Introduction
As the old adage goes: “Knowledge is power”.
We need only look back in time for context. From merchants capitalizing on advance knowledge of regional battles, overthrown kings and war outcomes; ticker-tape, price, and technical trading becoming a prevalent source of alpha during the Livermore/Morgan era; digitization of financial statements in the 70’s; satellite imagery and Twitter sentiment in the last few years. Tapping insights others don't have amounts to profitable “edge”.
Today’s concept of "alt data" has been around for a while, the "alt" in alt data lasting as long as data remained subject to fair use within a closed ecosystem of participants (the data “have’s”).
As humans have evolved, so has the landscape of data they’ve created around them. It has always been - and still is to this day - constantly evolving by virtue of dilution at the hands of an increasing number of participants motivated by profit.
As such, any data that at one point in time was coveted, unique and difficult to source, eventually became commonplace, i.e. alpha always decays, eventually diffusing into the environment as a common risk factor.
The data “haves” always have an advantage over the “have nots”. Survival of the fittest, nothing more, nothing less. The question is: is access to this edge (and the capital that backs it), meritocratic? In this article, we discuss today’s structurally asymmetric alternative data ecosystem, and how Darwinex movement members collaborate to level the playing field.
Extractive Finance
Unfortunate as it may be, we live in an age of increasing disparity between our two main classes of market participants:
Main Street vs. Wall Street
1. Main street generates high volume data
2. Custodians (brokers, banks, etc) store (1)
3. Data vendors cleanse and transform (2)
4. Institutions purchase and mine (3)
Consequently,
The more you know (information from main street)
-> the more you make (alpha vs common risk)
-> the more you have (capital gains)
-> the more you know (purchase more information with capital gains)
The cyclical nature of this data transformation value chain systematically amplifies capital availability for the already most sufficiently capitalized participants..
..which in turn strengthens the case for such participants to become the custodians themselves, ensuring continuity of new data and reduced stakeholdership.
This extractive practice hence reduces the markets over time, to a venue where a “cartel” of the wealthiest enable constant capital and information asymmetry.