Markets and digital future

Markets comprise key elements such as buyers, sellers, price discovery, risk transfer etc. A well-functioning market is usually thought of as one that has a robust proportion of all these elements and has a platform to bring these elements together in one place.

While the evolution of multi-faceted exchanges is construed today to be a sign of economic progress, in my opinion, the future will likely be quite a different paradigm. In future I see markets will focus more singularly on the platform (data) where the elements (price, risk, etc) are originated.

I surmise that the need for traditional exchanges will actually greatly diminish, as it is apparent that the future will be driven by data, with lower frictional costs and reduced barriers to operations.

Consider the future where computing capacity will be disproportionately higher than now, and the access to market data will be greater than ever. In such a scenario all the information that we consider key to a well-functioning market – namely, buyers, sellers, price discovery, and risk transfer – will be available via a platform that can be accessed by nearly anyone who wishes to access it.

Exchanges will move away from servicing outputs such as views of price and risk and towards servicing the foundation - data. In theory, the exchange may move from Chicago to your desktop. Thus, we can imagine moving from a world of “many-on-many” model (many participants on exchanges) to a “one-on-one” model (participant to participant).

Information flow

Every buyer and seller produces and consumes data, creating what I consider to be a net ‘surplus’ or ‘deficit’ of information. Consider the case of a large chocolate manufacturer called firm A.

Currently, firm A will need to access an exchange where cocoa is traded to participate in the chocolate trade. While doing so, firm A is supplying data (intent to buy cocoa, the price, volume and many such variables) and is also demanding data back (world prices of cocoa, location of cocoa, etc).

Arguably, the marginal value of the information supplied by firm A is greater than the marginal value of the information demanded by the firm A, as the former is private and latter is public.

The difference between the private and public information is what I call a ‘data surplus’ for that firm.

In today’s world, once firm A participates on the exchange, it gives away this surplus.

In the new world I envision, this data surplus will be in demand and monetised, which will give rise to few scenarios. Firstly, a data-deficit firm (a cocoa supplier to this firm A) would be happy to pay for this surplus and in doing-so, make itself data neutral. Secondly, a value-adding data analytics firm could provide analytic services for firm A in return for the data surplus.

Thirdly, a speculator can buy the cocoa risk of firm A, while paying for the data surplus.

In any case, the price at which the cocoa supplier sells cocoa, the analytics firm sells its services, and the speculator buys risk all appreciate the data surplus created by the firm A.

The need for data is the common denominator among all these participants and across these scenarios, we can see they move away from a traditional “many on many” model to a “one on one” model, focusing on data that ties all of them together.

Conclusion

Firms will increasingly compete to create valuable data surplus to help them be leaders and be successful in the market, and firms that can leverage these data better will survive longer.

I borrow this notion from the macroeconomic principle of deficit and surplus where the balance of payments is key.

Similarly, the balance of data is key to a firm’s overall strategy its longevity in business.

The writer is based in London and is the founder and Managing Director of OpalCrest ( www.opalcrest.com ).

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