How Data is Transforming Financial Markets

December 22nd, 2021 3 minutes read

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The world has advanced toward a new digital asset management era. Being a part of the change and adapting to new realities is not a simple task. Automation, new asset classes, and high market volatility are all defining trends in the financial sector. 

Data is reshaping asset & wealth management. Structured, unstructured, and alternative datasets have become an invaluable part of business processes. So much so  that financial institutions’ spending on alternative data surpassed $7B in 2020 alone (as per Deloitte Center for Financial Services).

We see platforms, strategies, and markets becoming more sophisticated and producing more accurate signals across multiple asset classes. By and large, most of the focus has been to cover equity strategies. Still, fixed-income and other classes are getting attention as well.  Smart and quantitative investors have been on it for several years already.  

The concept of ‘smart’ is increasingly used in the more generic commercial environment. Now it refers to the capacity of adopting a different approach to managing physical and financial assets when necessary. Furthermore, the concept of smart asset management (SAM) came into being by incorporating proven methodologies and applying these in real-time management structures.

Data in financial markets  has never been more valuable. Trading is about information. Whoever has the best and the fastest information gains the edge. Today, traders are also challenged with managing the sheer amount of data in financial markets. Traders who can consume and make sense of the data the fastest have an edge. And that edge can be built on through modern technologies, like artificial intelligence.

We explore data’s impact on financial markets over the following years. This includes which data types will be most valuable, who will provide that data, and how traders expect to use said data.

According to an article from Refinitiv,  “... an overwhelming 85 percent of banks, investors, and capital markets service providers plan to increase spending on data management.” This makes the value of data in financial markets essential. The quantity and velocity of market data will continue to grow alongside trading volumes and the number of tradable instruments. At the same time, tolerance for errors and acceptable latency for delivering that data will drop. Significant investments in market data infrastructure by those up and down the value chain must continue for the foreseeable future.

In the search for external data, 41 percent of market participants believe that leading market data aggregators will continue to act as the primary data source for trading desks (per Refinitiv). They are expected to beat out all other potential providers.

Why? Because they have the ability to find, normalize, and distribute data around the world effectively and accurately. Latency is even sometimes counted in microseconds.

For investing and measuring execution quality, the evolution of analytics is just as critical as acquiring the data itself. In other words, finding information is not enough. An overwhelming 95 percent of trading professionals believe alternative data will become more valuable to the trading process and offer a market advantage in the coming years (from Refinitiv).

We note that in a noisy, rational-expectations economy, private information and supply drive asset prices. The relevant consequence is that with multiple (at least two) sources of uncertainty, traders cannot fact-find effectively. However, improving their private knowledge equips them with actionable information.





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