The data explosion created by automated trading, regulation, and the rising speed at which trades are executed is placing financial institutions under severe pressure, said Steve Mitchell of consultancy Detica.
Banks, exchanges and other financial institutions are increasingly reliant on technology, and organisations that can make sense of the next generation of data-handling technology will have a big advantage, Detica's Global Financial Services Director said on the sidelines of a futures and options conference in Switzerland.
That advantage could be worth hundreds of millions of dollars, he added. The data volume is only heading upwards. "It's exponential. If you look at it on a chart, it will be going off the scale," Mitchell said. Algorithmic trading, which slices trades into smaller manageable chunks to smooth market impact, is perhaps the biggest strain on institutions' technological systems.
Transaction overload has already caused system breakdowns. In 2005 the Tokyo Stock Exchange had to suspend trading after its platform failed. Additional financial markets regulation, such as the Markets in Financial Instruments Directive, will also put pressure on firms' back-office system.
Technology that can take data and spot recurring patterns within them while also performing the complex group of calculations that, for example, price derivatives in minutes rather than hours, will give investors greater opportunities to exploit price differences.
"You might see a growing distance between the tier one and the tier two banks, because from a tech perspective they can invest much more heavily," Mitchell added.
Crime might also add to pressure as organised gangs graduate from defrauding retail banks and insurers to capital markets. "You've got electronic exchanges, you've got a whole new range of asset classes. The opportunities for fraud are enormous," he said. "We are going to see organised crime in capital markets. Fraud propagates quickly, exponentially, like bacteria in a petri dish."