This last week a report from Bloomberg News of a prominent alternate market data provider being fined by the SEC due to alleged stock promotion scams brought to light a potential risk when using alternate market data. Combined with the ever present concept of fake news these are cautionary tales that financial institutions and traders must extend their risk management practices into their use of alternate market data.
Three keys to evaluating risk in alternate market data
Effective risk management of alternate market data begins with evaluation of 3 key elements:
- Input data sources – Every alternate data provider has sources of data as input to their analysis or aggregation platform. Each provider should be able to confirm the sources of their data. This will aid in evaluation of source quality. For instance primarily social sources of data may need to be further vetted or counter-balanced with other sources of quantitative data.
- Potential Areas of Conflict – The alternate data provider should also be able to highlight potential areas of conflict such as whether the content source provides compensation for the creation of certain types of data. This insures the ability to effectively evaluate the downstream capabilities for data manipulation.
- Compliance or Veracity Systems – when data is from crowd sourced or social data a determination should me made regarding the systems or processes used to evaluate the viability of the content or analysis.
Alternate Data + Risk Management = Increased Capability
Hedge funds, asset management firms and other financial market participants are seeing great benefit from the growth of alternate market data providers. These new sources of data are crucial to obtaining an information edge in the markets. And, risk management protocols remain critical when evaluating and utilizing these powerful alpha generating datasets.