Interest in and investment with alternative data — or alt data — is exploding as financial organizations use the data to gain insights into company performance and the prospects for stocks. As expansion continues, numbers of alt data sources, providers and customers will escalate, begging the question: How will the role of data intermediaries need to change?
- Investment using alternative data is escalating as financial firms look for new insights and signals.
- Central to a sustainable alt data ecosystem are trustworthiness, value and risk.
- Intermediaries need to extend their offering to provide multiple assessment services.
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A recent report published jointly by Refinitiv and the Open Data Institute (ODI) notes that expansion in the alt data space means that intermediaries will no longer be able to vet every alt data provider, customer and dataset.
This will change the role of intermediaries and the value they add to the development of a transparent, trustworthy, and sustainable alt data ecosystem.
The data and the intermediary
While standard investment data has traditionally been acquired from a limited number of sources, the diagram below shows how alt data can be acquired from many sources via many routes.
Each has different transaction costs including:
- The price of alt datasets.
- Time and effort needed to locate relevant datasets.
- Assessing the trustworthiness of the organization selling the data.
- Evaluating the potential vale and risk of a dataset.
- Drafting legal requirements to acquire the dataset.
- Cleaning and processing the dataset once acquired.
While customers can buy alt data directly from source, the majority is bought and sold by providers and intermediaries.
Alternative data providers
The aim of alt data providers is to acquire datasets and sell them on to intermediaries or customers. They do the heavy lifting that reduces the transaction costs mentioned above.
Their tasks include:
- Technical and legal assessments to evaluate the value of alt datasets.
- Due diligence to assess and mitigate the potential risk of using the dataset.
- Processing, cleaning and transforming datasets to make them more useful.
- Aggregating disparate datasets.
- Analyzing datasets to isolate valuable signals and insights.
- Creating bespoke products and producing further insights.
Alternative data intermediaries
Intermediaries go a step further, facilitating the supply of data across an alt data ecosystem by collating disparate alt datasets in a central location, and vetting providers and users of the data.
They help customers lacking capability and capacity to vet and negotiate with growing numbers of sources and providers, and make the increasingly complex and crowded alt data market more manageable for sources, providers and customers.
Their tasks include:
- Collecting and cataloging many datasets and making them available in a single, central location or platform.
- Performing analyses on behalf of customers to identify relevant signals or insights, or providing access to analytical tools.
- Obtaining open or free-to-use data, such as government statistics related to commercial acquisitions, and combining it with alt data on their platforms to increase access to useful insights and signals.
The difference between providers and intermediaries is the volume and variety of data they offer.
Providers tend to focus on one or a few specific sectors, while intermediaries work on a much larger scale, across a wider range of sectors. Additionally, intermediaries have a greater focus on generating insights for customers through internal analysis or provision of analytical tools.
Trust, value and risk
Central to a sustainable alt data ecosystem are trustworthiness, value and risk. Value is usually defined as financial return on investment. Risk is more complicated and may be legal, technical or commercial. Trustworthiness must be assessed.
In an expanding and changing market, assessing trustworthiness, value and risk can be difficult. The report identifies useful mechanisms that can help, such as due diligence questionnaires, data protection impact assessments, registers describing actors, data and regulatory risk, public data standards, and codes of conduct.
A difficult dilemma for intermediaries
The vast amount of alt data being generated causes a dilemma for intermediaries. They want to provide access to data from as many providers as possible, but huge volumes of data mean they can no longer assess each provider for trustworthiness, value and risk.
A solution is for intermediaries to offer a range of assessment services depending on datasets involved and the needs of alt data providers and customers. Service options could include:
- Connecting different actors within the alt data ecosystem.
- Providing actors with the tools to do their own legal, technical, ethical and commercial assessments.
- Raising the capability and trustworthiness of actors and enabling them to demonstrate their capability to others.
These options would add specificity for all in the alt data ecosystem and reduce transaction costs depending on the components of the assessment service.
While intermediaries have a large role to play in shaping the future of the alt data ecosystem, they cannot work alone.
The report discusses the potential to distribute responsibility for assessment across the ecosystem, so that legal, technical, ethical, and commercial assessments and services are stewarded by the community.
It also notes the criticality of standards in building a trustworthy and sustainable alt data ecosystem. Intermediaries could lead here, although open and transparent processes will be paramount to trust across the ecosystem.
Certification and rating of providers carried out by independent organizations could also encourage standardization and lead to successful outcomes for all actors:
- For sources, standardized processes and certifications extend reach to potential customers and lower publishing costs.
- For providers, third-party certification or rating speeds up onboarding with intermediaries and helps them to reach a larger number of customers.
- For intermediaries, standards and certifications mean more datasets and services built on those datasets can be hosted.
- For customers, standards and certifications make it possible to compare actors.
- For all participants, standardized processes and certifications help increase trust between actors.
By making it easier for sources, providers and customers to assess the trustworthiness of other actors, and evaluate the risk and value within alt datasets, intermediaries can help the alt data ecosystem grow in a transparent, trustworthy and sustainable way.