Holding court at a recent press briefing, the chief executive of a leading investment bank briefly enthused about the money to be made by selling data on its clients’ investments. None of the assembled journalists quizzed him about it.
When Risk.net later probed a spokesperson about the remarks, the reply neatly illustrated the quandary banks face as they eye this new business: “I’m so glad you didn’t ask him. We can’t talk about it. It’s too early.”
On the one hand, dealers are itching to talk about the clever ways they plan to make money from proprietary data – information about order flows and client positioning, for example – but equally they are terrified about how clients might react.
No firm wants to stumble into a Facebook moment.
Yet selling financial data is a lucrative business. Global exchanges make millions of dollars packaging data about deals taking place across their markets. Data and related services made up a fifth of total exchange revenues last year – the second largest revenue generator behind trading, clearing and settlement services.
Meanwhile, asset managers – quantitative and fundamental alike – are hungry for just the types of data banks have. Top of the wish list is order flow data. One asset manager estimates that while each bank only covers 10% of any given market, the combination of three banks’ data would be enough to gauge endogenous risks in markets such as crowding and potential forced selling.
Appetising datasets that could be up for grabs include leverage and margin use, the duration and credit ratings of fixed income holdings, short interest data, and derivatives transactions data and positions exposure.
So far, banks have been reticent to talk openly about their efforts, even though asset managers say conversations have been going on for over a year about what might be on offer
For banks, selling data might even help plug the hole in revenues left by the financial crisis and subsequent regulatory response. Investment banks made $11 billion less in revenue in the first quarter this year compared with 2011, for example, mainly due to a reduction in FICC business. Asset managers spent $400 million on alternative data last year, an amount projected to exceed $1 billion by 2019.
But the terrors are real too.
A global head of rates at one bank says selling data is a business model he hates. “Our clients would not appreciate it if they were trading with us and then later, their data gets boxed up and sold to someone else,” he says. “All it takes is for one client to take offence and the reputation of the whole franchise is threatened.”
Some banks fear giving away too much for too little. One sales head compares it to selling your own blood: “You can generate revenues, but at what cost?” he says.
Practical obstacles also stand in the way. Certain clients, for example, might want their data locked away, meaning those records have to be weeded out of any aggregated information set. Sometimes, the data may be in a tricky format. Other times, the bank’s own execution desk refuses to give data up for fear the firm will be front-run by clients.
The biggest struggle, though, could be how to present these initiatives to the outside world. So far, banks have been reticent to talk openly about their efforts, even though asset managers say conversations have been going on for over a year about what might be on offer.
When it was first reported Goldman Sachs was building a new group tasked with finding data within the securities division that could be sold to clients, the bank was quick to stress it is being conscious of client concerns around confidentiality.
Most banks approached by Risk.net stressed they are not selling client data, but rather, building analytics based on anonymised and aggregated client data and selling those on to clients – for any bank conscious of reputational risk, this is more than just a case of semantics.
The race is on to build platforms that include not only data generated by banks, but also alternative data sources from outside. Firms like Citigroup and Goldman are hiring taskforces to scour internal business lines and trading desks for information clients might value. One European bank currently has a team looking into the legal and compliance side. It expects not to have a firm policy until sometime next year.
But among the challenges facing banks, guarding against bad optics might prove to be one of the biggest.
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