The Associate Press reported on a press release indicating General Electric would pay US $3.2 billion in back taxes. The problem with the report is the press release was fake. GE opened at $20.05. At 11:09, they were up to $20.08. By 11:59 GE was down over 1% to $19.87. Now, unlike Apple and United Airlines, both victims of news-reacting algorithms in 2008, GE did not experience the rapid drop false news can have on a stock. That said, the many firms we speak with exploring trade triggers on news and other unstructured data beware. You can be gamed.
In this case, you would have been gamed by some corporate-hating ideologues called the Yes Men, who apparently don’t realize that the average American’s retirement savings are in mutual funds, which, you guessed it, hold stocks. So beating up on GE doesn’t hurt GE management. It hurts GE shareholders, many of whom are the proletariat masses those idiots hope to champion.
I digress. The point of this exercise is to show my unstructured data friends that even the AP will let you down, so watch those trade triggers. In the slow latency world of reference data management, firms bring in multiple feeds. Three is popular. Scrubbing logic assumes a price is correct if two of three match. You might have to think about applying similar logic.
Imagine a more nefarious exercise where someone understands how algorithms consume news and apply sentiment analysis. There are a myriad of ways, including issuing false press releases or untrue statements on Twitter for you Twitter fund groupies, to affect stock sentiment. Maybe someone only needs GE to move down 1% in 50 minutes to make money. Keep that in mind as more firms employ low latency trading strategies based in part on news. At that point, penny stock spam campaigns will be rookie league compared to what’s possible at the institutional level.
I spend a lot of time with the technology arms of both these exchanges, so I figured while everyone else debates what a potential name might look like, I’d opine on what a marriage might look like from a technology offering perspective. In short, while there is some overlap, there are some highly complementary offerings. While trading volumes and listings may be down, the real money potential from a growth perspective would come out of the market data and technology areas. NASDAQ OMX keeps those groups separate right now. NYSE Euronext has them combined.
On the exchange technology side, NASDAQ OMX has the lead. Over 70 exchanges run on NASDAQ OMX technology and HFT shops I’ve spoken with like the matching engine. That said, NYSE Euronext is no slouch and maintains a small cadre of exchanges running their technology as well. A marriage would provide ownership of a significant portion of global trading done on a single provider’s technology.
Risk management maintains the biggest overlap now that NASDAQ OMX owns FTEN and NYSE Euronext offers RMG. This is also becoming a popular area for market entrants right now. Celoxica, Fixnetix, Mantara, ULLINK, SunGard, BonTrade, etc. are all vying for pre-trade market share. I’m not sure how RMG and FTEN would come together. That said, NASDAQ OMX also owns SMARTS, which controls half of the commercial market for trade surveillance at exchanges and regulators and has its sights set on the broker/dealer community. That market is owned by Actimize, with SunGard and Oracle (Mantas) following. Combining strong pre-trade capabilities with market surveillance provides a compelling differentiator and could be interesting.
For market data products, NYSE Euronext and NASDAQ OMX are quite complementary. NASDAQ OMX has made some forays into providing retail access to both real-time and historical market data, while NYSE Euronext has been focused on creating more commercial institutional products like their consolidated tape offering and their Wombat ticker plant / feed handlers. Combining the market data teams is perhaps the most exciting potential product area. Fritz and I looked at the exchange data market potential last year and found it a hot revenue area.
Lastly, NYSE Euronext is much further along building commercial product for broker/dealers. They have the processes in place, the management structure and coordination, and the experience. They could help NASDAQ OMX, which has just begun moving into that area. They have new datacenters with excess capacity, consulting capabilities through a partnership with CSTK, and the SFTI network. Their marriage could upgrade global trading capabilities given their presence and position in the exchange technology market. That said, it could also bring with it a slew of M&A as the combined exchange goes after more of the broker/dealer trading stack.
So… The prosecutor for Paris Hilton’s cocaine charges gets arrested for, well, cocaine possession. Senator Claire McCaskill, who sponsors a bill to fire federal employees who do not pay their taxes, gets caught not paying $287,273 in taxes. The SEC’s David Becker, in charge of recovering money for victims of Bernie Madoff, has a mother with a $2 million investment in Madoff. As I sit here watching my bracket for March Madness, I’m wondering how many regulators and prosecutors for Galleon are watching their own brackets. I’m wondering if any of them did their homework. How much effort did they put into achieving a competitive advantage? How many Vegas odds makers are looking at travel schedules, injury reports, and scouting reports to determine odds and/or rankings? How many Galleon prosecutors are making decisions based on those rankings?
A Moody’s analyst tells a junior analyst about m&a. The junior analyst tells someone at Galleon. And? Galleon got the injury report and made the pick. Pardon me for waxing on about expert networks and people doing homework. Certainly, there were some shady activities in that firm. But really, where is the line between diligence and insider trading? If a regulator’s brother was best friends with a pro scout for an NBA team, would the regulator pass up the opportunity for expert feedback on their picks if they were at the same party?
The attack on information flow is disturbing. I wonder how long it will be before the SEC wants to see Google queries. How long before they want to see if an analyst scraped Facebook postings of employees? How long before you have to save your Twitter hashtag searches? Ah well, I hope they do well on their pool. I’m running middle of the pack, but being a total homer with Wisconsin to win it. I have inside information that it’s cold as hell in the winter and there’s nothing to do there but be indoors playing basketball or out on the ice on some lake waiting for ice fishing rig flags to pop up because I lived there. Please, don’t arrest me if they win.
I lead a panel at SXSW on black box trading on news last Sunday. Prior to our panel, I spent the day in panels on qualifying and measuring online influencers. In simplistic terms, sites like www.klout.com provide metrics on your overall online influence. The panels offered an impressive array of statistics and visualizations tracing metrics on online influence from the innocuous (Bentley cars) to the false (Nelson Mandela is not dead). My particular score… Well, not so good.
First off, let me say this. Capital markets friends, we would be embarrassed to put slides up after these whiz kids. They do data visualization in ways that are both cool and easy to understand. We typically choose one or the other and rarely choose cool.
Second, they’re one track mind geniuses. It took more effort to talk to some of these companies about their potential outside social media marketing than it was worth. None of them attended my panel on black box trading on news, even the news aggregation companies. Ah well. It’s not my job to help them. It’s my job to help you.
Saving the best for last, you need these people. They are your future. They can understand things about the companies you cover that you don’t know yet. Do you know who is going to influence the opinion of the latest razor? Who is going to impact perceptions of the next consumer electronics product? These people know. They can determine things they don’t know matter yet. Who works for which companies? Are those people happy at work?
As an asset manager, they could also become your worst nightmare. Let’s say I know the 100 most influential people online about a company. If you wanted to affect that company’s stock price, how much effort would it really be to pay some of those people to say very specific things about that company? Think of it as a penny stock spam campaign on steroids.
I like talking about the potential of machine readable content in trading. Signal generation. Risk management. News is an obvious first step, but are reporters the only trusted sources of information anymore? In fact, how do you know reporters even tell the truth? Tracking social media influencers could be the next wave of quantitative analytics. We’re still in our infancy with news, but get ready to account for both news and influencer opinions about news as dual components in your signal generation.
I spoke at Tradetech Architecture Data Architecture conference this week in London. It was a surprisingly well-attended conference full of interesting people. Nice job on this one WBR. After the last speaker finished blah blahing about real-time risk and surveillance technology (me), it was time to network over drinks. A guy from an FPGA development company introduced himself to me and said he hoped to sell their framework and custom development to banks to compete with existing vendors. Since I gave him some free advice, I’ll be democratic and share it with everyone. Why consider other vendors competitors? Sell to them.
Sybase doesn’t generally tell me who and they never tell me how much, but I know some of their biggest CEP sales are to other vendors. I’ve already written about Streambase and a company that didn’t want to be mentioned the first time, so I won’t mention them again. Look how many vendors are adding hardware acceleration to their platforms. Fixnetix, NASDAQ OMX’s FTEN (Ted, you’re keeping the CapsLk key alive), Activ Financial, Mantara, etc.
Companies like Lab49 make a decent living helping other software companies develop functionality. Well, I should say Lab49 makes a decent living because there just aren’t that many firms in the ‘companies like’ statement and there should be more. Software firms have white-labeled or embedded functionality for years. But now, the speed paradigm is becoming a big hurdle. In this space, you have to develop really fast things really fast or you’re dead.
If I were a custom shop with hard to learn skills trading vendors are the first people I’d be trying to sell my skills. They need them the most, especially some of the legacy folks with a really fat, stable code base and entirely too much process in their development cycles. The hardware dragons are scaring their customers. If they could swap 10,000 lines of existing functionality for a card, that’s a no brainer to reduce the amount of code they have to support and the number of processors it takes to run that code. Oh, and I’m not just talking to hardware development shops. Network appliance providers, monitoring solutions and messaging middleware providers also have potential to augment or replace code in vendor solutions.
Well, I’ve been out for a while. Sitting on an airplane from London with DMB ‘Crash’ stuck in my head. Prior to this, I had to burn some vacation because I tend not to actually use much.
We just put out our annual top ten trends report . I’m going to put out number eleven as a freebie to all. Unstructured data for risk management. Folks, it’s an information jungle out there and it takes the right technology to do the crawling. Electronic trading has taken to unstructured data and semantic applications like a five-month old teething girl to my finger. They have paved the path to reapply this technology into all of these risk management efforts going on. I mean, if you use it for opportunity, what adjustments do you really need to make to the chain to apply real-time, machine-readable news to risk efforts?
I was walking through the Savvis datacenter in New Jersey with my friend Tony a couple months ago and he was telling me they were bringing in lots more low latency news feeds. Further, the outside world is starting to take interest in unstructured data in trading. The New York Times recently covered it and I just got asked by South by Southwest (SXSW) to lead a one-hour discussion on the topic to their interactive track. Expect folks like Dow Jones, Thomson Reuters, Deutsche Börse, Raven Pack, Wall Street Horizon, etc., to start creeping risk management into their marketing collateral.
Think about it. Real-time credit risk. Market risk for regulators. Counterparty risk. Tell me one significant risk management arena that does not benefit from the application of real-time unstructured information. Even things like operational risk for employee monitoring benefit from being able to track things on Twitter, the news, etc. Further, no offense to providers, but these services aren’t cheap. Someone outside the trading group will come calling asking to share the information and technology stack to enhance the firm’s risk management controls; and they should.
Lastly, once trading firms figure it out, it makes perfect sense for other industries to adopt. If I’m waiting on my shipment of basketball shoes from China, would it make sense to know the supplier’s ship just got hijacked by a group of 14-year-old Somali kids with a boat and some AK 47s? There are a million applications outside capital markets for this technology. There are a myriad inside capital markets. In 2011, look for growth in unstructured data inside and outside trading.
Last week I was in New York mixing holiday parties and client meetings while wrapping up my market surveillance technology report. I also ventured into the deepest level of Dante’s Inferno (Toys R Us in Times Square) to buy a little train set for Christmas that I am now toting through airports like every other tourist. Incidentally, I am now going to model my holiday Times Square proximity trips around the homeless guy getting off the elevator. No showers for a week. Talk about parting the Red Sea of otherwise oblivious humanity.
I digress. So NASDAQ OMX bought FTEN and BNY ConvergEx bought RealTick. That’s good stuff. These companies weren’t quite at their apex, but they weren’t very far from it either. I have to say, the more I think about SMARTS and FTEN surrounding risk management, the more I think someone at NASDAQ OMX had some vision. What a fun product management job meshing those two solutions. I suspect those deals will trigger a couple more. July is coming quicker than it looks and pre-trade risk is going to be required reading for sponsored access.
Contrast that with the slew of EMS providers with for sale signs. Nada. Land of misfit toys from an investment perspective. It isn’t that they don’t have a market or aren’t making money, they just aren’t the hot toys for the season. Further, some of them are downright trés cher.
Ted and I sat down to chat about the FTEN acquisition. Some of that conversation is client-confidential, but I don’t think he’ll mind if I talk about the generic investor stuff. We traded stories of companies that had too many investors to sell and companies that didn’t have enough to sell. It’s a delicate tightrope and Ted had to walk a little of it over the course of nine years building FTEN. Same with figuring out where you are on the momentum spiral. I spent a little time on Saturday walking through the Guggenheim. Up through spiral staircase… (U2 reference for those not in the know). The placement of the art in relation to the climb was important to the exhibit. Same with when you sell. It’s delicate. It’s as much art as accounting. Wait too long and your audience loses interest or gets tired and turns around.
Here’s my advice. Your audience has money to invest. Look hard internally. Do the gut check. Are you spurious or authentic in where you are in relation to market demand? Make sure you aren’t at the apex headed back down. Think about where you fit in a solution that needs to exist in nine months based on regulatory changes, market demand, global and/or product opportunities, etcetera. Look at your investor structure. Are you going to be a nightmare to buy? To integrate? If so, you might want to lighten up the product roadmap and make some acquisition-position changes. Christmas bonuses are here.
As an aside, this year’s annual CIO survey is upon us and response has been anemic. If you enjoy my little freebie nuggets of capital markets technology truth, how about encouraging your senior technology friends at sell-side and buy-side firms to unwrap 15 minutes of their life to help me out.
There are a lot of motivators to this job. Some people do it for the press quotes. Some do it to be recognized as an ‘expert’ in their field. Some because you essentially get paid to learn. Me? Two reasons in inverse order.
- I like the people. You can’t sell intellectual capital if you surround yourself with dummies. Any of you in any decent-sized (or family-owned) company can point to at least one person and think, “How in the hell did that person get where they are?” There is none of that here. It’s also why I like my competitors. They can’t hire dummies either. (Well, based on SunGard’s Analyst Day last Monday, one of the analyst firms can hire a pompous chest beater).
- The entrepreneurial part of growing Aite Group is like crack to me. I love how tangible growing a company feels. Building a product. A brand. Adding a business line. The ‘Other Contributions’ is my favorite section of the biannual performance review. I wish I had started day one instead of day 150.
So what’s the point? I see Peter Orszag joined Citi today. Former Office of Budget and Management head. An economist. Have you seen the budgets coming out of the OMB? Would there even be a tea party if that office or the Congressional Budget Office (Mr. Orszag’s prior post) had actually functioned? I think the populist attack on Wall Street is a great fraud. Wall Street takes bailouts, promotes stimuli, and hires the people pointing the fingers. I’m not trying to espouse my Libertarian leanings here. I’m just saying, I think we could use a few more people in senior positions in our business who’ve actually built something from the ground up. People with dirty hands and a failure or two under their belt. People who think the ‘Other Contributions’ category is where the innovation opportunities exist.
In Pretty Woman, Edward says, “I want to build something” as justification for going into the ship-making business. My two cents of the day: We need more of that. Maybe one of the reasons we’re such a herd-mentality business is because we don’t hire enough people who’ve worked in a small business. Or enough people who’ve created something new. At SunGard’s event, Chris Conde said he’d never seen a year with so little product innovation in financial services. I agree. Maybe we need a release saying someone like a Jeff Bezos, a Mike Sinyard, heck, a Jake Burton, is now running strategy for a big bank to get some innovation back.
The nice thing about this blog being off the reservation is that I can write about anything I want. Further, because it’s a freebie, you can like it or return it for a full refund. With that, today’s post is a shout out to my best bud for a dozen years. He’s done more than a dozen 14ers, hundreds of other hikes and snowshoe treks, lots of camping, and one cold night in the back of a Durango in the middle of nowhere cowering with me while a mountain lion roared outside in the dark.
He put me in the hospital once with a separated shoulder and almost killed us both on a cliff on a snowshoe hike in the Rockies. He also thought the pack of coyotes would be fun to play with on an evening run once.
He’s also been there in the office for every report, vendor briefing, phone call, and webinar. I’ve had to push mute in a hurry more than once for him. He never caught a rabbit, but he did snag a squirrel once off the fence. Cancer took him out, but not before a life of memories.
Well, it’s Friday night so I’m probably one of the first people to see this story posted because the rest of you probably have a little thing we like to call a life. I think the idea of ‘expert networks’ playing a role in insider trading is interesting. I guess you could call Aite Group an expert network. Our core product is intellectual capital after all. We don’t chase information for trading purposes though, and I can honestly say I’ve never been asked to do so. The thing I do get asked to chase on a regular basis is M&A potential for several of our clients.
I like pairing software companies. I can’t tell you which companies are married because of my advice, but each deal is like a little medal on my chest in my head. Every so often, I have these little epiphanies that company A should buy company B because piggybacking their products makes a perfect couple. I had one today. I was looking at this company and the whole time I’m on the phone with them I’m thinking, “If company A bought these guys it would be like putting a missing puzzle piece in place.” So, I try asking some questions. I can’t really tell these folks why I’m asking what I’m asking, but it’s one of those times having the marketing person lead the briefing is counterproductive.
My question to you marketing folks forced into wearing multiple hats as analyst relations. Have you ever seen an analyst write your company up with a list of clients you couldn’t disclose for marketing? It irritates the expletive out of me to get the standard ‘client who shall not be named’ speech over and over. I’m not a reporter. It’s not my job to publicize your client list. It’s my job to make sure your solution is real. For my clients, it’s my job to figure out if you can add value as something they should buy either as a solution or you as a company.
So, while the expert networks in the WSJ story may be crossing a line as it pertains to insider information, it is almost always to a vendor’s benefit to not throw up a marketing wall because your primary goal is looking good in a report. Think about what the analyst does. You may not know why they’re asking what they’re asking. But, the odds are good providing something a little deeper than the PowerPoint is to your benefit if they’re asking. In your case, feeding the expert network a little insider information is both legal and potentially beneficial.