I have three topics that I’d like to hit on, so let’s just get to it. To read previous Waters Wrap columns, click here.

Consultants

I have to be honest with you, dear reader: I’m not the biggest fan of the largest consulting firms, of which I mean the Accentures, Bains, Boozes, Bostons, Deloittes, EYs, McKinseys, and PWCs of the world. Maybe I’ve been living in Williamsburg, Brooklyn for too long, but it’s all just too corporate for me.

Many of the research reports that come out of these firms come off as obvious, if not outright pedantic. They also seem to care more about retail finance rather than hardcore, wholesale/institutional capital markets—order management systems, market data, quantitative analytics, etcetera. And there’s the old stereotype that though consultants give advice, they’re not liable when things go wrong—it’s always the end-user’s fault, not the messenger’s. Then again, what do I know? I don’t work side-by-side with these folks, and they rake in a ton of money…so I guess they must be doing something right, right?

And so it is that I was a bit surprised when our Josephine Gallagher broke the news that the European Commission contracted Accenture to build out the European Securities and Markets Authority’s big data analytics platform, which will operate on the Microsoft Azure cloud environment.

As Jo wrote about previously, Esma, which is publically funded, doesn’t exactly have the biggest tech budget, but if it wants to properly surveil the markets, it needs to improve its big data analytics capabilities.

Here’s how Paul Hussein, team lead of supervision and analysis systems at Esma, put it: “As we only have enough money to keep ticking over with the [responsibilities we have], and the systems we have, and then just enough money to build a new system, it’s very risky to look at new types of technologies. So, we must have a risk-averse manner, by going slow and steady rather than fast.”

This begs the question: Is Accenture the right choice to build something effective, or is it just the most cost-effective choice? Perhaps a bit of both?

Maybe I’m just being cynical, which my dad likes to often tell me I am, but if regulators are going to require more and more data from end-users, the regulators themselves must also be investing in tech and innovation to actually make use of this data. Otherwise, what’s the point of all these new or expanding regulatory regimes? 

ESG

Belgium and Germany are experiencing “a 1-in-100 year deluge” of rain, killing more than 100 people and counting. Uncontrolled wildfires are spreading across Oregon and California. In June, a deadly tornado ripped through the southern border of the Czech Republic. In February, hundreds died from unprecedented extreme cold in Texas.

When it comes to climate change, it’s clear that storms, fires, and earthquakes are becoming stronger and occurring with greater frequency. This is already leading to changes in population. Often, when we talk about climate migration, it has to do with Central America and Africa. But more developed nations are now struggling with this new reality and it could—actually, will—lead to climate migration within their borders.

In 2015, I read Kathryn Schulz’s Pulitzer Prize-winning story about the Cascadia fault line in the US Pacific Northwest and Canada. Titled “The Really Big One”, it details an almost assured earthquake and subsequent tsunami that will—potentially very soon—devastate the region.

That earthquake will have nothing to do with climate change, but that article all but guarantees that I’ll never move to the Pacific Northwest. But, to be honest, even if I’d never read that article (and it’s outstanding, so read it), I’d have to really think about making the jump out there. Forest fires and drought have plagued the western half of the United States for several years now. Is that something that you can stomach dealing with on a regular basis? If you live out there currently and are in a location that is vulnerable to forest fire, and as you see these flare-ups happening more often, do you not have to reconsider your long-term living arrangements? Sure, you might’ve been spared this year, but the next really big one is right around the corner, no?

Fact is that Texas’ power grid is under constant strain from both extreme heat and extreme cold. Some forecasts say that Miami will be underwater by the end of the century. Every 90 minutes, Louisiana loses the equivalent of a football field’s worth of land on its southern border. Hurricanes are becoming stronger and more numerous. As are forest fires in the West. As are tornadoes east of the Mississippi.

Let’s try a thinking exercise: As remote work becomes more common/acceptable, people will have more leeway in deciding where they live, rather than being tethered to a major metropolitan center. If we agree on that premise—and, to be fair, some believe this to be overblown—then people could start to evaluate new areas of the country to live and raise their families. Now, do you want to move to an area that is experiencing more destructive weather events, even if the area is beautiful and cheap, or will you play it safe and move to an area that has relative climate stability? If people start moving to areas that are not traditionally popular living locales, that will change local economies, which will breathe new life into some cities, while others start to resemble Detroit and Pittsburgh after the car manufacturers and steel companies left town.

Maybe that’s excessive, but this is to say that firms need to do some hard forward-thinking when it comes to climate and the environment, or the “E” in ESG.

Which brings me to this point: While ESG is playing an increasingly important factor when it comes to market data consolidation, that’s a pure data play. What about the data analytics and technological innovation fronts?

As ESG becomes more important to the investment process, firms will need new ways to parse this sea of information to find unique, actionable insights. It’s on this front that I think the largest investment firms have led the way, rather than the vendor community. Similar to pre-2008 when banks did most of the building rather than buying, it looks like they are happier to build internally and potentially white-label their offerings—or just keep it for themselves.

For instance, UBS Asset Management’s Quantiative Evidence and Data Science (QED) team has developed a decarbonization framework for valuing the green transition of heavy industry—understanding how corporates could achieve strong financial performance in the future while shifting to more sustainable business practices.

Goldman Sachs is working to hardwire controls into its risk management framework to help it guard against the risk of loss from climate change, a process it expects to complete by the end of this year. “It’s one of our top risk priorities, not just [for] Goldman, but for the industry,” said David Wildermuth, deputy chief risk officer at Goldman Sachs. “We spend a lot of time talking to our peers, and people are approaching it from the same perspective—but, obviously, there are a lot of nuances.”

Acadian Asset Management is building an AI tool that screens public companies for green credentials—and then engages with firms that it suspects of failing to live up to their promises. BNP Paribas Asset Management is using machine learning to estimate carbon emissions for companies that do not report their carbon footprint. Asset manager Nuveen has developed a new data platform to integrate ESG information. The list goes on.

I may be overreaching here, but it would seem to me that investment firms are desperate to find alpha-driving signals via ESG data, but they want to keep these tools close to the vest. What is clear is that while the E has traditionally lagged behind the S and the G of ESG, it’s gaining more prominence as traders and portfolio managers look to better understand the long-term effects of climate change. It would thus seem that there’s a greenfield for savvy vendors to produce more robust and ESG-specific analytics tools, rather than simply focusing on the data itself.

Think I’m over simplifying it? Let me know: anthony.malakian@infopro-digital.com.

Outages

This past week we published an interesting story about how banks and high-frequency trading firms have begun discussing a draft protocol to encourage trading to transition onto alternative venues if a primary exchange crashes. The talks have been facilitated by the Association for Financial Markets in Europe (Afme) and the Futures Industry Association’s European Principal Traders Association (FIA Epta).

“What we are discussing with Afme is an industry protocol that, if an outage happens, we do think that we will all be there and we all agree to be there,” said a regulatory source at a proprietary trading firm. “It doesn’t have to be binding, just a gentlemen’s agreement (emphasis my own), where you say: ‘ok, we are going to continue trading in this manner,’ and therefore everyone will adhere to that.”

A “gentlemen’s agreement”? Amongst trading firms? In a cutthroat capitalist market?! Color me skeptical.

I’ll leave the article to explain why these outages are disruptive and how this would all work, but it states that the protocol being considered would see adherents agree to funnel trading onto alternative venues—such as Cboe Europe and Aquis Exchange—during an outage. It is hoped this will help solve widespread reluctance among market participants to act alone during these stoppages.

“By coming to a gentlemen’s agreement, the hope is that both sides will be comfortable transitioning activity onto alternative venues. Market-makers will quote tighter bid-offer spreads and take more risk on the alternative venues, while brokers will be able to advise clients that the conditions are good for trading.”

Sources also say that the protocol alone wouldn’t be enough to guarantee continuous trading, and there are other proposals currently circulating.

“It definitely helps a great deal, but I don’t think it is enough,” said Natan Tiefenbrun, head of European equities at Cboe Europe. “To ensure participants and end-investors have the certainty [about their positions] and the confidence to continue trading, venues must improve their process and communications during, and when recovering from, an outage.”

As I see it, here’s the problem with “gentlemen’s agreements” and technology—when tech doesn’t work the way it’s intended, users get skittish, leaving ample room for non-binding agreements to fall to the wayside. Furthermore, agreements like these tend to fall apart once a few key players move on to new roles or companies.

Outages are annoying and disruptive—and they can be costly—but they’re not permanent, and it isn’t like capitalism comes to a screeching halt every time an exchange goes down. If an exchange has frequent outages, they’ll lose liquidity and heads will roll—it’s the free market at its best. Potential problems of an agreement like this one is that, first, it’s unlikely to work, but it also might stir regulatory agencies to be more proactive and prescriptive, which likely won’t be good for anyone. This simply doesn’t pass the sniff test. Why not focus attention and time on more productive means?

Do you think I’m once again being too cynical? Let me have it: anthony.malakian@infopro-digital.com.

The image at the top of the page is “Quasimodo” by Odilon Redon courtesy of The Met’s open access program.