DATA LAKES OR FOUNTAINS OF KNOWLEDGE?

By |2019-03-07T00:02:06+00:00November 29th, 2018|Data Management, Machine Learning, Markets, Regulation, Risk, Trading|0 Comments

Given the noise around IT transformation and innovation, the only surprise is that so few financial institutions seem to be embracing change with any obvious strategic commitment. It’s certainly not for the lack of advice and exhortation from vendors, consultants and analysts. Entire forests (and keyboards) have been destroyed to convey the “adapt or die” messages which form the backbone of so many recent warnings and predictions.

Of course, the industry is still spending billions of dollars on IT every year. The biggest banks are doing that individually. And plenty more is also being directed by banks into innovation projects, incubator labs and experimental joint-ventures. But the problem remains that the vast bulk of that spend is still committed to keeping the lights on and maintaining complex, inefficient and outdated IT systems that are being rendered ever more unwieldy as they are forced to handle astronomical amounts of new data and ever more demanding layers of regulation.

No honest IT manager or chief data officer I have spoken to at a bank in recent years has claimed with any conviction that they have been successful data managers. But some are getting better.

The temptation to focus on tactical, short-term fixes rather than tackle the seemingly gargantuan task of fundamental, strategic transformation is understandably irresistible. The logic for adopting a long-term plan that delivers sweeping change and sustainable, agile and efficient IT for the future might be compelling. But how many managers, or board directors, will commit to projects that are probably going to outlast them before they deliver the benefits they promise? Not many it seems.

So this is the first in a series of blogs and podcast discussions that tries to simplify some of those arguments and identify best practises. They will demonstrate the advent of new IT capabilities that can deliver the new standards and capabilities required, without the risk of failure, or disruption that causes so much fear of change.

Costs, compliance and customers

The three main drivers for change in the capital markets are costs, compliance and customers. Investment banks, brokers, asset managers and exchanges must operate far more competitive cost structures that recognise continued pressure on margins and enable more sophisticated risk management while delivering better value products and services for customers.

At the same time, they must cope with new regulations that drive costs higher as central banks and regulators seek to impose new working practises and standards that improve transparency and oversight, protect investors and prevent systemic risk occurring in the industry through tougher capital requirements. The message is clear: this business is not going to get easier.

Data management is key

The key to tackling all these challenges is coping with the plethora of data. The businesses that thrive will be those that succeed in managing, analysing and delivering the data the most effectively, where it can be used to ensure better-informed decision-making and therefore better outcomes. Some say it means turning the proverbial data lakes into fountains of information, but perhaps that implies a lack of structure that is sorely needed.

In order to tackle the data, be compliant with regulations, reduce overheads and meet customer expectations financial institutions will need to reform business models, operating practises, working cultures, and IT infrastructure. Some call this IT transformation, but for many, it means unbundling and simplifying the complex technology estates that have evolved over decades. Data needs to flow seamlessly in both vertical and horizontal directions, while also be able to be aggregated holistically for the benefit of customers and regulators.

This transformation of how data is stored and managed will be at the heart of successful enterprise and will also ensure the optimisation of risk management and capital allocation. It will occur from pre-trade decision-making to post-trade clearing and settlement, as well as within individual asset classes and across multiple lines of business.

The building blocks required to achieve this will include increased automation, to reduce both headcount and the errors arising from manual interventions, and greater use of shared services and collaborative practises. There have been significant shifts in these directions in recent years, but the rate of adoption is now beginning to accelerate. Not surprisingly, fears of the cloud have dissipated exponentially as the costs of maintaining in-house IT estates and data centres have soared.

Smarter approaches

Automation will be applied through the wider deployment of Artificial Intelligence and Machine Learning techniques, while a combination of private, hybrid and public cloud services and industry collaboration through joint ventures will remove many layers of fixed costs and substantially reduce ongoing operating costs. The adoption of open architectures and componentised applications and solutions will avert the terrifying need for wholesale replacement.

These collaborations can then be extended to more direct co-operation between businesses and regulators and greater consistency across regulatory regimes. All these are bundled together under themes such as “Fintech” and “RegTech” which are umbrellas for the confluence of ideas to use new technologies and techniques to resolve old problems now compounded by new expectations.

Within these high-level themes are a multitude of specific activities and IT innovations which warrant more detailed analysis,such as MiFID 2, FRTB, Basel 3/4 etc… or the changing demands of specific areas such as collateral, liquidity, derivatives, algorithmic trading, integrated risk and pricing, active v passive fund management and of course blockchain, bitcoin and ICO’s. But the key message is to deal with these challenges holistically, not individually. Break down those fiefdoms, silos and ring fences. The rewards are there to be taken.

Lastly, very little of this will be achieved without informed management and more authoritative leadership. There has been no shortage of bank executives declaring that they are now leading technology businesses, not financial institutions. The problem is that too few of the banks’ leaders or boardrooms contain sufficient technical expertise to fully embrace the change required. Part of our remit will be to stimulate the debate that provides the platform for better education, less fear of change and therefore eventual adoption of the working practises and IT investment required to deliver longer-term, sustainable success.

Peter Farley

About Peter Farley

Peter is an authoritative commentator and analyst on business challenges and best practises in the capital markets, in particular where IT and Fintech are delivering innovative solutions. He brings insight from a career that spans financial journalism and markets analysis, leading industry IT research teams, as well as working for a major global financial IT vendor.