Fueling this shift are data-driven strategies that offer huge benefits, such as the elimination of human emotions, accelerated results, improved product development, personalization, and better marketing analysis, in addition to countless other advantages. In the financial industry, this shift is evident through quantitative investing, a surge in fintech tools and services, and growing emphasis on digital customer experience tools.
While the future of finance is surely digital, the road to becoming a data-driven industry is rocky and full of challenges. In celebration of Halloween, we’ve rounded up some of the scariest stories and statistics that have spooked the financial technology industry along its path to digital transformation.
Beware of Black Box Tech
Research firm HFR reported at the end of last year, that assets under management at quantitative hedge funds would surpass $1 trillion in 2018. This is an enormous amount of money being managed by machines.
The scary part is that data-driven investment strategies are run by complex algorithms that oftentimes, are really only understood by the engineers and data scientists that created them. As the Financial Times notes in an article on quant hedge funds, some fund managers “fear that the money gushing into both simple and complex algorithmic trading strategies is making markets both more complex and fragile.” We’ve taken a deeper look at this “black box” nature of many quant funds before. Keep reading via our previous post here.
Phantoms Forced the Quant Quake
In August 2007 just before the financial crisis, some of the largest firms in the $1.5 trillion the hedge-fund industry suffered big losses among quantitative funds. Goldman Sachs’ Global Alpha fund and many others lost billions of dollars. Today, we know this as the “Quant Quake,” and it serves as a cautionary tale of what can happen when machines are left to make trading decisions on their own. When algorithms are managing the money, who’s managing the algorithm? In some ways, phantom traders were calling the shots and that ghostly thought is exactly what caused the negative chain reaction that rippled throughout the industry.
Security Statistics That Scare
Financial institutions are increasingly adopting new fintech and IT tools to support their data-driven investment and security models. While new technology tools and services enable firms to drive digital transformation, they also create exponentially more security risks. To compound cybersecurity risks further, financial firms are among the most targeted organizations for attack given the tremendous value of the information they store. According to a report by Generali Global Assistance (GGA) and Identity Theft Resource Center® (ITRC), financial services firms are hit by security incidents 300 times more often than businesses in other industries.
In addition, while a data breach can cause irreparable damage to any organization, financial institutions are especially susceptible to acute damage. The report reveals that while the average cost to U.S. businesses per record lost or stolen in a breach was $225, the cost for businesses in the financial industry was $3,3614.
Whether you lived through these scenarios or are reading about them for the first time, they can certainly send chills down the spine of any finance professional. But at the end of the day, there’s more good news than bad. These scary stories will go down in the folklore of financial services as turning points that forced opportunities to learn and correct course. The clouds are clearing and tomorrow will be even brighter.