Pipeline Report March 2011

The Pipeline Report Incisive Analysis of Emerging Trends in Financial Technology March 2011 INFORMATION LIQUIDITY THE NEW DATA PARADIGMWe recently heard a presentation from Marcia Metz, a web operations executive at EMC.Her presentation, Information Liquidity, discussed issues related to web contentmanagement. Metz focused on the use and reuse of web content across a distributed webpresence. She also described using information as a strategic asset within web operations.Prior to this, we had not heard the term information liquidity. Though her focus is on theuse and reuse of web information, we find her metaphor extremely clarifying for financialdata. The concepts she discussed are even more applicable to market data and referencedata.Metz defines information liquidity as,● The ability or ease with which assets can be converted to cash or leveraged.● Liquid is the state in which matter can flow freely and adapt to the shape of its container.This edition of the Pipeline Report extends her concepts to the world of financial data(market data and reference data) and presents insights on information liquidity willirrevocably transform this world.OVERVIEW OF THE NEW PARADIGMUnlocking financial data will transform its value in ways limited only by the imagination ofentrepreneurs who use and apply it.Here is the thesis of this Pipeline Report:● Market Data is commoditizing. Business models built on information scarcity will succumbto those that enable information abundance.● With the proliferation of market data, value shifts elsewhere● Proliferation leads to information liquidity, which in turn, leads to information agility● The value chain will shift to a new paradigm, where liquid information flows quickly andfreely between collaborating ecosystem partners.● Huge value will be creating by enabling a thriving ecosystem, powered by liquidinformation

● The Cloud Data Platform, a technology seemingly unrelated markets, will irrevocablychange the face of market data distribution, processing, and analytics. This is the technicalunderpinning for the new ecosystem.● Emerging from this new paradigm will be: - Collaborative analytics running in the cloud - Niche vendors who combine and join to deliver value - A level of dynamics between applications, such as analytics, trade-by-trade risk,compliance— will become the financial information equivalent of a website mash-up.● Massive opportunities will emerge in enabling technologies and services. Some of theseare discussed below.Let us develop the argument.The Emperor Has No ClothesPerhaps more accurately, the emperor is doing a strip-tease—and it isn’t going to be pretty.That market data is commoditizing, especially for common instruments such as equities, ishardly insightful. However, a more fundamental change is inchoate.Market data originators—the legacy exchanges—have lost their pricing power, becausealternative venues originate lots of market data, as we discussed in the March 2010 editionof the Pipeline Report. The alternative venues focus on driving information abundance, notinformation scarcity—as has been the case the with the legacy exchanges. The genie hasleft the bottle.The value of financial data is going to zero. Given its many sources, the price of marketdata will also go asymptotically to zero.Originators who rely on information scarcity, proprietary lock-downs, wall-garden approach,and suffocating licensing restrictions are in for a rude surprise. In a monopolistic culturebuilt over decades, the legacy originators have trapped themselves in a Kafkaesquenightmare with their current cost structures, business models and licensing restrictions.Purveyors resting on their laurels will be swept to oblivion, and replaced by vendors whoenable value, not just deliver data.As the price of market data goes asymptotically to zero, value comes not from the dataitself, but from the transformative applications that data enables. When data is expensive,its use restricts new applications. When it is free, its use enables new applications. Thatfundamental change in perspective will drive the new data paradigm.We expect market data incumbents to do what incumbents always do when their oligopolyis disrupted and their business models are immersed the acid bath of free competition: they

will retreat to higher margins niches where they think they can differentiate. Examplesinclude:● Exotic instruments● Emerging markets● Differentiated data, for instance low latency● Bundled comprehensive offerings in the form of (a) one-stop shopping, or (b) cross-subsidized offerings, e.g. pay for this, and we’ll give you that.In light of the emerging world of information liquidity, we believe the incumbents will bedecimated. From their cumbersome cost structures, to the rigid business models, to theirinflexible licensing models, to their anachronistic feed technologies, we believe their effortsto protect their businesses will be futile.For the rest of us, data will flow as never before, and information liquidity will createunprecedented value.THE UPHEAVAL OF MARKET FEEDSToday, most market data is delivered to institutions by feeds.In the past, financial data has moved not like water, but like massive blocks of ice. Thebasic steps for processing market data has been● Ingestion● Transformation● DistributionMultiple roadblocks based on technology, license rights, and distribution models haverestricted free flow.On the ingestion side, traditionally market data has been delivered via feeds. For manyapplications, this approach is tantamount to watering a house plant with a fire hose.Typically, market data feeds are expensive, difficult to implement and use. The timerequired to integrate legacy feed technology into new business processes is months if notyears. In contrast, it is now possible to get market data on-demand (via web services), andhave it provisioned in hours if not days. More on that later.The traditional transformation of market data is often described as ETL (Extract, Transform,Load): extract the information from the feed, transform it, and the load it into the newprocess. The new data paradigm, exemplified by information liquidity, where data as aservice delivers market information from a platform, and where the data is morphedbetween collaborating partners—each adding their own value. The information liquidityparadigm transforms analytics by an order of magnitude.

The further distribution of financial data has been restricted by commercial and licensingmodels. Now that the genie is out of the bottle, originators will change their models—ordie quickly.Information liquidity leads to information agility, which enables applications to consume andtransform market data.In the future, every vendor—data originators, distributions, analytics firms—will need to uptheir game continually—and at an accelerating rate—just to say in the game. The alterativeis to end up as road-kill on the information superhighway.This paradigm will evolve to allowing collaborative analytics (across companies andinfrastructure), much as websites use mash-ups to combine information in new insightfulways.For at least a decade, web information has broken the tyranny of the seller (or saleschannel). Look at the world of residential real estate.For instance, back in the day, home buyers were held hostage by realtors, because theywere the only source of listings and transaction information—the equivalent of the exchangefeed. Today, real estate information is being exposed in new innovative ways.Trulia, a real estate website, combines Multiple Listing Service data and Google maps toshow home listings in a new useful way. This is a typical website mash-up whereinformation and capabilities across organizations is dynamically combined to deliver newvalue to existing users, and entice new users. A home buyer can now run intelligentsearches based on his criteria, such as distance from a train station, number of bedrooms,price range and have these amalgamated in real time and presented on a Google Mapsmash-up. In this model, the power has passed from the sell side to the buy side.The abundance of web information is nothing new. What is new is that data from multiplesources is being combined with applications to drive new insight. For instance, a websitecalled Spotcrime combines reporting crime with mapping software to spot out crime maps.In a recent article, the New York Times describes government agencies who are providinggovernment data via APIs. Agencies from the U.S. Department of Transportation to theConsumer Product Safety Commission are considering exposing APIs so third parties canuse to retrieve, aggregate and process information. This is yet another example of creatinga platform on which to build third party applications.Web site mash-ups have been around for years. What is now new is the systematicexposure of massive databases through APIs, on which third parties are buildingapplications. A key technical linchpin will be the emergence of the Cloud Data Platform.

THE CLOUD DATA PLATFORMOne of the most clarifying blog postings we have seen entitled Data is the Next Major Layerof the Cloud, by Mark Suster, a venture capitalist at GRP Partners. Ostensibly, the article isabout a $25M funding round for a California technology company called Factual. Factual hascreated an open data platform and community in an effort to maximize data accuracy,transparency, and availability.Factual has focused on local data enhancement for online sites. An example use case: anewspaper article mentions a opening of a new museum, and based on geo-coordinates, aside panel displays all of the sushi restaurants in a three block radius.What does this have to do with the capital markets? Not a whole lot. But companiesignoring cloud data platform technology do so at their own peril. Perhaps moreimportantly, the Cloud Data Platform is a paradigm shift that we believe we engulf financialdata.What Factual is doing will be transformative for any organization touching data. They andtheir ilk have created a new metaphor for the creation, curation, and distribution of data:they are doing for data what cloud computing is doing to data centers.In his posting Venture Capitalist Suster describes the Cloud Data PlatformEnter the world of “data as a service” where businesses can consume data in the same waythat they now consume Amazon’s storage services or processing. This is what Factualprovides…Suster goes on to plug Factual, in which he has invested, by saying:What I love about Factual is that it democratizes data and make [sic] it an order ofmagnitude cheaper, more available and higher quality than the historical approach.[emphasis added]To be sure, Factual’s data is static and in a different domain than market data. Findingsushi restaurants near a new museum museum is a far cry from running intra-day riskmodels on the divergence between Spanish Sovereign debt interest rates and Markit’siTraxx Credit Default Swap index.However, the emergence of a cloud data platform, will drive a living-breathing dataecosystem for financial data. This new paradigm will completely transform the cost,distribution, and use of financial data. It will also make current analytics engines look likesomething out of the Flintstones.For this new metaphor to work, we need to get to a world of information liquidity. Marketdata needs to be emancipated (as it will) from its current strait-jacket of fire-hose feeds andcrushing distributions licenses.

Another key theme of Factual model is the creation of an open data platform and acommunity to maximize data accuracy, transparency, and availability. To think that WallStreet is going to create “community” for all to contribute to and benefit from is naïve.After all, the Street is hardly renowned for its Kumbayah moments—except when the titansget called on the carpet in front on Congress.However, we do expect new data paradigm partners to collaborate across extranets—inclosed communities—to enhance workflow and drive profitable trades. Market data comesinto one partner, where it is dynamically recombined in the cloud and sent to an analyticsprocess in a second partner, to a risk engine in a third partner, and finally through acompliance process in a forth partner. Each of these partners is collaborating dynamicallywith a throbbing ecosystem to deliver better value, better trades and higher profits.The ability to use information liquidity to move data between collaborating partners willcreate a new trajectory in trading analytics and methods.The multiple origins of market information, the emergence of the “Data as a Service”-platform—all of this—will make market data free or bundled—the capital markets equivalentof long distance on cell phone plans.Market data is not an end in itself, and provider certainly will not be able to charge for it.Rather it becomes an enabler. Information liquidity will drive transformation, limited onlyby the imagination of entrepreneurs.Information liquidity begets information agility, where market data passes through a living,breathing ecosystems between partners. The new paradigm is one where information iscompletely liquid. Value comes not from awkwardly transforming it’s shape as a frozenblock with hammer and chisels, but from the free flow.Data is not horded, but aggregated to gain new insights. When it is free flowing, it can beaggregated in innovative ways to deliver insight and value. One promising application iscombining different data sets to create unique information. For instance, Semantinet, anIsraeli start-up, has semantic extraction technology that can transform unstructured textinto clean structured data. As a test, Semintinet run a query and determined that actorswho win Academy Awards have a different life expectancy than non-winners.Emerging OpportunitiesWhat opportunities will information liquidity drive? One of the key drivers will be flexibleand rapid access through web services interfaces. Related to flexible technical access isflexible commercial access, through a usage-based pricing model. One company, Xignite,has built its business around on-demand financial market data distribution. Integral to thisis not only the technical interfaces, but also an appropriate commercial structure. To besure, the company started at the fringes, going after non-consumption in marginal

applications for which there was no viable solution—e.g. tickers on websites. However,the company’s success has emboldened it to move more into core data distributionapplications. More to the point, it’s capital markets customers are dragging it into coreapplications because of the value of quick provisioning and a usage-based commercialmodel.Another key opportunity is in financial data management. In a recent article entitledElusive Information the Financial Times discussed some of the challenges of financial datamanagement:When Lehman fell in September 2008, not only did institutions no know their rivals’exposure to Lehman or to other problems such as subprime mortgages, they weresometimes unable to map their own with any speed.A key issue in sorting through the Lehman collapse was a lack of standard reference data,exacerbated by the spate of bank mergers, and their legacy systems, over the past decade.The thrust of the FT article was on regulatory issues such as the creation of the Office ofFinancial Research and the drive to mandate common reference data. In the Lehmancollapse, regulators and counter-parties, were unable to gain clarity because the definitionof the data itself was ambiguous. Was this Lehman SIV the same as that one? Nobodyknew. It was as if the United Nations had been reduced to the Tower of Babel.With information liquidity, the complexity of the problem increases by two orders ofmagnitude. As information flows freely—and morphs—between collaborating partners, howdo we keep things straight?Financial data management, from companies such as Asset Control, becomes key toenabling the new data paradigm. Financial data management focuses on issues such asdata provenance and chain of custody to answer questions such as, “Why is this IBMdifferent from that IBM?”Aggregation tools will also play a role in this new world. The ability to aggregate data fromradically different domains (not just different trading venues), the ability to combinestructured and unstructured data, the new dynamic portioning models will radically alter thelandscape.In the world of information liquidity, chiseling frozen ice blocks into ice chips is no longerrelevant or useful. If data is no longer horded, but can be easily aggregated andrecombined, investors gain new insights. Promising mash-up applications running acrossthe cloud and delivered by an ecosystem of collaborating partners delivers unique valuefaster than the current model.

SUMMARYAs the cost of financial information collapses, past industry behaviors will need to change.Information liquidity begets information agility; when enabled by the data cloud platform,which itself will further destroy market data pricing, an entirely new world emerges.The advent of data-as-a-service will not only transform the economics and use of marketdata, but will also transfigure its manifestations. These new capabilities will no longer beinfuriatingly locked inside of proprietary systems, but will flow freely to processes running inthe cloud, linking insight and analytics across domains.The new paradigm of information liquidity will make the existing methodologies look asantiquated as the Quotron terminals of the 1970s. Get ready for the roller coaster ride.About the Pipeline ReportThe Pipeline Report is a periodic report produced by Chris Lamb, a business strategy consultant in financialtechnology and web services. Previously he was at Thomson Reuters, in which he stills owns some shares. Lambalso is an advisor to Semantinet, a company mentioned in this report. The opinions expressed herein are his own.To contact him, please email him at clambresearch@gmail.comTwitter Feed: @c_lambTo unsubscribe, respond this email with Unsubscribe in the Subject Field.© 2011. Chris Lamb. All Rights Reserved.V.05

Pipeline Report March 2011

by clambresearch on Mar 14, 2011

Accessibility

Categories

Tags

Upload Details

Usage Rights

Statistics

Pipeline Report March 2011 — Document Transcript