When I started my career, the stock market was a physical building in the City.
Back then there was only one way to trade stocks – you asked a broker on the exchange floor. Because everything went through human beings, there was a natural limit on the amount of business that could take place.
Then, in 1986, electronic trading arrived. That’s when the data started to pile up. By the mid-1990s the New York Stock Exchange was generating around half a million quotes and trades per day – far more than was possible between humans.
But fast forward 20 years to today and the number of quotes is around 500 million. That’s a thousand-fold increase in two decades. On particularly busy days it’s even been known to exceed two billion.
This is what I mean when I talk about ‘big data’. For the first time in human history we are able to gather and analyse these vast pools of information, and finding a way to profit from them is why I’ve made this area one of my big investment themes for 2014.
Regular readers will know that I’ve written about big data before: the human genome project, oil rigs, automation, smoke alarms and the cloud, among other areas. But one area I haven’t yet covered, where big data has a big role to play, is financial data.
Today I’m going to introduce you to a successful company called First Derivatives (FDP) which helps its clients make sense of stupendous quantities of market data.
It sells specialist software to investment banks, brokers, regulators and hedge funds. It’s a fast-growing company, and the recent pullback in tech stocks has given us a good opportunity to buy in. Let’s take a closer look.
A hugely lucrative niche
As it has in many other industries, the analysis of data has become a key part of finance. We are talking about very large numbers here. For example, in the North American financial markets there are nearly 20 million price updates per second. That’s 113 billion per day, on average.
Whether investment bank or regulator, companies understand that there are secrets to be gleaned all of this data. That’s where First Derivatives steps in – to help its users to sort and analyse it all.
Over five years its customers will be able to query 94.6 trillion accumulated messages. Forget gigabytes and terabytes of data – that tots up to 20.8 petabytes. Just one petabyte is enough to record 2,000 years’ worth of music.
I think financial data is going to be a hugely lucrative niche. The massive increase in computing power and IT systems in recent years has generated an explosion in the volume of price quotes and trades in all markets – shares, bonds, foreign exchange and derivatives.
At this price, it’s worth a look
The stock isn’t especially cheap, but then there is no reason why a company that is growing sales at a 20% plus rate in an attractive market should be.
At 1050p the shares are trading on a price/earnings ratio in the low to mid 20s for the present year. I think this gives them scope to do well.
Despite FDP having a £200m market value, the shares trade quite thinly. This is partly due to CEO and founder Brian Conlon holding a 40% stake. As a result, price moves can get exaggerated with the stock moving from £6 to a high of over £15 during the last year. They’ve now pulled back to just over £10 as the market in tech stocks has cooled off in recent months.
I think they’re well worth a look at this level.
At this price, I think they’re well worth a look. Small-cap big data companies like First Derivatives have serious growth potential – that’s why I pay them such close attention. If you’d like to read some of my other recommendations, have a look at the report I wrote recently on three big data pioneers I think you should buy today.