City watchdog the Financial Conduct Authority is opening an investigation into the use and value of data and advanced analytics in financial investment markets as it seeks to understand how the techniques are being accessed and used, and whether products are being competitively sold and priced.
The FCA’s Call for Input (CFI) explains that the regulator will be investigating the use of “big data”, such as satellite imagery, client data, location data and social media. It will consider whether companies with access to this data and the analysis tools have a market advantage. It is looking at all data available from or accessed in the UK, regardless of where it has been generated.
The data falls into four main categories:
Trading data. The FCA says this has recently become a major source of revenue for trading venues and a key growth driver. It will look at issues such as market dynamics, pricing levels, quality and innovation in provision of trading data and the potential for discriminatory pricing.
Benchmarks. The regulator notes that the importance of certain benchmarks to investors seems to be growing and it seeks to explore market dynamics, impact of concentrated markets, pricing, quality and innovation, transparency and complexity of contract terms and vertical integration.
Market data vendor services: The FCA will study issues such as market dynamics, how data vendor products and services are sold and vertical integration.
Access and use of data and advanced analytics in wholesale markets: The FCA wants to understand how market participants are capturing and using alternative data and the analytics being applied to generate meaningful insights from unstructured datasets.
It will look at how this data is used in business decisions and activities in a way that may change business models and data strategies. It notes that use of data and advanced analytics can pose risks to competition and potentially market integrity if those with access to certain data and technology can identify market movements ahead of those without such access. The FCA will consider information sharing, collusion and biases as well as data governance, controls and ethics as part of its review.
The regulator believes the changing use and value of data and analytical techniques is transforming how business and markets function. Wholesale participants have long been using new data sources and improving their capacity to extract valuable insights from such information.
While the FCA sees the benefits of technology and innovation, it wants to understand both the risks and the opportunities that are generated by these. This will help inform the regulatory environment and in which the regulator and market participants seek to balance risk against benefit.
FCA executive director of strategy and competition Christopher Woolard said: “Wholesale financial markets play a vital role in our economy, and it is important that they work well. There is rapid and wide-ranging innovation in data in wholesale markets as firms become better able to gather and analyse data.
“More efficient, comprehensive and timely data for wholesale market participants have the potential to generate significant benefits. But these changes may also create new risks that may require us to act. We are launching this review to better understand any risks and assess whether FCA action is needed.”
Responses to the CFI are due by May 1 2020.
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