The critical element to successful information technology is the underlying data. Without good data, all that can be expected is 'garbage in, garbage out'.
This blog has spent a considerable amount of time talking about both the Mother of All Databases and what would make up the 'good' data is should hold.
This database, which has been championed by the Economist Magazine and Wired, would have current asset-level data for every financial institution, broadly defined, and shadow banking entity, including structured finance securities, on an observable event basis. The data would be made available to all market participants, including the regulators.
Another critical element is the ability to transform the data into useful information.
This blog has talked about how regulators are going to be able to piggy-back off of Wall Street's ability to transform the data into useful information. This is a short-term solution.
Recently, IBM demonstrated the future with its 'Watson' information technology. Suddenly, we can see a future where regulators can ask 'Watson' a question and it will sift through the Mother of All Databases to find the answer.
... Reeling from a crisis that wiped out some of its most lucrative products and a regulatory overhaul that will curb high margin activities, the financial sector sees information technology as its saviour.
... If, by dint of IT, financial groups can automate functions carried out by error-prone, bonus-guzzling humans, their cost base will shrink, bolstering profits and pleasing investors.
The Holy Grail in this quest is Ficc – fixed income, currency and commodities trading. Unlike stocks, which have been traded electronically for years, Ficc is still human-based, partly because much of it consists of tailor-made derivatives not quoted on exchanges.
In the good years, the lack of price transparency for these “over-the-counter” products enabled banks to charge customers high prices. But in an environment where regulators penalise illiquid assets and push more derivatives on to exchanges, the human touch has become a liability to be replaced by cheaper algorithms.
... Expenditure on IT will be considerable – good news for tech companies but not for banks.
JPMorgan, for example, puts the cost of its forex integration at half a billion dollars.
Multiply that by several product lines and countries, and only a handful of financial institutions will be able to take part in the technology revolution without harming short-term profits.
A widespread use of technology is almost certain to depress margins as customers refuse to pay a premium for trading electronically.
... The upfront costs of technology have the added advantage of being a barrier to new entrants, enabling five or six large participants to dominate. Call it the Bloombergisation of trading, with banks’ technology firmly embedded in investors’ trading systems.