What Financial Markets Can Learn From Formula One

What Financial Markets Can Learn From Formula One

Drivers catapult around corners at 140mph and scream down straights at 200 with their backsides only a few inches from the tarmac. To say they are super-human, and put their lives in the hands of mechanical engineers, data engineers, and their own split-second decision making, is an understatement.

How do F1 teams push the boundaries of speed and reliability so constantly? After all, it’s one person in a car, on their own, with just their bravery and skill to keep them on the track, right? And how can financial markets learn from a highly engineered team sport like F1?

This article aims to answer these questions and explore one of the remaining data challenges facing financial institutions in capital markets.

Technology – unseen but critical to success

Unless you are a diehard motor racing fan, you might not know that every car carries somewhere in the region of 300 sensors. That’s the equivalent of 300 tiny teammates all working together to improve performance or, for safety, alert the team of impending failure. Being a sensor is a cut-throat business; you must earn your ride and prove your worth. If you don’t, and weighing no more than a few grams, you’re too heavy and will be scrapped.

How do F1 teams harness the power of the sensor?

Event-driven data – these state-of-the-art machines carry onboard servers to capture the constant stream of data and send it back to the pit lane engineers, in fractions of a second. Over a race weekend, a single team running two cars can collect 3TB of data. Almost everything imaginable is collected; ride height, engine power, tyre pressures, g-forces – even the driver’s heartbeat, hydration and how hard they’re pressing the brake pedal are measured and recorded.

Sensors are useful when unexpected events occur during a race that could affect the performance of the car or the driver. They will detect the cause and try to limit the effects as the engineers frantically work through scenarios, remedies, and ‘what ifs’ in real time.

In a sport that pushes design, materials and technology to the limit, it’s not always realistic to fix problems in real time, so sensors do a great job of limiting the unknowns and informing the team so they communicate effectively and change their behaviour if that’s the only available course of action.

How does this relate to financial markets you might ask?

On occasions, the pace and volatility of financial markets can sometimes seem as if they’re moving at 200mph. To fuel a fully-functioning market, technology firms have made huge strides in enabling safe trading and allowing investors to execute orders in seconds – transactions are confirmed, affirmed, and reported in minutes. Trades

and positions are risk-managed in hours and cleared and accounted for in days. This is by no means an exhaustive list of functions, but a decent sequence of basic transaction lifecycle events that – for this comparison – act as ‘sensors’ and oversee a safe, healthy, functioning market.

Is every ‘sensor’ effectively working as part of the team?

A market study conducted in 2021 showed that, on average, the legal negotiation of new arrangements ‘typically takes 60 days (or more) to complete’. The consensus of the participants also suggested that lawyers ‘would always pull the document’ in response to a significant market event, introducing wasteful time between the event and the decision.

A significant amount of the narrative in legal documents is there to govern operational and risk matters, such as how firms should behave, what they should do in the ordinary course of business, and when and how to remediate issues. In other words, with a significant list of anticipated events acting as ‘sensors’, it seems fair to ask whether the cadence of the legal processes is compatible with the underlying markets they govern.

At times it feels that firms will forever be grappling to balance the investment required to run the bank, comply with regulations, and build towards their digital future. Given that corporations and financial markets literally exist and operate entirely within a legal framework, surely it would make sense to make innovation in this space a priority.

But where to start? Big data, data lakes and many other on-trend buzz terms have been around for years, but how’s it all going? A few early adopters invested large sums of money in centralising corporate data, but without the innovation to keep it usable, relevant, and up to date it quickly became stale and burdensome, drawing more investment to the wrong places (akin to the weight of a sensor).

Other firms have found comfort in operating a federated data environment, perhaps a polite way of framing underinvestment and disparate businesses. But regardless of the starting position, there appears to be two glaring problems that always stands in the way of progress, namely who owns the investment decision and what’s the primary business goal?

Back in the race.

In F1, investment is heavily weighted towards innovation to stay within the sport’s rules and regulations, rapidly respond to events on the ground and to go faster, safely. Going faster safely is a goal, and behind that goal sit 300 tiny teammates and a team of engineers, each with a specific job to do, and a team boss, who ultimately makes the data-driven and event-based decisions.

Where do financial market firms start?

The volume of legal documentation now required to support trading, reporting, custody, close out netting and regulations has made requirements more complex and challenging to maintain. Future-proofing legal data as a digitised golden source (smart contracts) has never been more critical.

But without governance, innovation can be chaotic, and without innovation, governance is just a word. Our recommendation is that firms look to benchmark their current contract data capture process by booking a free demo of the LIKEZERO software which is transforming the way you can accurately and efficiently capture data and manage risks in your legal contracts.

Margin Reform provides consultancy services directly and through LIKEZERO on all aspects of legal requirements. These include netting opinions, technology options for digitisation and outsourcing options for negotiation of conditions to support UMR, LIBOR cessation, Brexit, Repo, Securities Lending and custodial and outsourcing arrangements.

If you are interested in a further discussion on any aspect of this document, please get in touch with me at shaun@marginreform.com or connect with me on LinkedIn