For the Good of the Game

A popular conversation for the late summer barbecue of 2019 is to talk about how terrible the game of baseball has become.  Too many strike outs.  Too many pitching changes.  Too many home runs (!)  We used to have batting averages and ERAs and now have to hear about WAR and BABIP and launch angles.  All the strategy and feel and art has been sapped from the game.  TV commentators openly lament this on live broadcasts. [IMGCAP(1)]

This conversation feels all too familiar for those of us who have worked in and around the equity trading landscape over the last decade.  The fragmentation and electronification of the markets has changed the “playing field” and fueled many of the same critiques of the equities markets.  The difference of course is that where baseball exists to entertain whereas equity execution fulfills a specific function whose results can, at least in theory, be measured.  The old saying that “Trading is more Art than Science” feels under attack.

But stepping back from the market structure details that occupy so many of the headlines, it is becoming clearer that we are continuing to see a fundamental shift in the behavior of the buy side.  While this isn’t “new” we can’t help but observe that the pace of change has increased, whether the result of asset manager consolidation, automation, and personnel changes.  The dual trends of unbundling and competitive cost pressures are causing many firms take a fresh look at their fundamental approach to the execution process.  And a recurring theme in this conversation is data.

Whether or not we view these changes as “good”, both the buy and sell side are being forced to adapt to this revolution.  This demands new skills, tools, mindsets, and importantly, data sources.  Look no further than the increasing prevalence of Tableau and PowerBI on trading desks.  The quantitative revolution in professional sports is not possible without advanced data sets with which to apply analytical techniques.  I will have a hard time analyzing a complex and unstructured topic like defensive efficiency in soccer without detailed knowledge of where every player is on the field at any given time (for those that thought this was a baseball-only phenomenon the quants are coming for your favorite sport too – I’m looking at you, Corporate Bonds).

To that end, the industry and regulators are rallying around initiatives such as the updated Rule 606 requirements.  Although we have only just recently received clarifying guidance from the SEC and the implementation date has been pushed into 2020, thematically this is all part of a march toward greater transparency and democratization of richer data sets that are enabling clients to take an increasingly data-driven approach.  While the enhanced Rule 606 is in many ways just a start, it tremendous step in the direction of making available the kinds of data that have long been used by the largest buy side firms for some time and a strong validation of this trend.

Whether or not we view this as a threat to “the game” is a matter of perspective.  Is execution an equation that can be “solved”?   There are those that believe so.  In certain controlled cases that is likely true, but as I’ve discussed previously it is only through the combination of data-driven process and tools and human intuition that we can truly realize clients’ nuanced trading objectives.  And our industry is still ripe with opportunity for those that are willing to embrace the new rules of the game.