Welcome to the first entry of the ValueStream Labs (VSL) blog, where the VSL staff and its advisors and partners will bring you short and relevant insights around emerging use of technology in financial services. As we continue forward in the space - beginning with a focus on companies in the capital markets and asset management space but eventually expanding to verticals like wealth management, credit markets, and insurance - a few key theses about the market are guiding the way:
The WEBvasion
Financial services has long been one of the last industries to embrace web technologies. Security concerns, complex transactions, and entrenched relationships have conspired to create an industry that still functions in silos with tight controls around communication. To some firms, hiring the best analyst or the banker with the biggest rolodex is the key to differentiation. If the Internet has taught us anything, it's that the web tends to reduce communication friction and information asymmetry...meaning the differentiators today are increasingly becoming skill, content, and the ability to leverage a social graph. We expect to see more financial activities occurring in a distributed web context - particularly when it comes to research, analysis, and execution.
Low Frequency trading
Data is the king...long live the king. This is not news, but we believe it is becoming increasingly more difficult to generate alpha through high frequency trading. Trade times have reached the microsecond level, and it is next to impossible for new high frequency shops to open their doors and gain competitive footing.
At the same time, we are seeing an explosion of new data sources that are helping to predict market performance based on fundamental vs. technical analysis. These include new sentiment-based startups such as Dataminr and collaborative research and analysis tools like Estimize (an early VSL partner company). Many of these datasets can be linked to event-based or earnings related strategies, which are showing demonstrated alpha but typically act on slower timeframes compared to High Frequency technical price arbitrage strategies.
The data-risk-pricing triangle
The fundamental concept behind risk has always been assigning a potential range of outcomes in order to understand the potential for gain or loss. When used defensively it is called risk management, when used offensively it is risk based pricing.
Banking (both commercial and investment) has historically been about understanding and valuing this band. As we use data more and more to subdivide sources of risk, the band gets narrower and narrower...resulting in lower (and more accurate) risk based prices. This shifts the balance of power in a financial institution from risk taking to technology and data science. Risk will always play a vital role inside financial institutions, but the picture of risk inherent in any specific counterparty is becoming clearer and clearer through the use of technology.
Buy side is the new sell side
The sell side has always played an important role in financial markets, acting as a central counterparty in financial transactions. The sell side has played an important role in connecting relevant parties, intermediating and transforming risk, and generating ideas. Regulation and technology are placing serious pressure on existing business models in sell side institutions, and we see market infrastructure and peer-to-peer networks playing a larger role in connecting parties and facilitating transactions. Banks will continue to play a significant role - particularly with regards to risk transformation - but upcoming Basel III regulation will hamper larger banks ability to engage in this activity.
Seeing is believing
Numbers dominate in Financial Services - analysts, traders, investors, and advisors spend hours staring at them trying to glean a single insight, and the industry has proliferated the use of this data in seeking a competitive advantage. One screen became two screens which became nine screens.
We believe users are reaching the edge of usefulness of text-only analysis. Visualization tools will become an increasingly important weapon in the face of ever-increasing amounts of market data. The equities industry has long been a significant user of charts for technical analysis, but there are other datasets besides stock data and other asset classes where visualization tools can provide the next stage of analytical decision making...and we're excited for it. Our latest addition to the ValueStream family, ChartIQ, is leading the charge in finding news ways to visualize institutional datasets in an HTML5 environment.
We look forward to using this blog as a forum to share our experiences building VSL and working with our partner companies, as well as to spark debate about the themes introduced above and more. Please feel free to share any thoughts or feedback as we go.