When using and sharing data, trust is vital, particularly in ‘alternative data ecosystems’ – and data intermediaries (those who sit between data providers and users) – can help build trust to benefit all parties.
How can financial organisations create value from ‘alternative data’ – data from new and unique sources used by investors to help evaluate a company or investment – while also being open, trustworthy and sustainable? How can they do this so that it benefits themselves and others in the data ecosystem? In particular, how does this apply to data intermediaries – organisations who collect, validate or analyse data on behalf of customers?
As part of the ODI’s partnership with Refinitiv, a financial market data provider, we are researching trustworthiness – and the influence of openness and sustainability – in alternative data ecosystems.
Financial companies often make their investment decisions based on specific but widely available sources of data. Balance sheets, cash flow statements, press releases, quarterly reports and investor briefings would all be considered traditional forms of investment data.
However, some companies have sought out new data sources to help inform their investment decisions. These datasets, often released by non-financial organisations, can help predict price-moving events that traditional data sources may miss, get wrong or not yet know about. This repurposed data is known as alternative data (‘alt data’).
There are many sources of alt data – web traffic, public records, surveys, weather reports – but they can be broken down into three broad types:
- Data about individuals, such as analysing consumer sentiment from social media.
- Data about business processes, like using web-scraped job postings to gain insights on company hirings.
- Data from sensors, such as from private aeroplane flight trackings to help discover potential deals between companies.
The parties within an alt data ecosystem provide ‘value exchanges’ – these can be formal value exchanges, such as services and money, or ‘soft’ value exchanges, such as advice advice and support. While there are many ways in which data and value are shared, a common scenario is the following. An organisation publishes data which a data provider will acquire and test to see if it contains useful investment signals. The data provider can then provide access to this repurposed data to a data intermediary who collects, validates and creates insights into data from many providers. This intermediary will provide access to their collections of data and insights to data customers, who can then use this data to inform their investment decisions.
Legal and ethical considerations
Those using alt data must also consider legal and ethical implications. Many regions have strict legal guidelines regarding personal data processing. Organisations may acquire data that is labelled as anonymised data but in fact could identify individuals, especially when combined with datasets from different sources.
Companies must also ensure that they have the right to collect and use/sell the data. For example, web scraping is routinely used to gather alt data but is a legal grey area which has led to several court cases.
Alt data could be used as ‘material nonpublic information’ – that is, information used for commercial gain without it being publicly available. Companies found in breach – or even considered to be in breach – of any of these laws can face serious financial and reputational consequences. Because of these risks, companies must be able to rely on and trust each other within an alt data ecosystem. The data customer must trust the data intermediary to sell safe data and in turn the intermediary must trust the data provider.
Further exploration into trustworthiness in alt data ecosystems
The ODI has examined trustworthiness in alt data ecosystems in previous work with Refinitiv. Together we published a report: ‘Building an open and trustworthy alternative data ecosystem’ which recommends creating ethics assessments, technical and procedural standards, and more transparency around data sources.
At the ODI, we are continuing to explore the role of 'data institutions' in increasing access to data, with a particular focus on how to design institutions that are trustworthy and sustainable. We have found that organisations can assess, build and demonstrate their trustworthiness by using tools and mechanisms like contracts, audits, codes of ethics and certifications. We have also found that sustainability relies on continued access to the data, a demand for that data, a viable business model around it, and maintaining working relationships.
For our 2019–2020 partnership with Refinitiv we’ll continue to explore the features of open, trustworthy and sustainable alt data ecosystems, with an emphasis on the role of intermediaries and platforms like Refinitiv.
We aim to answer questions such as:
- Who are the actors in alt data ecosystems and what are the value exchanges between them?
- How do they assess the risks and values in alt data exchanges?
- What mechanisms can intermediaries use to assess, build and demonstrate their trustworthiness?
- As alt data ecosystems grow, which mechanisms should intermediaries promote such that providers and customers can trust each other more?
As part of this project, we will host online workshops and conduct interviews with Refinitiv and other experts in the alt data space. We will publish findings along the way and will publish a short whitepaper bringing together all we’ve learned and outlining future points of research.
We believe that helping to guide the alt data sector towards better practices and standards can benefit all parties in alt data ecosystems and indeed wider society.
We’re keen to hear from others about what makes organisations in alt data ecosystems more trustworthy. If you have thoughts or just want to hear more about the project, please drop us a line.