The importance of data in finance

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains the importance of data-management for corporations and how they are used to improve profitability.

According to a study published by CapGemini untitled: The data-powered enterprise: Why organizations must strengthen their data mastery, it is estimated that the gain from efficient data-management would represent 22% in terms of firm profitability.

Why is data used?

The use of data in finance can also be very useful in finance for various reasons.

Indeed, the multitude of data available allows for a deeper understanding of the market in terms of risks and opportunities. This knowledge is accompanied by an important consideration of political, social and economic factors.

As early as 2006, British mathematician and Tesco marketing mastermind Clive Humby stated “Data is the new oil.” The companies with the largest market capitalizations also bear witness to this importance of data. The ranking shows of tradingstat shows a podium of Apple, Microsoft and Google: the predominance of data-driven companies is clearly observable here.

In which finance-related fields is data used?

In finance, it is especially in the trading rooms that data has become an absolutely indispensable tool. Indeed, it is thanks to Big Data – i.e. increasingly exhaustive data, at an ever faster pace – that high frequency trading has been developed. In short, high-frequency trading makes it possible to place several thousand buy and/or sell orders in a few seconds, or even milliseconds, while optimizing risk management in order to adapt the strategy to market responses. This trading strategy allows for buying and selling in a sufficiently short period of time to avoid a potentially negative market movement during the operation.

On the other hand, retail banks (i.e. banks for individuals) are also confronted with the challenges of data-management. The development of online services offers them a better knowledge of their customers, which leads to a change in the bank’s relationship with its customers. In doing so, banks improve their ability to adapt their offer to the customer profile. Big Data also enables banks to fight fraud. Banks are now able to monitor all bank card transactions and be alerted when a user makes a payment (particularly in terms of amount, time or geographical area). For investment banks, whether it is the implementation of a more reliable scoring of credit files, the pooling of data between banks, analysis of the “sentiment” of investors for traders or the compliance of data and its processing, the indispensable character of data is no longer to be proven.

The importance of data regulation though

The use of data in finance is very useful but can be problematic when the data concerns the personal data of users or customers. In this context, financial actors are subject to ever increasing regulation and the adoption of the EU’s GDPR, in 2016, seems to be a step in this direction.

Useful resources

BlackRock L’utilisation du Big Data dans un processus d’investissement

About the author

The article was written in March 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

The importance of data in finance