Part 2 - Our Review of Big Data’s Impact on the Financial Services Industry

Big Data Brings Transparency, one of Wall Street’s Biggest Fears!

(Part 2 of 2)

What new Big Data has Become Available to Change Things???

Along with better systems to process large amounts of data, the introduction of FINRA TRACE trade data (A Regulatory Function) for many OTC securities is now readily available to the financial community.  What was previously a non-transparent market is now open information to everyone!  In some markets however, Big Data is leading to market inequality, with high-frequency trading many investors, mostly hedge funds, have access to data very rapidly and are equipped to have trading decisions made with algorithms faster than the rest of the market is able to (also referred to as “algo-trading”).  Although competitive regulation around this is in the works in many regions, it is questionable whether high frequency trading has an overall material impact on the markets.

Increased Transparency from Big Data is now REVOLUTIONIZING Traditional Bond Markets

Traditionally, OTC markets have been profitable for the Broker-Dealer community, since due to the lack of relevant trade transparency, they have been able to earn more profits through a higher risk premium and higher bid-ask spread, in some cases up to 2% of market value.  This means a Bond worth USD 2m, a single trade is roughly $20k of revenue for a nearly no-risk execution trade for the broker dealer that can take minutes to execute!  That profitability model certainly does not sound sustainable.

With the availability of Big Data including TRACE pricing and other relevant investment financial data (Bloomberg, Reuters, StatPro, etc), the justification for the Traditional Sales based Broker Dealer OTC market model is waning away for many asset classes.  Because of this, investors become more price sensitive to the fees they are being charged by investment banks and overall fees have dropped tremendously.

 “Corporate and sovereign-bond deals around the world generated a total of $13.6 billion in fees for bankers, down from $14.9 billion in 2010, according to data compiled for Bloomberg Markets’ ranking of the best-paid investment banks.”  BusinessWeek - SOURCE

In fact, many major global banks have closed shop on their OTC trading desks because they were simply not profitable.  For example, UBS closed the majority of theirUS desk in 2011.

How Banks Are Reacting to the Transparency of Big Data… 2 Financial Titans React with Bold Moves

Similar to the traditional stock exchange demise in the US, just last week, Goldman Sachs announced they were launching an online broker dealer interface that would swiftly undercut the fees of the traditional OTC street norms.  Roughly 2 weeks ago, another financial titan, Blackrock, announced they were launching a similar system under their Aladdin platform.  This means that in the last month alone, 2 of the largest and most powerful players in the financial services industry are realizing openly and committing time and resources to launching platforms that may announce the beginning of the end of the OTC nature of these markets.  These systems will match buyers and sellers and help alleviate the unnecessary costs of maintaining a costly sales force.  Other major banks on the street are expected to follow soon with competing products.

Big Data is making markets cheaper to trade, more efficient, more liquid and more transparent!  Net Impact is less transaction fees for the 99% to pay for

These are just initial efforts to re-work the OTC system and adoption by the investment community is still up for grabs and market share in this new market will bring out some fierce competition among banks.  Utilizing Big Data properly has made this possible and ultimately the end consumer (The 99%!) will reap the benefits of this by their investments having drastically lower transaction costs. 

More Reasons to Love Big Data to Come, Please check back!