Herd Instinct: Financial Firms Combat Information Overload with Social Networking Tech

In the late 1840s, a young Paul Reuter realized that using homing pigeons to deliver stock-market information from the Paris exchange on a route between Brussels and Aachen in Germany, would be much faster than the post train. Over the next few years, pigeons were eventually superseded by a telegraph link between the UK and the Continent, and further sped up by an extension to Cork, Ireland, which would transmit information dropped in canisters by passing ships from the US directly to London, creating a rudimentary and highly manual form of an electronic information web.

Today, data is transmitted through underwater fiberoptics, lasers and microwaves at incredible speeds. The production of this information occurs on an ever-increasing scale, particularly for financial services firms that—faced with modern electronic markets, large volumes of record retention, and an interconnected workplace—have found their internal information estates blooming in recent years.

“Even a business as small as Majedie has a frightening amount of content—really, it’s quite staggering, and it’s growing exponentially,” says Simon Hazlitt, information director at London-based Majedie Asset Management, which has about £9 billion ($15 billion) under management, and employs just over 40 people.

Trending Topics
The issue is so acute in some firms, and the inefficiencies that result from poor information management so broad, that many have been eyeing other industries for ideas on how to address the problem. Social networking is a kind of exercise in data management and discovery, where people search for contacts based on a series of information factors, form connected webs of shared photographs, and items that are dynamically updated, and communicate with one another through a central medium.

If the word “contacts” is replaced with “documents,” and “photographs and items” with “files and research,” it becomes easy to see how some principles of social networking can be applied to the burgeoning information archives at trading firms.

“The ability to monitor, in a shared, digitally collaborative environment is going to continue to challenge us until we sort it out. We don’t have the answers yet, but there’s heavy pull for greater sophistication in our internal abilities to do digital collaboration.” —Catherine Bessant, Bank of America

Hazlitt says Majedie’s staff is beginning to experiment with using “tagging” functionality, and a number of different technologies such as vendor Coveo’s enterprise search, Microsoft SharePoint, and even wikis to expand a more intelligent use of information and content produced by the firm.

“We have a turbocharged wiki inside SharePoint called MajWiki, which is our qualitative research system,” he says. “It is used to log research items, and for me, being able to generate the experts in a specific area is tremendously valuable, but so is being able to inform all of us on what’s trending. What have been the most popular shares in terms of research articles published in the last week? Where’s the research engine trending? This is obviously private information, but it’s fantastically valuable.”

Utilizing tags in a single, central document store, Hazlitt says, greatly simplifies version control for things such as a fund prospectus, enabling staff to access the latest version without having to e-mail legal and compliance staff to check, and to bring up information relevant to a current issue that might have been explored several months prior. More than that, though, is the potential future application of tying in this data with the actual users, building profiles for “specialisms” in a business where one of the core activities is research on complex organizations.

“We’re in a position now of putting in a fully fledged collaboration engine that offers all of the business the whole gamut of subjects to effectively blog about,” Hazlitt says. “What we’d like to do is index that content, because if anything will tell you who the expert is on cash management or something, it’s a Coveo view of the search term, which will give you all the blog articles and the active directory profile of the person who has done the most. For me, that’s the next step.”

Friend Request
Social media and markets have historically been linked in two primary ways—either through sentiment analysis, such as that used by the ill-fated Twitter-based Derwent Capital Markets fund that went belly-up in May 2012, and later popularized through sentiment indicator inclusion on platforms such as Thomson Reuters Eikon, or through regulatory measures about what can and can’t be mentioned on social-media networks, specifically Twitter.

There aren’t many people talking about the underlying technology concepts and their applicability to workflows and the trading process, though, as opposed to just taking in a firehose of data. On a collaborative level, tying in information management with social networking principles potentially offers market participants a powerful way to aggregate and utilize information in ways that can pierce through the static generated by the daily process of business.

“What we’re talking about is noise, and how we can make sense of that,” says Stuart Taylor, CEO at London-based Algomi. “In a typical trading-floor environment, there are thousands of potential opportunities coming through voice channels, the e-channels, and information that you just happen to pick up along the way. Each one of them has the potential for a trading opportunity. What we try to do is say, if we’re looking at brokering the flow then it’s not necessarily about printing 10,000 trades in a day—it’s about finding out what the right 400 or 500 great trades that a bank should be focusing on today are, based on information it knows, and ensuring that content gets to the top of the list for everyone.”

Algomi is one of a number of platforms seeking to blend certain social-media mechanisms with trading, in this case the arrangement of fixed-income sales. It uses a combination of intelligent information management with advice on potential partners, not unlike suggestions for contacts that appear on LinkedIn or Facebook, but on a deeper scale.

Rather than opportunities being blasted out to an entire sales and distribution division, it matches a handful of people across firms who are likely to get the trade completed, using algorithmically-intensive business rules that factor in relational aspects such as historical data on similar trades. It then places them in what the vendor calls a “collaboration group,” which incorporates chat and other pertinent information, so that they can get the trade done.

Other firms are also utilizing practices popularized by social media as a basis for trading practices. DealVector, for instance, markets itself as LinkedIn for the buy side, and matches validated participants on a deal-by-deal basis. Squawker, a London-based block-negotiation venue for sell-side firms, works through users defining a network of potential partners for trading based on specific criteria such as settlement rates and product interests.

“On Squawker, we allow firms to define their own, personal universe,” says Chris Gregory, CEO at Squawker. “We’ll present a list available, and you can define who you want to trade with for whatever your reason. You also define acceptable behavior, because Squawker is a discretionary, invite-based system that begins negotiations. It’s like a big gathering where everyone tells Squawker what they’re interested in buying or selling, whether that’s buying at the consolidated mid-price, or selling at volume-weighted average price, or whatever. Squawker then makes the introduction to the person who will be likely to do that, and the two of you can negotiate, away from the rest of the room. It’s almost like a private chat, but one that is very machine-readable, and one that generates FIX messages, execution reports and so on.”

Risky Business
While the wider market is slowly coming around to social technology, using it inside or between financial firms can be risky. One example is the maintenance of Chinese walls inside mergers and acquisitions departments at investment banks, a crucial block for ensuring that information leakage on deals doesn’t occur, given that laws on insider trading are ruthlessly—and publicly—enforced.

This is only part of the potential issue with incorporating social technology into the wider trading landscape, however. The recent scandal over rate manipulation in the foreign-exchange markets has demonstrated how even basic social tools such as multi-dealer chat rooms can result in manipulative behavior that has real costs for an institution and its employees.

There is a strong argument that this is down to the traders rather than the technology, but major banks seem to have taken the approach that facilitating the potential for this is undesirable—at the time of writing, all tier-one investment banks had banned the use of multilateral chat rooms on their trading desks.

Such is the sensitivity surrounding the potential risks of social-based technology within banks these days that senior executives are hesitant even around collaborative tools, saying that they need more time to study them before allowing employees the ability to collaborate on formalized networks, either internally or externally.

“Those things are dicey because protecting data and information in a collaborative environment, when you’re a financial institution with fiduciary responsibilities, is very tough,” says Catherine Bessant, global technology and operations executive at Bank of America. “The ability to monitor, in a shared, digitally-collaborative environment is going to continue to challenge us until we sort it out. We don’t have the answers yet, but there’s heavy pull for greater sophistication in our internal abilities to do digital collaboration.”

Socialization
As in other areas, such as the expanded use of mobile devices, technology at investment firms is not immune to trends and practices in the wider world. Social networking is now such an integral part of everyday life that many new employees are simply used to using those methods to collaborate with colleagues and friends, and are starting to push for that capability in the professional environment.

With venues and platforms making waves by cleverly incorporating social tools, it seems inevitable that the interconnected nature of the modern world is slowly pushing trading—in itself, an inherently social activity—toward utilizing more of these workflows and underlying technologies. As an industry, though, with its own particular set of requirements and risks, a wholesale embrace of social-networking principles is still inappropriate for some activities. Junior analysts may still have to wait a while for the boss to accept their friend requests.

Salient Points

• Given the sheer level of information that flows both inside a business, and in the wider markets, effectively sifting through that to find specific items or actionable data can be challenging.
• As a result, some venue operators, investment firms, and platform vendors are incorporating elements of social networking technology, in an attempt to introduce a more intelligent approach to managing information. This can range from document control inside a business, through to selective identification of trading counterparties in ad-hoc networks.
• A wider rollout of collaborative tools is hindered by concerns inside institutions about information protection, insider information leakage, and as a direct result of recent scandals that have been centered on the use of social technology, such as multi-dealer chat rooms.