Enabling information arbitrage

Arbitrage. That word is familiar to anyone who has ever done any trading. The strategy? In its purest form, it’s executing trades that take advantage of pricing differences caused by market inefficiencies. When it comes to information – the standardization, accessibility, and usage of it – the differences between how various firms attempt to master that can create those inefficiencies.

So how does management of that information lead to opportunities for information arbitrage? 

In the prime fashion of finance, let’s try to stick it into a formula: Information Management, or “Transparency” + “Analytics” = Opportunities for Arbitrage.

But we can break that down even further.

financial_charts_3d

Transparency and Analytics
Data, when it’s messy, when it lacks structure (implicit or imposed), is inaccessible, is partially electronic and partially on paper buried in desk drawers and file cabinets – well, it’s not helpful. It’s just data.

But data that’s been:

  • Cleaned up
  • Put into some form a structure (relational or otherwise)
  • Indexed or scanned or input into an electronic format

Is the first step that turns inert data into information. That is the point where you can start to see what you have (or what you don’t and need), and you get a measure of transparency. Of clarity.

Good data, or information, lends itself to use. How do you use information?

  • Running scenarios
  • Looking for or watching the 80/20 bubble up
  • “Walking the line” to see where your data takes you, so you can
  • “Tell the story” that your data has made

The ability to do that will give you confidence.

Therefore, Transparency (or Clarity) + Analytics (or Confidence) means—

Opportunities for Arbitrage
Why do I say just opportunities? Because knowing is not doing.

You see, good information management gives you options and choices. It allows you to see and understand:

  1. Where your profits are coming from
  2. Where your costs are concentrated
  3. Which sales teams are producing sustainable profits
  4. What areas of your business are over-performing
  5. What trading strategies can be tuned further
  6. What investments you should be making
  7. What investments you need to exit
  8. Why certain investments are doing well
  9. Why certain investments are not doing as well

The above sounds great, but there is a lot of work involved to be able to easily and confidently answer those fundamental questions. The work required is going to cost money, may inflict psychic pain on your organization, is riskier in the short-term, and never has a guarantee of success.

But not doing the work has this guarantee: other firms are getting their houses in order and they will be able to take advantage of the market inefficiencies produced by you not doing the same.

So now that you know, here’s the question: which side of this arbitrage opportunity are you going to be on?

 


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