REAL-TIME RISK: NEWS

What Investors Should Know About Fintech, High-Frequency Trading and Flash Crashes

Are You Using Your #BigData to Your Advantage?

By Steve Krawciw

Many companies today are collecting and then literally sitting on terabytes, petabytes (1024 terabytes) and even exabytes (1024 petabytes) of data. The data is often collected as “nice-to-have” information, but then left to languish on the company’s servers. While data storage technology is now sufficiently cheap to allow near-infinite data storage at a very reasonable cost, in many cases, unused data represents a missed opportunity to generate revenues.

As discussed in our new book, “Real-Time Risk: What Investors Should Know About Fintech, High-Frequency Trading and Flash Crashes” (Wiley, 2017), all data has a high potential value. Take, for example, universal product codes (UPCs) we are completely accustomed to—bar codes attached to virtually everything we buy, and scan at the cash register for easy processing. By now, many items shipped or stored also contain their own radio-frequency identifiers (RFIDs). An RFID is a “smart” UPC. Each RFID is a tiny electronic device that, when in the range of a radio-frequency reader, reflects to the reader its unique identifier information. Most RFIDs are passive devices, in that they do not require their own energy source. Instead, the devices are activated by the energy transmitted by the RFID readers. Much of this technology was invented for the purposes of being undetectable in spying devices during the Cold War.—Since they typically don’t contain a power source, RFIDs emit no heat until activated by the RFID reader, and are, therefore, undetectable by conventional device scanners under most circumstances. Without a power source these devices are long-lived, potentially lasting indefinitely, and costless to maintain—there is no need to replace batteries or provide air conditioning. Aside from accidental breakage, the modern RFIDs are weather- and tampering-proof, and are manufactured on a large scale.

RFIDs are not a rare species. Every time you buy new clothes or walk through a modern US pharmacy, you encounter RFIDs embedded in the boxes of most items as deterrents to theft (the devices are activated by the scanners at the exit to the store and set off the alarms, unless previously deactivated at the cash register). While the devices are commonplace, it’s the emerging ability to collect and to use this information that is innovative.

The best part of RFIDs is that the information they contain, as well as their geospatial coordinates, can be and are continuously scanned and stored. This information can be subsequently mined for various applications: Amazon uses RFIDs to optimize its warehouse shelf stocking, farms track livestock movements, and fleets follow the locations of their containers.

For financial professionals, all of these datasets translate into information-driven profits. The data on warehouse movements can be distilled into relative demand figures for IBM products versus those of Intel, for example. The quantities and movement of livestock allow for more accurate commodity futures pricing. Shipping container movements not only predict the financial health of shipping companies but also of fuel demand and a host of auxiliary products and services.

In fact, the demand for such data is hot and growing among investment firms looking for an extra edge in their returns. Many hedge funds now have a specialized role of “data scout”, whose responsibility it is to identify new useful data sources to deliver uncorrelated returns on their investments. Data of all sorts is a hot commodity and the demand for it is growing every day. The ability to organize and process data may separate winners from losers in the long run.

Steve Krawciw is an expert on Fintech strategy, a co-author of “Real-Time Risk: What Investors Should Know About Fintech, High-Frequency Trading and Flash Crashes” (Wiley, 2017), and Managing Director and CEO of AbleMarkets, a big data for capital markets company. Prior to AbleMarkets, Steve launched over $4 billion of products for Credit Suisse over a 7-year span. Previously, Steve ran asset and wealth management initiatives for CIBC, and consulted for McKinsey and Co., and Monitor Consulting. Steve had an honor of working for President Mandela of South Africa. Steve holds a BComm from University of Calgary and an MBA from Wharton School at University of Pennsylvania.

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