The Data Discussion

The future of business. Period.

The U.S. stock exchanges have proven that selling data can be a very profitable business. Yet their example also illustrates how the sale of data can sometimes become thorny. Any Wall Street professional knows the debate over Exchange data ownership.

Is order-execution, the Exchange's data to sell?

Or does that data belong to the underlying customers who originate the orders?

REAL MONEY

The answer to this question certainly matters to the stock exchanges. Their data revenue profit sharply increased from 2010 through 2015 - up an amazing 62%! Yet during this same period, their execution revenue declined by 75%. So this represents a real shift in the business model of the stock exchanges. One that is perhaps not being talked about enough with a public who still largely views them as non-profits. And this new business mix is still the case. More recent figures reveal that revenue from the Exchanges' data business grew an additional 9% to $5.9 billion in 2017, according to research firm Burton-Taylor.

On the flip-side, all this Exchange revenue is really a growing cost to the asset management community. And the Buyside doesn't like the increasing bill attached to information that they perceive to be their own. Maybe none of this is news to you.

But here's what is new: the data conversation no longer involves just about the Exchanges.

COTTAGE INDUSTRY

Many of the world's largest financial firms are now hiring scores of data scientists. Both the Buyside and the Sellside have entered the fray. They are now both actively seeking to harvest internal information that may be sold back to their respective clients in packaged form.

The growth of A.I. - and more specifically, machine learning - is driving this development. The Sellside already has multiple, competing A.I. offerings in the marketplace. The Buyside is just getting out of the starting blocks. However, the Buyside spend on "alternative data" is forecast to grow from $656 million this year to $1.7 billion by 2020. They require such data to build their own A.I. tools....ironically, to oversee the Sellside's tools. To meet this data demand, a burgeoning cottage industry of alternative data providers has sprung up. And it is all over the map at present. This "alt-data" is being applied to everything from streaming analytics and algo backtesting to news-monitoring and regulatory reporting. 

EDGE

So Wall Street's data conversation has moved well beyond trading now. Many of the current projects that financial institutions are now tackling involve "non-markets" data. This means things like foot traffic, cellphone signals, satellite images, credit card usage, point-of-sale transactions and geospatial data. Want to buy a pizzeria on Main Street? No need to guesstimate the number of customers per day. You can get the exact number of building entrants from the SIM card data that can inform the pricing of your offer for the business. You get the idea.Thus far, the main challenge for all these applications has been data integrity. Because the manner of "cleaning" your acquired data can make or break its effectiveness. Scrubbing and mapping to universal identifiers is required to create statistical trend-spotting. Get it right and you've created "edge." get it wrong and you've invalidated the inherent value of the information which you hold.

OLD HAT

Retailers have a long history of selling their customer lists, so in a sense, none of this is really new. But as information collection becomes so comprehensive and ubiquitous, a broader question of ownership is arising. Which takes us back to the stock exchanges at present. Except that now, this question is beginning to be asked across all industries.

To whom does customer data belong?

A growing chorus believes that consumers should be rewarded in some way for a valuable asset that is being directly supplied by them. Yet today they are paying dearly to acquire this exact data.

My opinion will not settle the societal question. That is not the intent of this article. Rather, it is to alert you to the scale of the issue and how it reaches far beyond Wall Street FIX tags. It turns out that Tag76 "Last Market" was merely the canary in the coal mine.

STORM BREWIN'

 There is a wave washing across the entire business landscape. So regardless of which industry you call home, you had better start closely following the data discussion. Because how things turn will decide tomorrow's winners and losers. This will not be a slow evolution. Within a few short years, major players will be up-ended and upstart firms you never heard of will take market share. We are entering a new chapter in business and it will form a schism right down the field. The two camps will be those shops who utilize data effectively....and those who do not.

Do not make the mistake in thinking this is about who has the data. Or even where the data comes from. Those are secondary challenges. The fundamental issue is who knows how to effectively wield data for a positive result.  Last week a top A.I. Hedge Fund announced they are folding after less than two years in operation because they have not been able to generate a positive return this year. And they had all the "Big Data" they needed. Apparently, data is about more than just bits and bytes. It's really about proper business execution. There are those who will do this....and those who will not.

Make sure you're positioned to ride what's coming.