“Real opportunities for innovation come with evolving constraints”
We are in the middle of a “FinTech” revolution right now with much interest in the finance domain and how we can use technology to disrupt both incumbents and business models. We talked to JAX Finance speaker Dr. Jamie Allsop about the problem of finance, where we are today, how we got here and how we might make sense of it all.
In this interview, Dr. Jamie Allsop, director of clearpool.io and speaker at the upcoming JAX Finance conference, is sharing his views on what makes finance special —if anything— and how all the changes in this area have led us to where we are today.
JAXenter: The title of your JAX Finance talk is “The problem with finance“. What’s so special about technology in finance?
Dr. Jamie Allsop: Good question, and not one with a simple answer! In fact that’s the reason why I thought it would warrant a talk to discuss the idea: bringing not only my perspective but taking the opportunity to see if others concur or perhaps have a different perspective. To at least address the question though, I can say that finance brings with it a variety of constraints, both regulatory and performance, where failure to achieve them can have a broad range of consequences. I think it is that broad range of consequences that can set finance apart to some degree.
JAXenter: In your abstract you are saying that finance is a „domain of contradictions“ – can you please explain what you mean by that?
Dr. Jamie Allsop: I think this relates to the remark I made with respect to there being a broad range of consequences when things go wrong. Finance covers a wide range of systems with highly variable sets of constraints: from handling terabytes of data, to offering slick modern web experiences, to working with ultra-low latency, to using simple form-based data capture. Basically pretty much from one extreme to another. Equally diverse are the consequences when things go wrong. It is probably fair to say that in most industries a poor customer experience normally correlates with a decrease in revenue and customer-base size. Ultimately this leads to a loss in business and in more extreme cases going out of business.
Certainly this can happen in finance but we also see cases where large institutions are considered too important to be allowed to fail and that creates the opportunity for poor quality systems to outlive their natural lifetime. In some cases this leads to serious problems where the lack of reasonable consequences can lead to endemic under-performance.
In contrast, failure in other corners of finance are so heavily regulated that failure – perhaps in the same institution – can lead to criminal prosecution, never mind the actual consequences of the failure itself. In other words, on the one hand you have a need for a very high level of professionalism and on the other you can get away with wasting a lot of time and a lot of money.
JAXenter: Speaking of regulations as being one of the most dominant frameworks of finance development in both respects, technology and business – do they limit the possibility to innovate or do they create a new space for innovation, especially in a fragmented market such as Europe?
Dr. Jamie Allsop: The simple answer is that any constraints will initially limit the possibilities that are open to providing solutions. However, those constraints will also act as a catalyst for the development of innovative approaches. Why? Well, when you constrain the solution domain people are forced to innovate to find better or different solutions. There is no choice in the matter.
I believe some of the real opportunities for innovation come not just with constraints (perhaps from existing regulations) but more so when you have evolving constraints. Such evolution forces a re-think of existing practices while still providing boundaries offering scope for solutions. I think large regulatory frameworks like the incoming MiFID II will usher in many innovations in the capital markets space. It’s not just about the changes, but the fact that the regulatory pressure itself will make customers more amenable to trying new and innovative solutions.
Finance brings with it a variety of constraints, both regulatory and performance
JAXenter: Automation is the engine in modern trade systems. What’s the role of (decision-making) humans and how would you describe the changing interactions between systems and humans in finance?
Dr. Jamie Allsop: This is a huge topic, too big and too broad to go into any real depth here, but I will say that one of the constant challenges in modern capital markets revolves around getting the interface right between machine driven aspects to trading, such as algorithms, and humans who ensure that systems don’t run amok. Given the incredibly high speeds at which systems operate we see whole industries focused on automating all aspects of correctness in trading systems. Indeed many regulations exist solely to quantify and parameterize the boundaries within which systems should operate. Additionally much effort has been put into figuring out ways to automate fails-safe mechanisms in the event of extreme market events.
In this example the humans making decisions are concerned primarily about preventing deviations from acceptable limits or conditions (correctness). They typically also reserve coarse-grained controls over the systems allowing them to preform basic tasks like forcing an abort or restarting manually, but otherwise rely of the systems to operate automatically. For example, to ingest and analyze market data to drive trading algorithms.
To come back to your question, how are these interactions changing? I would say that if anything there is a continual move towards defining increasingly sophisticated rules and requirements which can only be effectively delivered with more and more automation. I don’t think there is so much a change in the interactions but more a continual trend of a move to automation that we saw starting with the electronification of markets and increased reporting and compliance requirements that followed.
Thank you very much!