The capital markets are often presented as the epitome of confidence. From the smooth-talkers to the flashy dressers, from the loud, burly traders on the floor, to the quietly confident risk folks in the middle office, embodied in movie characters from Gordon Gekko to Patrick Bateman, Louis Winthorpe and Billy Ray Valentine.
However, there are signs that the confidence that both Wall Street and Main Street have in the markets is starting to erode. A series of high-profile flubs, including Knight Capital’s near-collapse and the botched Facebook IPO by Nasdaq—which last week had its Facebook compensation proposal publicly eviscerated as “insufficient” by Citigroup and UBS, and suffered failures of its new FPGA-enabled version of TotalView on consecutive days—has undermined confidence in the US equity markets, according to a report from Tabb Group. According to the report, only two percent of respondents reported very high confidence while 26 percent have very weak confidence levels—compared to 12 percent and three percent, respectively, after May 2010’s near-catastrophic Flash Crash.
Declining confidence isn’t limited to the US: Deutsche Börse subsidiary Market News International’s monthly MNI China Business Sentiment Indicator shows key indexes that reflect overall conditions and purchasing declining during August, according to the vendor’s “Flash” pre-official report.
If you fear the unknown, take confidence from facts—i.e. data. Like a superhero’s box of gadgets, data is faster and more accurate than in the past, and also—sometimes as much a curse as a blessing—more plentiful. Soon, traders won’t be able to do without sophisticated tools to filter the data and pluck out valuable information, such as new screeners being planned by behavioral finance analytics provider MarketPsych—one of a new breed of vendors bringing niche datasets to market. Another is RavenPack, which generates sentiment scores from news and macroeconomic events, and is looking to tap into the potential value of applying its analysis to social media.
Yet another is New Constructs, which creates research and recommendations based on information hidden in the footnotes of company financial statements. Because, like a Dark Knight exposing Gotham’s underbelly, restoring confidence can mean exposing the dark arts that erode it to the light of day. By interpreting management statements and notes in ways that traditional analysis does not, New Constructs chief executive David Trainer believes he can offer a more accurate valuation of a company’s operating metrics—which the company itself might try to obscure.
“Companies don’t provide transparency; they obfuscate They’re focused on selling stock,” Trainer says. “Income statements have gotten shorter, but 10K filings have got huge. There has been an explosion of the management discussion and analysis section, which is where all the good data goes to hide.”
One sign of confidence is big names putting themselves in the public eye, such as former SunGard CEO Cris Conde, who recently joined risk and regulatory compliance training software provider True Office—a company he mentored during the 2012 FinTech Innovation Lab—as its executive chairman, or former SunGard MicroHedge president Peter Hauser, who has joined Chicago-based hosted tick database and complex event processing startup Vertex Analytics as president.
The markets have taken a big fall—and there is clearly fear of falling further. But why do we fall, if not to learn how to pick ourselves up? And one thing we can learn is that putting our trust in solid data—and to continue developing and harnessing datasets that more accurately reflect the markets—will lead to more confident decisions. If we do that, then any coming storm will bring renewing rain from which grows a lush, fresh tapestry of financial products and tools.
Waters Wavelength Podcast Episode 97: C-Level Execs Talk Bitcoin, Fintechs, Cognitive Computing & Open-Source Tech
In separate interviews, executives from AQR, JPMorgan, Cboe and IBM discuss topics permeating the capital markets.Subscribe to Weekly Wrap emails
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