Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
The bright side of data regulation
It was little more than a year ago that trading spreads across a range of instruments had blown out to record levels, courtesy of the first market impact of covid-19. Now, they are as narrow as they have ever been.
It’s that sort of volatility with which most of the investment community has had to cope, including the providers of all the data which the traders need. This tends to be a chicken and egg scenario.
As John Mason says: “With volatility comes wide spreads. At some stages earlier last year we saw spreads so wide that a lot of people felt they couldn’t trust the prices. We saw five times the normal number of price challenges as clients wanted their prices validated.”
Mason is the London-based global head of enterprise for the middle and backoffice at Refinitiv Financial Solutions, a big provider of market data and infrastructure. Refinitiv held a webinar last week (April 21) for clients and prospects in the Asia Pacific region. Refinitiv was acquired by the London Stock Exchange Group last year.
Also speaking were his colleague Janelle Veasey, the head of real-time customer proposition, also based in London, and Daniel Kennedy, a director and APAC head of sales for Alveo, based in Singapore. Alveo is a major data and workflow management company.
Mason said that the big trends of the moment, post-covid, were more regulatory oversight of data, more digitalization and electronification, and more use of cloud-based services.
Like most components in the financial services sector, increasing regulation is both a given and a challenge for data providers too.
Mason said: “Sometimes a new regulation comes out and you wonder whether they’ve spoken to the [person in charge] of the previous regulation. There is a lack of uniformity.”
Kennedy said the regulators were getting a lot more granular in their oversight, looking at things such as data quality and meta data, which was becoming more common.
It is easier to add levels of data than pull them apart, according to Mason, so it is important to have granular data to start with. He said that while volatility had abated somewhat, it had not disappeared.
Looking on the bright side, Kennedy said increased regulation often provided opportunities, such as in post-trade reporting. “New regulations can deliver great byproducts,” he said. “By continuing to hold extra data, you may be able to spin it and add some alpha.”
There was more to the cloud than technology, he said. There were also people and process. “You have to show stricter controls and that could create operational efficiencies.”
