Custodians have vast amounts of data but have been slow to develop big data services – but projects are starting to be rolled out, finds Nicholas Pratt.
You would think that big data would be a cash cow for custodians. They sit on more data than anyone else in the market and are crying out for new revenue streams as margins in traditional custody business get ever smaller. However, it is seemingly not a simple task to turn this data into gold.
Ultimately, the data belongs to clients, so while custodians may aggregate and anonymise it for their own research purposes, most custody banks have not sought to monetise or commercialise the data they work with, says James Lowry, Europe, Middle East and Africa head of State Street Global Exchange, part of custody giant State Street.
State Street Global Exchange has been able to do this in relation to its private equity business, however.
Lowry says: “The one example where we have done that is in our private equity index given that, as a [private equity] fund administrator, we hold 60% of the global private equity market’s data. We felt we were in a position to offer a superior product, but it still took us over a year to get the clients’ consent to use that data.”
What some custodians have sought to do is position themselves as centres of innovation by partnering with specialist providers of data analytics services. For example, State Street has aligned itself with a firm called PriceStats, which provides daily inflation measures in more than 20 markets with a three-day lag by trawling the online world for this data and adjusting for differences between online and physical world pricing. Providing inflation indicators like this means managers can then use the data for overlay strategies.
State Street Global Exchange is also soon to unveil a sentiment analytics service, based on web-scraping news items for certain indicators that could lead to alpha generation. It is also looking at using behavioural analytics for compliance as well as investment decisions.
Meanwhile, BNY Mellon’s big data offerings have been in the distribution support and market access part of the market through its role as a transfer agent, says Daron Pearce, chief executive of global financial institutions within BNY Mellon’s asset servicing business. “If you can capture the demographic data behind your client base, you can look at why they might be buying certain types of funds.”
BNY Mellon’s Albridge Analytics provides this service in the US using information from some of the national distributors. The custodian is now in the early stages of exploring whether to launch the service outside the US. After all, it is one thing to provide this service in a single market, but it is far more complex to apply it to a multi-currency market such as Europe and beyond.
The custodian also has a service called iFlow, which looks at the movements in currencies as a result of patterns in securities trading and investment funds. “This data can inform investors which markets appear more investable at any given time,” says Pearce. “You can then build on that data and look more specifically at what type of investment funds are being bought and sold on an anonymised basis.”
Big data is also used internally and externally at Société Générale Securities Services (SGSS), another custodian bank, says Etienne Deniau, head of business development, asset managers and owners. “We use some of the data to better manage our customers and to know what assets they are trading and where. In our role as a depositary, we need to know why some funds are performing well and why others are not,” he says.
“Externally we are providing risk analytics, performance measurement and attribution to clients. We are currently working on linking this data to a SRI [socially responsible investment] offering so that clients will also be able to evaluate their carbon footprint and their ESG [environment, social, governance] ratings and performance.”
SGSS is also looking to provide analytics based on liabilities within funds to measure fund liquidity at the fund-holder level in changing market conditions. Another service in development aims to provide institutional investors with a look-through capability, initially for hundreds of funds, and calculates how an investor’s global and detailed country, sector, and rating risk exposures would change with each investment before actually making an investment decision.
As useful as all of these services may be, no custodian has yet tapped into the idea of using big data in areas like behavioural finance and predictive analytics. “Developing services on the predictive side will take more investment and thought about exactly how we use industry-wide data,” says Pearce.
Data privacy and data security is a key concern, especially for firms operating across national borders, given that some regulators do not allow data to leave its shores. Or else there may be commercial concerns. For example, providing information on settlement prices, even though anonymised, may reveal information about larger firms’ trading strategies.
There are also some technology issues, says SGSS’s Deniau. “There is a lot of open data available, but they are not in consistent formats, and so a lot of reformatting has to be done before it is distributed freely to clients. Either clients need to be willing to pay for the vendor data, or we [will have to] find alternative free sources and reformat them to add value.”
One key development that will help the growth of predictive analysis is the idea of a digital identity for investors. In the UK, the ‘digital id’ initiative is designed to allow investors to carry out activity in a more streamlined way via a digital ID, rather than engaging in multiple sign-ons and repeated ‘know your customer’ processes
“If we are able to track and link all of those investors’ information, then it will make predictive analysis much easier,” says Pearce. “If it is set up as a centralised government database, regulators will have to figure out what it means to allow access to the investors’ data for commercial use, but the industry direction of travel is clearly towards digital IDs and holistic record-keeping, and this will create a real opportunity to get a digital view across the whole industry.”
One problem that will not arise is a shortage of data, given that 90% of today’s global data was produced just in the past two years. “The premise of using big data for investment decisions is that if you have more information than the competition, then you will have the advantage when it comes to figuring out investment opportunities,” says State Street’s Lowry.
“But in the longer term, as more devices become connected through the ‘internet of things’, we will have much more data available and the hardest task will be separating the signal from the noise.”
©2016 funds europe