Managing Big Data After Brexit

By Ivy Schmerken, Editorial Director

The UK’s Brexit vote threw traders and investors off-balance and disrupted global financial markets.

After the UK’s June 23 referendum to leave the European Union, traders and investors awoke to a global sell off in stocks, a surge in U.S. equity trading volumes, and volatility in foreign exchange rates as the British pound sterling fell to historic lows against the US dollar.

Despite the uncertainty, U.S. stocks – the blue-chip Dow and the S&P 500 — recovered and hit new highs since then. Yet investors are still wrestling with concerns about the global economy and the fallout from the UK’s decision to leave the EU.

In a global, interconnected market, Brexit reminds firms that IT systems must be prepared for shocks to the financial system.

“Brexit is the perfect example of the real need for agility,’ said Alexander Tabb, partner and COO at Tabb Forum, who moderated a webinar, “Taming the Big Data Behemoth ‑ How to Align Your Data Infrastructure to the 21^st Century.” The webinar looked at trends in technology, the surge in big data and how to manage data amidst regulatory demands.

According to Tabb, Brexit is like a big asteroid that comes barreling out of nowhere and knocks everything haywire.

But the Brexit vote was not unforeseen, noted Tabb. “Everyone knew that the UK’s referendum was happening on June 23,” he said.

Two weeks before the vote, polls and bookies were showing that Brexit was not going to happen, said Tabb. “Bookies were confident that a vote to remain was coming,” noted Tabb.

Instead, “The markets were caught off-guard, and are scrambling to adjust to the new reality,” wrote The Wall Street Journal on June 24.

“Brexit is an example of what can change and how things can happen suddenly,” said Vishal Sood, Director, Equities Electronic Execution Technology at Citi, who spoke on the webinar. According to Sood, Citi was not caught flat-footed. “We knew what could happen. We were preparing for it,” said Sood.

Trading After the Vote

Exchanges have also had to deal with surging volumes after the Brexit vote.

“Your system better be able to handle the Brexit when it occurs,” Dominick Paniscotti, Vice President, System and Performance Engineering, Nasdaq, told attendees at Market Media’s recent Summer Trading Network event. ”There’s this continuing demand that it needs to be faster. And faster is not even enough anymore. It needs to be faster and it needs to be highly deterministic under load.”

If an exchange is processing data at 500 nanoseconds, and then all of a sudden Brexit happens and it’s processing orders in 5 milliseconds, [then] you get these phone calls, asking “Why the heck is this happening,” said Paniscotti.

Lessons Learned?

 The question is what lessons can be learned from Brexit technologically?  How can financial firms prepare for future events that are almost certainly around the corner?

Firms are living in a time of unprecedented change in the global capital markets, advised Tabb.

“You need to be able to get in and out of markets at a moment’s notice.” A lot of this change is driven by regulatory initiatives, such as Dodd Frank, the SEC Equity Market Structure Committee, and FINRA, said Tabb. Other projects coming down the pike, such as the Continuous Audit Trail (CAT), will require more transparency and massive amounts of data transfer, while Europe has EMIR, MiFID II, MiFIR and AFM.

Events like Brexit also underscore the fleeting nature of investment returns and flows.

“Alpha has never been more transitory. It shifts and flows and is very hard to capture depending on what people are trading,” said Tabb. To capture alpha, “institutions need to be able to get hold of that data, manage that data, massage the data and distribute that data” in ways that they haven’t experienced before electronic trading took off around 2006, added Tabb.

What’s needed is a more agile infrastructure, which means adopting some of the newer technologies, such as open source and APIs (application programming interfaces), several speakers suggested on the webinar.

In the past four to five years, there’s been unprecedented growth of unstructured content, noted Arjun Nagar, Senior Business Director for market development for North America Enterprise Capabilities, Thomson Reuters.

“[Capital markets firms] have to evaluate their internal processes and systems to see how they will address and manage not only their internal complexity of data, but the unprecedented growth of unstructured content as well,” said Nagar.  With advancements in technology, Nagar said organizations have found a way to look into that data and make smarter decisions.  The key is for organizations to understand the data by data linkages, he said.

With events such as Brexit and regulations driving demand for analysis of big data, firms are also looking at partnering with FinTech companies involved with cloud computing to lower their costs and to become more agile. They are asking, “How do I move from an industry focused on speed toward smarts or intelligence,” said Tabb. Historically banks have been focused on customization, but now people are talking about the idea of configuration. “We are moving now towards a configuration environment in which institutions look at partner technology startups,” said Tabb.

Build vs. Buy

 In the past, banks have developed all of their own technology and resisted outsourcing it. But the pendulum on build vs. buy could be swinging the other way.

What’s changed is that a lot of clients, particularly in equities, are asking the sell-side for execution data in real time to be made available to them, noted Citi’s Sood.  US equities markets have had to deal with tons of data since decimalization in 2001, leading to fragmentation of trading across scores of venues. “Regulatory change is demanding that this data be made available. All clients are asking to know the details of how we took care of the order from them. In the past it was a small set of clients,” he said.

“Transparency and the real time ability to prove the quality of execution at this juncture is not a luxury. It’s a commodity,” said Citi’s Sood. “Everyone has to do it and that will be the standard going forward.”

As such, the UK’s Brexit vote served as a wake-up call about market infrastructure and managing big data. While the ramifications of the Brexit vote are still evolving, there is no doubt that such events are bound to happen again and that market participants will be tested for their agility.

Past blog posts related to data issues:

MiFID II: Brexit, Pain Points and Other Hurdles

Raising the Curtain on Treasuries

Will the Buy-Side Become Fixed Income Liquidity Providers?

TCA Trends: Venue Analysis Tops Buy-Side Priorities

A Tale of Two Pilots: Maker-Taker and the Tick Pilot

TCA: Bridging the Gap Between Equities and FX

A Hard Look at Last Look in Foreign Exchange

The SEC’s ATS Transparency Rules: What’s the Impact?

SEF Trading: Challenges and Regulatory Hurdles

MiFID II: The Buy-Side Transparency Challenge

Tick Pilot: The Road Forward