platform, Symphony aspires to gain a network effect through financial services, even beyond capital markets.
The Edward Snowden disclosures and the striking down of safe harbour privacy rules in Europe have intensified the focus on security. “The US is still 30 years behind European laws, which are more sensitive to data protection, especially in Germany,” says Weiss. Symphony exemplifies the current trend towards ‘bring your own key’ – your own encryption. It is designed from the ground up, so that only the users hold their own keys, while they can see no-one else’s data, which eliminates snooping.
Symphony is only about competition with Bloomberg on the surface. At a more fundamental level, it addresses the rigour of communications. Weiss adds: “It’s still barely a stream, but it wants to become the Mississippi – or the Thames.”
As for cyber security, any discussion must include the cloud – the network of servers used to store, manage and process data on the internet. Although the cloud has gained popularity, among consumers are some companies that the asset management industry seems cautious about. “Investment managers were reluctant for a long time to embrace it,” says Advent’s Sreba. They were wary of losing market position if someone stole their ideas, and investors did not want to risk being hacked. In the mid-2000s, who would put personal information into the cloud, with no control over the data? Times are changing. With increased awareness of social media and confidence in cyber security protection, investors are less inclined to insist on data being kept in-house. Better understanding of global regulations has help to relax those restrictions, according to Sreba. That attitude has prompted managers themselves to attend to security.
Technology is helping to flatten research across the world. It used to be more challenging to identify local boutique managers in far-flung locations, but today’s clients are demanding more depth and global coverage. eVestment, which has been tracking data for 15 years, notes a broad shift away from anti-home bias. “Technology made it easier to see the trend in real time, for better reallocation and rebalancing decisions,” reports eVestment’s chief operating officer, Matt Crisp. “Previously, it took two or three years to spot a macro level shift, but now that we capture data on a monthly or quarterly basis, and analytics sit on top, we can evaluate on a nearly real-time basis.”
A similar principle applies to benchmarking among firms, to obtain a quantitative assessment of competition. Crisp can tell asset managers in which reports they were included, with whom, and how often. Managers can then present themselves as complementary to a portfolio, for added breadth. He says: “The technology gives us a statistically significant sample, with 2.5-3m screens a year, at both firm and product level.”
Social media adds another dimension, as managers may buy the so-called ‘Twitter fire hose’ – a syndicated feed of all the millions of tweets sent in a day – using it to feed unstructured data in an attempt to determine trading algorithms. “It’s expensive, but you need not buy the entire hose,” says Denise Valentine, senior analyst at Aite Group.
Financial services are always hotly competitive, but can also be collaborative. Fund managers meet at conferences to share analysis, research and thought leadership. Interactive technology helps to disseminate strategies, from a data analytics perspective. “What’s exciting,” says Crisp, “is that connections can now happen in a single to multi-peer environment.” After an investment manager departs from a conference, the momentary sense of community, especially in the consulting space, can live on in shared ideas on interactive platforms.