18
Feb
11

Wall Street and Silicon Valley’s Divergent Approach to Data-Tracking

How innovation has come to mean different things on different coasts
by Gillian Tett

(Financial Times, 2/16/11)

In recent decades, a curious paradox has hung over the American economy. On the west coast, a gaggle of entrepreneurial companies, filled with some of the country’s brightest brains, has been scrambling to track data in the smartest and most innovative way.

Companies such as Google, Amazon and Facebook are now able to monitor what consumers and businesses are doing around the world in real time. They can track everything from book purchases to friendship links and the consumption of breakfast cereal.

But on the east coast, another collection of highly talented brains has been delivering a very different form of innovation. Wall Street has produced a plethora of products and processes that has made the financial system more complex and (often) more opaque.

But while bankers have used cutting-edge computer technology to, say, develop ultra-fast automatic trading strategies, the data-handling innovations developed on the west coast have been slow to move east.

As recently as six years ago, traders in the credit default swaps market, for example, were still conducting deals by fax. Banks’ back offices were not standardised and regulators could not collect data from them in anything resembling a timely manner.

Beyond banking, many other parts of the financial world went almost entirely untracked by regulators, who remain behind the technological curve.

The question that hangs over the Office of Financial Research, being set up as part of reforms to the sector, is whether these different west and east coast worlds can now meet – and apply Silicon Valley-style innovation to the financial system as a whole. Can the techniques that allow Facebook to aggregate data on online friends in a flash be used to track derivatives trades, say?

Optimists argue that the answer is yes, given the extraordinary strides in computing power that have already occurred. Officials linked to the OFR have started talking to companies such as IBM about how to transplant innovations in the non-financial world into a coherent form of data collection in finance.

But pessimists retort that financial companies have little incentive to co-operate; after all, opacity has on the whole served Wall Street well, enabling traders to enjoy fat profits.

Either way, the really big question is whether the type of entrepreneurial, innovative drive that inspires Silicon Valley can be transplanted to the state sector.

“If you really wanted to revolutionise [data collection], you should ask somebody like Google to run it, and pay them properly,” observes one senior banker, only partly in jest.

Right now, however, that prospect seems even harder to imagine than a world where the OFR starts to fly.

Copyright The Financial Times Limited 2011. Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.

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