A report by the European Securities and Markets Authority (ESMA) in 2016 outlined some of the potential benefits and risks of Big Data in Financial Technology.
The report described Big Data as ‘the processing and use of high volumes of different types of data from various sources, using IT tools, in order to generate ideas, solutions or predict certain events or behaviours.’ In particular, it enables increasingly powerful search techniques to use analytics to collect and analyse information to identify and measure risks, trends and customer preferences more than ever before. This can be useful in that Artificial Intelligence software can then use the data to identify patterns and make accurate predictions.
Such data is now being used in various financial sectors including banking, insurance and investment, with particular significance for the regulatory frameworks.
| Benefits of Big Data | Risks of Big Data |
|---|---|
| Improved quality of services/products – narrower segmentation of customers can also help tailor products more effectively and highlight possible additional services | Impact on access to products/services for certain consumers e.g. the less tech savvy |
| More efficient processes mean you can collect more accurate and detailed information | Possible lack of transparency around the processing of data and a firm’s decision making |
| Better management of risks or fraud situations – sophisticated analytics can unearth valuable insights | Potential limitations or errors in data analytic tools leading to the misinterpretation of patterns |
| Impartial, objective not subject to human emotion | Security and privacy concerns |
At CleverAdviser, we have certainly found Big Data and computer algorithms have significant advantages in the way we can run our investment model. It means our analysis of over 4,000 funds, based on pre-selected criteria, is removed of any biases.
We would also agree that it leads to more efficient processes, as demonstrated by our latest research on fund assessment. In this, we tested 362,880 different ways to rank nine criteria. If we had done this in 2006, it would have taken 247 years, yet with cloud technology and the fastest supercomputers, it took just over half an hour. The results actually demonstrated that by removing three criteria, the annual investment performance in a particular sector improved. So, by handling Big Data in such ways, it can lead to systematic improved performance.
In our view, awareness of some of the potential risks means they can be taken into account and combatted. On balance, the huge advantages that the judicious use of Big Data and Artificial Intelligence can bring mean they are most definitely here to stay and can play an integral part in a firm’s investment methods.
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