When a Butterfly Flaps its Wings…Big Data style…Financial Market Risk in Play


One of the biggest and most pressing issues in the financial and trading industry today is meeting all the challenges connected to high frequency trading or HFT. HFT is an ultra-fast, computerised segment of finance that is now accounting for most trades. Last May 2010, HFT was one of the reasons why the Dow Jones Industrial Average suffered from a sudden fall or a “flash crash”. This type of trading, however, is very different now from what it was three years ago because of one element — Big Data.

Big Data is a term used to refer to data sets that are too complex and large that they cannot be managed by just standard software alone. The financial market produces some of the biggest data of all with the trades, quotes, consumer research, earnings statements, polls, news articles, and official statistical releases involved.

When things go crash people go crazy.

Different generations of HFT have their different approaches as demonstrated by the unsophisticated speed exploits price discrepancies that the first generation of HFT had. Recent profits, in comparison with 2009, from the ultra fast trading firms were reported to be 74 percent lower by the Rosenblatt Securities, proving that being very fast is simply not enough now. Lawrence Berkeley National Laboratory’s Marcos Lopez de Prado have argued that more and more HFT companies are putting their hopes on what is called “strategic sequential trading” which consists of algorithms that analyse financial Big Data in order to identify footprints left by certain market participants. For instance, when a mutual fund executes large orders in the first second of every minute before the closing of the market, the algorithm will be able to detect that pattern and anticipate that the fund will continue following that trend for the rest of the trade.

This type of HFT, however, can go wrong as reflected by what is referred to as the “hash crash” that happened on April 23, 2013. During this incident, a market drop happened because of a bogus tweet sent by the Associated Press talking about a terrorist attack on Barack Obama. It is different from the incident that happened on May 2010 since it was not caused by rapid sales creating more sales. Instead, it was triggered by a speed crash—specifically a Big Data crash.

Two years ago, it became common for hedge funds to get their market sentiment from whatever happens in social media. Here, trading algorithms based from messages posted on social media sites such as Twitter, Facebook, blogs, and chat rooms are used to detect demand trends that might be related to certain companies. The downside is that these algorithms are making guesses on new information based on small sets of data. Recent months have also seen an increase on developing algorithms that do orders as soon as unexpected and unscheduled information is suddenly published such as terrorist attacks and natural disasters.

The bad news is that addressing this problem will need the ability to understand the mutating Big Data brings. The good news, on the other hand, is that regulators entirely acknowledge the need for the market to adapt to this problem. Commissioner of the Commodity Futures Trading Commission (CFTC) Scott O’Malia recently said in a Big Data Finance Conference that something needs to be done about the fact that “reckless behaviour” is now used in exchange of “market manipulaton.” Even though trading using information collected from social media may be accepted, pre-loading sweeping market orders just because an algorithm detected something different is considered reckless.

The question now is how can regulators make sure that trading participants use Big Data in a responsible way? The CFTC have considered before whether regulators should start certifying the algorithms of traders. This, however, posed the potential for interference and intellectual property theft. A compromise proposed was for market participants to set real-time indices that track what is deemed reckless behaviour instead. Once a trader crosses thresholds, he would be prosecuted. These indices, of course, will evolve with the market and can be defined in consensus by the market participants.

Big Data has been transforming markets the past few years. However, there is also the need to transform with them, especially when it comes to their appropriate regulation. This defines the challenge for those who find themselves lagging behind the speed of these changes, with government naturally amongst them.

Article Written By: Mark Nicholls.

Managing Director, Information Professionals. Mark is one of Australia’s most trusted IT Change Management advisors. He also has other entrepreneurial business interests that he operates through MaidenVoyages.

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Tom Waterhouse – Change is a gamble.

Tom Waterhouse – Change is a gamble.

Now I am not a betting man and I am not defending Tom Waterhouse, but I was very interested to watch the public backlash against bookmaker Tom Waterhouse’s recent campaign to introduce his gambling services to TV sport. When his ads first appeared on TV I was very impressed with how he got his message across and how complete the campaign was. He pitched himself as one of us – he didn’t know how they hit a six, or how they took those big marks, or made those crunching tackles, but he knew what Aussies wanted – to bet on sport. 

Gambling seemed fresh and non-threatening. It was something even the kiddies could enjoy. And he was everywhere. It didn’t matter what sport we watched, there he was with new and innovative ways of betting. He would even give you back your money if you got some things wrong! Gambling must be fun. How could it be harmful in any way?
However, in a matter of a few short months it had become one of the biggest political issues in the country. The Prime Minister got involved and legislation was soon being drafted to stop Tom Waterhouse in his tracks. What went wrong? Change Management – that’s what went wrong. Or at least that’s what Tom Waterhouse did not do. 
He was changing the way people watched sport and interacted with gambling, and changing it in a big way. Tom Waterhouse was engaged in transformational change and he got it wrong. There are some lessons in this for us as business and information and management professionals. How do you accomplish transformational change and win the support of your stakeholders.
One of the main things Tom Waterhouse had to get right and any transformational leader must do is to build trust. What is trust? One good definition is that trust is the disposition of a person to make themselves vulnerable to another person without the expectation of being exploited. Associate Professor Ken Dovey of UTS says, “Trust combines an emotional expectation with a cognitive assessment about the predictability and reliability of another’s behaviour. Trust is mental model about how a particular relationship will work”. It is a basic human concept that must exist for effective collaboration and collaboration is how we get things done in an enterprise. By collaborating we transform creativity and learning into innovation. That is, we make change happen.
It seems also that as humans we are wired for trust in a biological sense. Professor Michael Kosfeld, in the Business Administration faculty at Frankfurt University, conducted experiments that showed when people interact the human brain releases oxytocin, which is a hormone that stimulates trust. In other words we want to trust each other in our work places. Professor Kosfeld says that “when trust is absent, we are, in a sense, dehumanised”.
Taken from a footy punters’ forum
So, how can we build trust? Firstly, we need to identify the stakeholders, the people we want to come on the journey of change with us. We especially need to find those people who have the trust of others already.
Secondly, we need to honour the rules of the organisation and its culture. Obviously, that includes the law itself, but there are also conventions and accepted rules of behaviour that should be followed.
Thirdly, respect should be shown for those who have different opinions and may not even agree with the change. If respect is shown to them, then respect can be won also. Accept that not everyone will agree with the change, however showing respect for those people will help to ensure that they do not work against the change and they may even support it because they have at least been shown respect and allowed to voice their concerns.
Finally, where there is conflict, be prepared to reconcile with those people, so as to break down barriers and to not isolate people. Remember that sometimes people react badly to change often out of genuinely good motives, such as, concern for the direction of the enterprise or for the welfare of colleagues. Perhaps they have reacted out of fear. Viewing these reactions as opportunities to find constructive criticism and address concerns that may be more widely held can turn negative reactions into increased confidence in the leadership. This in turn can lead to stronger bonds of trust.
Of course, there are many other things a transformational leader needs to pay attention to, however the building of trust is possibly the most important. Once trust is built then old ways of doing things can be challenged and new innovative practices can be introduced to our organisations. Leaders can then drive change by providing a vision that is based on the shared beliefs and values of members of the organisation.
Can Tom Waterhouse accomplish the same? It might be hard as he is dealing with the Australian sport viewing public, in effect, a very large and complex enterprise. He has already challenged the perceived rules of behaviour and borne the brunt of the reaction of breaking those rules and not building trust in the first place.

I’m not a betting man, but it will be interesting to watch as this story evolves.

* Article has been edited 22/08/2013 – Names were edited from Robbie to Tom Waterhouse to correct the original title and body copy errors. ala “Fine Cotton”

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Written By: Information Professionals Associate Partner – Tim Hosking 

Tim is a senior business and information architect with wide experience in the private and public sector. His private sector experience is almost entirely in the finance sector, including Bankers Trust, Commonwealth Bank, Sydney Futures Exchange, Commercial Union (now part of CGU), and National Mutual Life Assocation (now Axa). His public sector experience has been with NSW Police Force, Police Integrity Commission, Australian Securities and Investments Commission (ASIC), and Australian Taxation Office (ATO). Tim has completed the ITMP program at UTS – Master of Business (IT Management) with special focus on research into enterprise architecture.

You can’t always get what you want….

“You can’t always get what you want.” The famous words from the Rolling Stones ring true when organisations acquire packaged solutions “off the shelf”.
Here is an analysis of what happens when an organisation has a legacy system it wants to replace with an “off the shelf” solution. There are three basic things to consider:
  1. What the organisation has right now, in terms of the capabilities the system offers
  2. What the organisation wants from a new system, often with updated capabilities, streamlined processes, support for new channels, etc.
  3. What the organisation actually gets from the new application it acquires off the shelf.
Let’s analyse the gap between what the organisation already has and what it wants. The gap between the two will depend on how big a business transformation the organisation is taking on. It is likely, however, that there will be at least some capability that the organisation currently has that it will want to retain. The figure below illustrates that there will be some overlap between what the organisation currently has and what it wants. Of course, there will be some legacy capability it will no longer be interested in, while there will be new capabilities required.
It’s reasonable to expect that where the business transformation is large the overlap will be smaller, and where the change is small the overlap will be greater.
Now, let’s analyse the relationship between what the organisation wants and what it will get off the shelf. It’s logical to conclude that what the organisation wants and what the organisation gets won’t match perfectly. There will be some kind of misalignment or gap between expectations and reality. The figure below demonstrates this:
The extent to which the two circles overlap will depend on lots of factors and obviously the more they overlap the better. However, no one should realistically expect that the two will exactly match each other. There will always be capabilities that the organisation wants that it will not get off the shelf. There will also be capabilities or functions it will get that it really isn’t interested in.
Now, let’s put it altogether and see what happens:
As you can see, it’s a bit more complex than it might have appeared originally. Obviously, the shape of this diagram is going to vary based on the organisation, the size and type of business transformation and other influences. However, there are a number of constants that are apparent.
Let’s look at what you will get. You will get some of what you want that you already have and want to keep. That’s a good thing. New capabilities that will replace your old ones and will hopefully do it more efficiently and effectively.
You will also get some of what you want that you do not have already. This is also a good thing. You want those new capabilities that were out of your grasp previously.
However, there are a couple of problems. You are also likely to retain some of the capabilities that you no longer want and you are likely to get some capability that you don’t have and don’t want.
Worse than that, you will NOT get some of the things you want, and you will lose some of the things you have and want to retain.

That’s right, “you can’t always get what you want.”

 

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Written By: Information Professionals Associate Partner – Tim Hosking 

Tim is a senior business and information architect with wide experience in the private and public sector. His private sector experience is almost entirely in the finance sector, including Bankers Trust, Commonwealth Bank, Sydney Futures Exchange, Commercial Union (now part of CGU), and National Mutual Life Assocation (now Axa). His public sector experience has been with NSW Police Force, Police Integrity Commission, Australian Securities and Investments Commission (ASIC), and Australian Taxation Office (ATO). Tim has completed the ITMP program at UTS – Master of Business (IT Management) with special focus on research into enterprise architecture.

So you still want to be a CIO?

 

The Reflective CIO – So you still want to be a CIO?
Welcome back! I figured it was about time to follow up on my original blog. Last time I discussed six time-tested observations I have made over fifteen years as a CIO. This time I thought I’d offer my perspective on a couple of topical subjects:
·       The evolving role of the ICT Organisation
·       The evolving role of the Chief Information Officer
You might believe that the two subjects are intrinsically linked and I would agree but I would suggest that the linkage will be radically redefined over the next couple of years.
1.     The Evolving Role of the ICT Organisation
First off, what are the main drivers for change? Well that might include:
·       Increasing the focus on business improvement
·       Freeing up scarce resources
·       Reducing the costs of running the business
·       Gaining access to a wider pool of capability
·       Refocusing on core business activities
·       Maximising profitability
·       Improving service quality
·       Achieving profitable growth
·       Differentiating products/services
·       Increasing customer self-service
·       Reducing risk
·       Increasing customer loyalty
At the same time you need to respond to emerging trends and realisations:
ICT Commoditisation
Let’s start with a clear definition.  I like the definition provided at www.BusinessDirectory.com – “Almost total lack of meaningful differentiation in the manufactured goods. Commoditised products have thin margins and are sold on the basis of price and not brand. This situation is characterised by standardised, ever cheaper, and common technology that invites more suppliers who lower the prices even further.
That same definition that applies to products can be applied to the services that are associated with those products.  Hence the trend in organisations to divest those services which have traditionally formed the backbone of the ICT Organisation.
BYOD – Now-Generation Outsourcing
An appropriate response to Gen Y and Gen Z consumers (i.e. staff and/or customers) is to let them redefine ICT as we know IT. The hardware is now user defined and supplied. The software and operating system is outsourced and managed over the cloud and Apps are readily available to download to devices of their choice.
In this scenario, the potential responsibility of the ICT Organisation or entity becomes that of providing secure (i.e. portal) access and facilities to update corporate information. BYOD is not without its challenges and it needs to be carefully planned and executed (see 10 Steps to a Successful BYOD Strategy)

 

Customer Self-Service –ultimate Business Process Outsourcing (BPO)?
An undeniable trend is that of customer self-service. How can it be possible that you can get customers to answer their own queries or choose their own product, at their own expense, in their own time? And there’s more: they can process their own payment, up front, and even make their own arrangements for delivery. Yes and we will rate those businesses very highly!
The world is changing!
Strategic Sourcing
Whereas organisations were once faced with two primary options:
a.     In-house – The generally low value, low cost option
b.     Outsourced – The generally higher cost, higher value option
There is now a multitude of variations available including:
c.      Sole-Sourcing – Outsourcing to one principle vendor
d.     Multi-Sourcing – Outsourcing to multiple vendors
e.     Co-Sourcing – Partnering with a firm that employs staff to meet your long term needs
ICT as a Service
With the emergence of the cloud, a proliferation of ‘ICT as a Service’ variations have emerged providing choices to organisations. These include:
a.     Software as a  Service (SaaS)
b.     Infrastructure as a Service (IaaS)
c.      Platform as a Service (PaaS)
d.     And other variations are emerging such as Data Centre as a Service (DCaaS).
The theme of ICT as a Service features throughout the Queensland Government ICT Strategy 2013-2017 http://www.qld.gov.au/dsitia/assets/documents/ict-strategy.pdf and increasingly of those in other jurisdictions.
In essence, these services provide for organisations to procure ‘turn-key’ solutions on a regular (eg. monthly) subscription basis. As a consequence the assets remain the property of the service provider as with the responsibility to apply upgrades and refreshments over the contracted term.
In some cases, these services can also be integrated with buy back and leasing arrangements to facilitate flexibility with financing and for those with existing assets.
The Overcoming of the ICT Stigma
Fairly or unfairly, many ICT Organisations carry a reputation for underperforming and failing to deliver business value. Some are judged to be expensive and lacking in capability and frequently external service providers are viewed through rose coloured glasses.

 

Implications for the ICT Organisation
When you add it all up, it would seem that the writing is on the wall for the ICT Organisation. Indeed, it’s fair to say that the writing has been there for some time. Certainly, as a CIO I have been presenting that message to my teams since at least early 2000. As I look back now, those teams bear very little or no resemblance to the teams of today.  On and off-shore outsourcing and more recently the cloud, have played a major part in redefining them.
In Gartner’s IS Lite publications from 1999, they have espoused the virtues of a slimmed down IS/ICT organisation. Much of that work continues to be relevant today. However, things look to be destined to move to yet a new level. I would expect to see:
a.     Acceleration of the slimming down of ICT organisations
b.     The emergence of new governance structures to accommodate what I refer to as ‘External Trusted Advisors’ (ETAs)
c.      Further divestment of ‘demand-side’ responsibilities i.e. some aspects of architecture and strategy development, business enhancement (e.g. project management) and technology advancement (e.g. prototyping)
d.     Emergence of new roles and capabilities to generate business value in areas such as data analytics, open data, business intelligence, social marketing etc.
They have been saying that the “mainframe is dead” as long as I can remember. The reality is that they are still around but their role that has changed. Likewise, ICT organisations can survive but not in their present form. How will you and your organisation be impacted:
·       What’s your value proposition?
·       Are you relevant?
·       What differentiates your services from those of others?
If your organisation has the right answers to these questions, you might survive and even prosper.
So what will this mean for the staff of the ICT organisation? Well, the technical skills will still be needed but those opportunities will mostly be with ICT Service Providers (SPs) including Cloud SPs. There will continue to be a place for high value capabilities including vendor management, strategic planning, relationship management and portfolio management. Otherwise, it will primarily be those occasional bad experiences with vendors that will slow down the inevitable transition to outsourcing and particularly ICT as a Service.
2.     The evolving role of the Chief Information Officer
So, with the prospect of his/her empire crumbling, will “CIO” finally stand for “Career Is Over”? Well, in some cases the answer is yes. For others it will depend on two main factors:
·       How progressive is the CIO?
·       How aligned is the CIO with the CEO?
Progressive CIOs will be reflecting on this blog as confirmation of the career development strategy that they already have in mind. Others might re-think theirs and start getting on board. The remainder I will call Blue Sky CIOs – because they see no room for the cloud – are most likely to dismiss the scenario I’ve outlined as being unrealistic. Well, to each, their own. What is for certain is that the role of the CIO is evolving. What is equally certain is that the role is evolving in different directions. These include that of:
·       The Chief Digital Officer (CDO)
CDOs will typically have experience with digital technologies, e-commerce and digital transaction processing, social media and online marketing. They will be concerned about how digital changes marketing, recruitment, procurement, sales and finance. They will be heavily involved in data analytics and in employing Business Intelligence and influencing business strategy to adapt to the Digital Age. The CDO’s focus is customer-focused (front end) technologies.
·       The ‘Traditional’ CIO/CTO
CIOs/CTOs toil to keep leading companies abreast of cumbersome, enterprise-wide technology upgrades and efficiencies – virtual servers, enterprise resource planning (ERP) and IT infrastructure of all kinds. The domain includes the maintenance of Enterprise Architecture, policies and standards was well as traditional ICT services such as Desktop support, telecommunications management, applications development. As these services increasingly become the domain of external service providers over the cloud, the role will become less relevant.
·       The ‘Hybrid’ CIO
The ‘Hybrid CIO’ reflects the evolution of the CIO as a business leader, tasked with leading business transformation with equal focus on business process optimisation, information exploitation and technology innovation. In the scheme of things, this will result in the technology taking a back seat with emphasis switching to stakeholder management, vendor management and cloud service brokering rather than ICT service delivery. Business Process Management and Data Analytics (as with the CDO) will be at the forefront.
·       The ‘Virtual’ CIO
It’s also worth contemplating the role of the ‘Virtual CIO’. For SMEs unable to retain a permanent CIO and for larger organisations requiring CIO capabilities to plan or oversee transformational changes, this might present an answer. It might apply for traditional, hybrid or even Digital nuances. Essentially we’re talking about CIO as a Service (CIOaaS) which may have particular appeal to organisations contemplating a move on from their current arrangement but being less certain of the flavour they need next.
With each alternative role I expect significant change. The likelihood is that the traditional CIO/CTO will operate with a reduced sphere of influence – to a large part reverting back to the role of ICT Manager and being consumed within the domain of the CFO, CMO or even the CDO. Not all CIOs will make the transition to CDO and many will choose not to. For those that don’t, I suggest that transition to the ‘Hybrid CIO’ role would offer a better alternative and (possibly) a transition step to being a CDO.
Final Word
  

It’s going to be an interesting time ahead for both CIOs and ICT organisations. Now would be a good time to contemplate what the coming changes will mean for you as a CIO or an aspiring CIO and to position yourself to make the most of it. Thanks for reading!

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Tony WelshTony Welsh
Associate Partner, Information Professionals

Tony has over 30 years experience as an ICT professional including 15 years in Chief Information Officer (CIO) roles. His particular skills include ICT and business strategic planning, program management, business and ICT alignment and stakeholder management. He is particularly valuable for organisations seeking to get more out of their ICT investments and/or to use ICT to transform their organisation.