How is Alternative Data Giving Investment Managers the Edge?

Posted on : 29-03-2018 | By : richard.gale | In : Consumer behaviour, Data, data security, Finance, FinTech, Innovation

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Alternative data (or ‘Alt-Data’) refers to data that is derived from a non-traditional source covering a whole array of platforms such as social media, newsfeeds, satellite tracking and web traffic.  There is vast amount of data in cyber space which, until recently remained untouched.  Here we shall look at the role of these unstructured data sets.

Information is the key to the success of any investment manager and information that can give the investor the edge is by no means a new phenomenon.  Traditional financial data, such as stock price history and fundamentals has been the standard for determining the health of a stock. However, alternative data has the potential to reveal insights about a stock’s health before traditional financial data. This has major implications for investors.

If information is power, then unique information sourced from places not-yet-sourced is giving those players the edge in a highly competitive market. Given that we’re in what we like to call a data revolution, where nearly every move we make can be digitized, tracked, and analysed, every company is now a data company. Everyone is both producing and consuming immense amounts of data in the race to make more money. People are well connected on social media platforms and information is available to them is many different forms. Add geographical data into the mix and that’s a lot of data about whose doing what and why. Take Twitter, it is a great tool for showing what’s happening in the world and what is being talked about. Being able to capture sentiment as well as data is a major advance in the world of data analytics.

Advanced analytical procedures can pull all this data together using machine learning and cognitive computing. Using this technology, we can take the unstructured data and transform it into useable data sets at rapid speed.

Hedge funds have been the early adopters and investment managers have now seen the light are expected to spend $7bn by 2020 on alternative data.  All asset managers realise that this data can produce valuable insight and give them the edge in a highly competitive market place.

However, it could be said that if all investment managers research data in this way, then that will put them all on the same footing and the competitive advantage is lost. Commentators have suggested that given the data pool is so vast and the combinations and permutations analysis is of data complex, it is still highly likely that this data can be uncovered that has not been uncovered by someone else. It all depends on the data scientist and where they decide to look. Far from creating a level playing field, where more readily available information simply leads to greater market efficiency, the impact of the information revolution is the opposite. It is creating hard-to access pockets for long-term alpha generation for those players with the scale and resources to take advantage of it.

Which leads us to our next point. A huge amount of money and resource is required to research this data, and this will mean only the strong survive. A report last year by S&P found that 80% of asset managers plan to increase their investments in big data over the next 12 months. Only 6% of asset managers argue that it is not important. Where does this leave the 6%?

Leading hedge fund bosses have warned fund managers they will not survive if they ignore the explosion of big data that is changing the way investors beat the markets. They are

Investing a lot of time and money to develop machine learning in areas of its business where humans can no longer keep up.

There is however one crucial issue which all investors should be aware of and that is the area of privacy. Do you know where that data originates from? Did that vendor have the right to sell the information in the first place?  We have seen this illustrated over the last few weeks with the Facebook “data breach” where Facebook sold on some of its users’ data to Cambridge Analytica without the users’ knowledge. This has wiped $100bn off the Facebook value so we can see the negative impact of using data without the owner’s permission.

The key question in the use of alternative data ultimately is, does it add value? Perhaps too early to tell. Watch this space!

Battle of the Algorithms Quantum v Security

Posted on : 28-03-2018 | By : kerry.housley | In : Cyber Security, data security, FinTech, Innovation, Predictions

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Like black holes, quantum computing was for many years nothing more than a theoretical possibility. It was something that physicists believed could exist, but it hadn’t yet been observed or invented.

Today, quantum computing is a proven technology, with the potential to accelerate advances in all aspects our lives, the scope is limitless. However, this very same computing power that can enhance our lives can also do a great deal of damage as it touches many of the everyday tasks that we take for granted. Whether you’re sending money via PayPal or ordering goods online, you’re relying on security systems based on cryptography. Cryptography is a way of keeping these transactions safe from cyber criminals hoping to catch some of the online action (i.e. your money!). Modern cryptography relies on mathematical calculations so complex—using such large numbers—that attackers can’t crack them. Quantum could change this!

Cybersecurity systems rely on uncrackable encryption to protect information, but such encryption could be seriously at risk as quantum develops. The threat is serious enough that it’s caught the interest of the US agency National Institute of Standards and Technology (NIST). Whilst acknowledging that quantum computers could be 15 to 20 years away, NIST believes that we “must begin now to prepare our information security systems to be able to resist quantum computing.”

Many believe that quantum computers could rock the current security protocols that protect global financial markets and the inner workings of government. Quantum computers are so big and expensive that—outside of global technology companies and well-funded research universities—most will be owned and maintained by nation-states. Imagine the scenario where a nation-state intercepts the encrypted financial data that flows across the world and are is able to read it as easily as you are reading this article. Rogue states may be able to leverage the power of quantum to attack the banking and financial systems at the heart of the western business centres.

The evolution of the quantum era could have significant consequences for cyber security where we will see a new phase in the race between defenders and attackers of our information. Cryptography will be the battlefield in which this war of the future will be fought, the contenders of which are already preparing for a confrontation that could take place in the coming years. The evolution of quantum computing will crack some cryptography codes but how serious is the threat?

In theory, a quantum computer would be able to break most of the current algorithms, especially those based on public keys. A quantum computer can factor at a much higher speed than a conventional one. A brute-force attack (testing all possible passwords at high speed until you get the right one) would be a piece of cake with a machine that boasts these characteristics.

However, on the other hand, with this paradigm shift in computing will also come the great hope for privacy. Quantum cryptography will make things very difficult for cybercriminals. While current encryption systems are secure because intruders who attempt to access information can only do so by solving complex problems, with quantum cryptography they would have to violate the laws of quantum mechanics, which, as of today, is impossible.

Despite these developments we don’t believe there is any cause for panic. As it currently stands the reality is that quantum computers are not going to break all encryption. Although they are exponentially more powerful than standard computers, they are awkward to use as algorithms must be written precisely or the answers they return cannot be read, so they are not easy to build and implement.

It is unlikely that hacktivists and cybercriminals could afford quantum computers in the foreseeable future. What we need to remember is that most of attacks in today’s threat landscape target the user where social engineering plays as large, if not larger a part than technical expertise. If a human can be persuaded to part with a secret in inappropriate circumstances, all the cryptography in the world will not help, quantum or not!

It is important that organisations understand the implications that quantum computing will have on their legacy systems, and take steps to be ready. At a minimum, that means retrofitting their networks, computers, and applications with encryption that can withstand a quantum attack.

Quantum computing presents both an unprecedented opportunity and a serious threat. We find ourselves in a pre-quantum era, we know it’s coming but we don’t know when…

Are you ready for Y2Q (Years to Quantum)?

Will Robotic Process Automation be responsible for the next generation of technical debt?

Posted on : 28-03-2018 | By : kerry.housley | In : FinTech, Innovation, Predictions, Uncategorized

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All hail the great Bill Gates and his immortal words:

The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.”

With the Robotic Process Automation (RPA) wave crashing down all about us and as we all scramble around trying to catch a ride on its efficiency, cost saving and performance optimising goodness, we should take a minute and take heed of Mr Gate’s wise words and remember that poorly designed processes done more efficiently will still be ineffectual. In theory, you’re just getting better at doing things poorly.

Now before we go any further, we should state that we have no doubt about the many benefits of RPA and in our opinion RPA should be taken advantage of and utilised where appropriate.

Now with that said…

RPA lends itself very well to quick fixes and fast savings, which are very tempting to any organisation. However, there are many organisations with years of technical debt built up already through adding quick fixes to fundamental issues in their IT systems. For these organisations, the introduction of RPA (although very fruitful in the short term) will actually add more technological dependencies to the mix. This will increase their technical debt if not maintained effectively. Eventually, this will become unsustainable and very costly to your organisation.

RPA will increase dependencies on other systems, adding subtle complex levels of interoperability, and like any interdependent ecosystem, when one thing alters there is an (often unforeseen) knock-on effect in other areas.

An upgrade that causes a subtle change to a user interface will cause the RPA process to stop working, or worse the process will keep working but do the wrong thing.

Consider this; what happens when an RPA process that has been running for a few years needs updating or changing? Will you still have the inherent expert understanding of this particular process at the human level or has that expertise now been lost?

How will we get around these problems?  Well, as with most IT issues, an overworked and understaffed IT department will create a quick workaround to solve the problem, and then move on to the myriad of other technical issues that need their attention. Hey presto… technical debt.

So, what is the answer? Of course, we need to stay competitive and take advantage of this new blend of technologies. It just needs to be a considered decision, you need to go in with your eyes open and understand the mid and long-term implications.

A big question surrounding RPA is who owns this new technology within organisations? Does it belong to the business side or the IT side and how involved should your CIO or CTO be?

It’s tempting to say that processes are designed by the business side and because RPA is simply going to replace the human element of an already existing process this can all be done by the business side, we don’t need to (or want to) involve the CIO in this decision. However, you wouldn’t hire a new employee into your organisation without HR being involved and the same is true of introducing new tech into your system. True, RPA is designed to sit outside/on top of your networks and systems in which case it shouldn’t interfere with your existing network, but at the very least the CIO and IT department should have an oversight of RPA being introduced into the organisation. They can then be aware of any issues that may occur as a result of any upgrades or changes to the existing system.

Our advice would be that organisations should initially only implement RPA measures that have been considered by both the CIO and the business side to be directly beneficial to the strategic goals of the company.

Following this, you can then perform a proper opportunity assessment to find the optimum portfolio of processes.  Generally, low or medium complexity processes or sub-processes will be the best initial options for RPA, if your assessment shows that the Full Time Equivalent (FTE) savings are worth it of course. Ultimately, you should be looking for the processes with the best return, and simplest delivery.

A final point on software tools and vendors. Like most niche markets of trending technology RPA is awash with companies offering various software tools. You may have heard of some of the bigger and more reputable names like UiPath and Blue Prism. It can be a minefield of offerings, so understanding your needs and selecting an appropriate vendor will be key to making the most of RPA. In order to combat the build-up of technical debt, tools provided by the vendor to enable some of the maintenance and management of the RPA processes is essential.

For advice on how to begin to introduce RPA into your organisation, vendor selection or help conducting a RPA opportunity assessment, or for help reducing your technical debt please email Richard.gale@broadgateconsultants.com.