DATA AND ALCHEMY
In my 5 predictions for what will happen in the market data world for 2021, (www.marketdata.guru/2021/01/05/2021-market-data-predictions-5-crystal-balls) my first was to assert companies believing their data had commercial value will attempt to capitalise of their digital assets.
The ability to ‘Turn Data into Dollars’ is a modern, and very achievable, form of alchemy. So what data is the market on the prowl for in 2021?
Even if you have the right data, what are the incentives to develop a revenue based data business and what challenges must be faced and overcome?
ON THE HUNT
Given the existing levels of saturation, market emphasis switches to differentiation, availability of original data backed by market depth and history, utilising analytics crafting the ability to manipulate data using investment decision tools. Subsequent performance then needs to be benchmarked.
So, which 5 areas grab our particular attention?
- Indices & Benchmarks. The 2010s saw 2 rolling events driving the market into the 2020s. 1. The substantial consolidation in the index industry with the traditional index creators buying out the financial institutions OTC indices, and 2. The transition from LIBOR and its fellow travellers to new benchmarks. According to Deloitte’s 2021 ‘Investment Management Outlook’, passive funds performance is thriving compared to active funds, underlying an ongoing trend. Given passive funds are benchmark driven, this bodes well for indices in 2021. We expect growth in new ways to benchmark, led by the rapid increase in the number of ESG (40%*) and OTC markets fixed income (7%*) indices. In the new frontiers of OTC indices anticipate competition with multiple data sources pricing the same asset classes allowing new index creators to enter. These new players will utilise alternative (and cheaper) business models to fashion then build their market presence. *Index Industry Association 2019/2020
2. Analytics. Having raw data is one thing, the question then becomes how to leverage it? Data consumers will increasingly rely upon the predictive outputs of their decision making tools. The use of analytics will expand through greater usage by Wealth Management, in the retail market, and notably in OTC markets as more data comes online bringing a greater range of trading signals to accurately work with.
Developing high quality models is expensive and time consuming, maintaining relies on keeping staff, 2021 widens the door to third party analytics providers who increasingly process the data for their clients as well.
3. Commodities. The oldest markets in the (financial) world, yet remains one of the most opaque. The proliferation in commodities trading is leading to greater demands for transparency, reflecting the search for new datasets and data sources to obtain a better view of the overall market to improve on the existing disjointed environment.
In 2021 this data pursuit will wend its way towards the specialist IDBs, and primary sources, especially in Latin America (Brazil) and Asia (China, Malaysia & Indonesia) where commodities production takes place. Focus is the areas of mass feedstock like grains, especially soybeans, along with elements needed for consumer electronics, i.e. rare earths, lithium, tin, aluminium, and the petro-compounds for constructing plastics. Look out for market auction data
4. Alternative Data. It is time for commercial data to truly come into its own. Previously timeliness has been an issue, but one of the impacts of COVID19 has been an emphasis on supply chains, especially for pharma and medical products. This means for 2021 dataflow will follow logistics, developing improved coverage for transport, freight, and shipping information.
Equally with so many people forced to work from home, demand has grown for telecoms services, consumer electronics, and peripherals. According to OpenVault, the broadband usage rate exploded 47% in 1Q2020. Sources with access to supply chain data tracking data, satellite based information, service usage data will have an edge plus watch out for specialist investment products, such as wines, whisky, and collectibles
5. Trading Data. Banks and exchanges possess a breathtaking database of market trading data never commercialised for reasons of confidentiality, let alone for internal performance benchmarking. Progressively onerous reporting requirements are data hogs, and one of the few ways to protect confidentiality while meeting regulatory standards is to employ trading data in partnerships with competitors.
Not that this is anything new, just herding cats is not easy, with few initiatives proving successful. In 2021 Banks will realise that leveraging their trading data will give them both a competitive and revenue edge, while exchanges will get the opportunity to provide data their members and the asset managers need.
If the demand exists, the natural question becomes why should a business commercialise its data? The answers are pretty straightforward:
• Data businesses create additional revenue flow
• It is profitable and tends to be higher margin than the underlying products
• That revenue flow is surprisingly ‘sticky’ with strong levels of client retention
• Data consumers, through usage, drive increases in the levels of trading in the underlying products
• If you do not commercialise your data then the competition will, and first mover advantage is greater in the data world than in virtually any other business
Unfortunately the challenges are not so straightforward to deal with and therein lies problems, often due to the tendency in believing that merely possessing data make you money. Critical facts all data sources must understand are:
• Investment is required, in people and infrastructure
• Avoid impatience, it takes time for the revenues to flow
• Ignore or misunderstand Intellectual Property Rights at your peril
• Do not apply inappropriate business models, and avoid copycatting
• Insufficient research into market users and usage leads to poor returns
One of the immediate things to notice about these 5 topic areas is how inter-related they are, and how they each fit into the data workflow complementing each other. The result is that the need for a more diverse range of datasets requires new sources and new suppliers, the analysis of the data needs new tools, and everything is benchmarked for performance
Most data in general use produced today is crap, yet there is no need to dig deep to find one of many hidden gems waiting for discovery and purpose, as long as the data sources think and act smart.
2021 will not be the heyday for new data sources, it takes time and effort to build a functioning business. 2021 can be the year that businesses embark on a new and profitable adventure, after all the Chinese say ‘A journey of a 1,000 miles starts with a single step’.
This is an exciting journey to make.
Keiren Harris 11/01/2021
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