The demand for high-quality data is soaring. From interest rate movements on money market instruments to equity trading volumes by security, to volumes of global credit derivatives contracts, precise monitoring of market activity enables improvements in trading outcomes, risk management and overall performance.
Related: Harnessing the Power of Data to Improve Trading Outcomes
Increased demand for greater market transparency is even more prevalent in volatile and shock prone markets. High-volume days have become increasingly common over the last year, as uncertainties around Covid-19 and the pandemic’s economic repercussions continue.
This upheaval in activity has underscored the importance of reliable, empirically based market data. Quality data can help explain how forces like greater retail participation in equity and equity-linked securities trading impact markets and, ultimately, lead to fundamental change in market structure.
Implications of Increased Retail Activities
The significant growth of the retail investor segment, and the related increase in meme stock trading, has changed the way that equity markets behave, encouraging increased volatility and, in turn, impacting overall demand for data.
Access to daily transactional data has become increasingly important to buy- and sell-side firms looking to mine the details of this retail trading activity to improve their risk models.
The current retail activity also has liquidity implications. Does retail represent a source of liquidity for institutions to tap into, or will it create conflicts of inaccessible liquidity in unlit markets and questionable best execution for retail investors? The answer must be fact-based and supported by market data.
Role of Technology in Equities Trading
Technology innovations and increased computing power are evolving the markets at breakneck speed. In trading, we see faster speeds, more precise decision making and unprecedented scalability.
Alphacution, a research firm focused on modeling and benchmarking impacts of technology on global financial markets, describes the latest wave as the fourth generation of the quantitative revolution in trading technology. The first generation brought options and data feeds; the second generation added pairs trading and exchange models; the third generation was high-frequency trading and smart order routing. Now we have the commission-free platform effect: frictionless, commission-free, gamified – mainly based on a strategy of “mobile-first.”
The dissemination of market information through social media and an exploding alternative data industry are providing non-traditional insights into market sentiment and consumer behavior. Analysts, traders, and portfolio managers who anticipate and act on this turbulent mix of news, rumor, and trading activity are more likely to perform strongly – and they’re looking to authoritative market data to help them do so.
Turning Data into Value
To maximize market data value, a robust and efficient data management program that feeds relevant, high-quality data into analytics and decision-making engines is essential. Normalizing data including through standard security identifiers mapping, putting data into historical context, and developing innovative sentiment models are integral to any data management program.
Given the need for quality data in the current environment, firms are looking to acquire their most critical datasets from verified trading or clearing activity across key asset categories -- equities, fixed income, and derivatives. It is important to obtain data from a reliable source with a strong data collection and delivery track record. One of the primary benefits of automating and digitizing back-office processes is that every event that occurs in the trading and settlement process leaves an electronic footprint. The benefits of this automation are now accruing to the front and middle office as trading, risk, and price discovery are relying on the empirical trade observations originally captured by the back office.
The time value of data is becoming increasingly relevant as investors deploy technology to identify fleeting price differences at a massive scale. Data needs to be delivered in formats that allows easy input into proprietary models and at frequencies (intraday, daily, or weekly, depending on the asset class) that enable users make timely trading and risk management decisions.
Premier Post-Trade Infrastructure
As the largest depository in the world and the primary infrastructure in the U.S. for clearing, settlement, and asset servicing, DTCC has more than 45 years of experience processing transactions across multiple asset classes. In 2020, DTCC processed USD 2.33 quadrillion of securities and approximately half of capital markets activity globally flow through DTCC, including OTC derivative reporting and institutional trade confirmation between buy side and sell side.
A Trusted Suite of Data Offerings
The primary objective of DTCC’s data offerings is to provide greater market transparency for investors and institutional financial services participants. DTCC’s trade observation products are branded “Kinetics” to depict the forces of energy, motion, and mechanics of capital markets. For sophisticated investors and traders in Asia Pacific, trade observations captured in the Kinetics portfolio provide new insights into the market in terms of liquidity, valuation, risk, momentum, correlation, contagion, and concentration - to enhance users’ understanding of current and historical market activity.
Our Kinetic offerings include U.S. and global equities, short-term fixed income trading like commercial paper, and credit default swap trade activity. Kinetics products can help firms derive new market signals, refine risk factors, more efficiently compile market aggregates, and enhance price discovery across asset classes to support risk and investment strategy decisions.
This article originally appeared in Funds Global Asia on November 25, 2021.