The boom in digital data
The capture, storage and analysis of “alternative data” is no longer a nerdy niche. But the explosive growth of the business has a downside, as the Facebook furore showed. Simon Wilson reports.
What is "alternative data"?
It's jargon denoting data sets culled from non-traditional, digital sources outside a particular company. They are used to gain fresh knowledge about that company, which facilitates investment decisions. Whereas "traditional" data means information sources such as company reports, investor presentations, regulatory filings and so on, "alternative" data describes geolocation data that tracks the location of mobile phones, or language tracking software that detects changes in sentiment around a company. Other examples include analysis, or "scraping", of credit card transactions, web browsing history, social media posts, price trackers, and flight and shipping trackers.
Hasn't all this been around for years?
Yes, but the explosive growth of digital data of this kind, along with better tools to store and analyse it, has boosted the once-niche industry that packages and sells this kind of under-the-radar information. Whereas once this was fringe stuff, now it's moving into the mainstream. "This data is lying all over the place," says Michael Recce, who became the first "chief data scientist" at the large US asset manager Neuberger Berman last year. "Knowing who is winning in the marketplace in real time is going to be a huge advantage."
What are key recent examples?
Avi Salzman in Barron's highlights the web-scraping company Thinknum, which noticed a drop in job listings on a Tesla site the day before the company announced a big restructuring. Or, long before it became clear that Adidas was gaining market share from Nike and Under Armour, consumers who filled out online surveys for the investment bank Cowen & Co began to say they preferred Adidas.
It is no longer just boutiques and hedge funds that pay for this kind of edge. A new division at JPMorgan Chase called Intelligent Digital Solutions is currently recruiting coders and PhDs who will work with asset-management teams. This month it held its first "data science hackathon" bringing together quantitative and fundamental analysts with data scientists to "crowdsource" investment ideas and insights.
Is this related to geolocation tracking?
Yes. For instance, Salzman cites researchers tracking mobile phone signals discerning a decline in the number of people visiting malls well before some shopping centres announced disappointing financial results. However, the market for geolocation tracking (mostly via apps on your smartphone) isn't limited to investment houses. The main market is advertisers. An in-depth investigation by The New York Times earlier this month found 75 specialist companies in the US whose business model is built around receiving anonymous, precise location data via apps that provide localised information weather, say, or news.
Several of the businesses claim to track up to 200 million devices in the US. They then analyse and sell information to advertisers, retailers or investors. The location-targeting industry is worth around $21bn. Location analysts say that these apps are obviously providing a service people want, and that when users enable location-based apps, their data is fair game. They don't often make it clear, however, that their data will be sharedand sold.
Doesn't all this raise privacy concerns?
Indeed. Data has been dubbed the "new oil" by numerous market commentators the idea being that data has become the world's most valuable commodity, powering the tech economy in the same way oil fuelled the industrial economy in the last century. It's an apposite analogy, not least because the damage to a company's reputation from leaks of data can prove every bit as damaging as oil spills for Big Oil. This year "was the watershed moment" for data privacy, says Moin Syed, an analyst covering environmental, social and governance (ESG) issues for Sustainalytics. "It's one of the front and centre issues in the tech sector."
Mostly due to the trials of Facebook. It emerged this week that Facebook suffered its third major data breach of the year in September, when it accidentally made the private photos of almost seven million users public and that it could now face a fine of over $1.6bn (£1.3bn). The web giant said that a bug affected 6.8 million people who had granted permission for third-party apps to access their photos, the issue lasted for 12 days in September, and that the bug was now fixed. It follows a major security breach in October, when hackers accessed 50 million user accounts the biggest data breach in its 14-year history.
Why is the potential fine so big?
It's thanks to the EU's new General Data Protection Regulation (GDPR) regime that came into force earlier this year. The main regulator of Facebook in the EU, the Data Protection Commission (which has its European HQ is in Dublin) says if it is determined that Facebook didn't do enough to prevent the breach, it could face a fine equal to 4% of its global revenues. In terms of reputational damage, however, 2018 will be remembered as the year of the Cambridge Analytica revelations. If a little known political consultancy could get its hands on the personal identifying information of at least 87 million Facebook users, how safe is anyone's data?
The upshot is that there is no intrinsic reason why extracting value from aggregated data and protecting the privacy of individuals must be mutually exclusive goals. However what is certain is that the balancing act required to exploit that data is set to become an ever more crucial issue politically and economically in the years ahead.