Wall Street algos being built by State Street

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• State Street recently announed a deal to buy financial data firm Charles River Development for $2.6 billion. The deal was seen as a step onto Wall Street trading floors for the company. 
• It’s a big bet. When State Street announced the deal alongside the cancellation of a big buyback, the company’s stock dropped 8%.  
• According to Lou Maiuri, an executive vice president at State Street, the deal will help the firm pipe tools it’s been quietly working on in to trading floors everywhere.
• It represents the next step in the company’s efforts to create a one-stop shop for Wall Street firms looking for solutions from the back office, where State Street helps custody assets, to the front office, where traders pick winning stocks. 

“The front-office has been the next frontier for us.”

Lou Maiuri, who heads up businesses spanning research, trading, tech and innovation at State Street, is talking about the trading floors across Wall Street that execute trades on behalf of investors. For State Street, which is best known for its sleepy custody business, it’s a new focus, one which has been taken to the next level with the recent deal to buy financial data firm Charles River Development for $2.6 billion.

Charles River will boost State Street’s efforts because it will fill in the gaps in the firm’s front-office offerings, including portfolio construction, order management, and trading. It will also help State Street pipe front office tools it’s been quietly working on in to trading floors everywhere. Charles River boasts a large userbase with 25,000 clients totalling $25 trillion in assets, according to its website. 

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There’s already a number of businesses operated by State Street that touch the front office, including FundConnect, a platform of electronic trading systems.

And two years ago, it started a push into tools relating to data and analytics, said Steve Marshall, a managing director at State Street. 

“There was a recognition then that we wanted to do something different,” said Marshall. “How we could address the big challenge our clients were facing?”

An unorthodox plan

Ultimately, State Street came up with a plan to bring on an external firm to engage with 100 of their largest asset management clients. The goal was straightforward: to unearth their biggest struggles and to then come up with solutions. At the time, it wasn’t clear if that plan would work and was met internally with skepticism, said Maiuri.

“I think it was after the third meeting, my team was saying to me ‘you have to stop this,'” Maiuri said. 

“They thought they were asking the clients stupid questions.”

But those questions, which ranged from “what does your commute look like” to “what do you do on the weekend,” served as a foundation for a new mobile app, which points to a shift happening at the firm. 

The big take-away from those client meetings was that news was a real problem for the front-office. 

Before heading to work and on the weekend, portfolio managers and traders had no good way of knowing what news pertaining to their stock holdings was relevant to them, Maiuri said. 

“They weren’t connected and there was a fear of missing out on things,” Maiuri said. “So then we thought what if we could help them read the news so when they wake up they can pick up their phone, check our app, and figure out what is most important so by the time they get to the office they are ready.”

The team toyed with nine different ideas before they went with what would ultimately become VersusSM, according to Maiuri. Leveraging a team of journalists, natural language processing, and machine learning, the platform scans financial news for information against data on client holdings to pinpoint and rank the most relevant news stories. That information is curated onto a newsfeed, showing the degree to which that news directly, or indirectly, impacts a particular holding.

“You want to look for connections that are obvious, and not obvious,” Marshall said. 

That’s because a story might not mention a particular stock, but could impact said stock in a positive or negative way. Let’s say for instance that a trader owns shares in a biotech that had its drug denied by the Food and Drug Administration. At first glance, that appears to just be bad news for that one holding, but VersusSM would also identify other connections. 

“Maybe it is also bad for a supplier to that company, which you own, or maybe you own a direct competitor, and so in one respect the news is not that bad,” Marshall said.

What’s striking is State Street has brought on six former financial journalists and editors to give supervised feedback on the product. 

Thus far, the firm has 25 clients — mostly long-short and long-only equity hedge funds and asset managers — using the product. 

VersusSM joins MKT, another front-office aimed data product tied to news, which has not been previously reported on. 

Whereas, the point of Versus is to flag relevant articles, MKT scans thousands of articles to produce a sentiment number for investors to plug into trading models. 

“It’s teasing out the signal from the noise,” said Will Kinlaw, a senior managing director and head of State Street Associates, an academic research unit of the firm. 

The effort got off the ground three years ago but didn’t come to market until last year. It looks at a number of indicators, including the amount of analyst coverage a firm has and the tone of coverage for 3,000 companies. Something that makes the product standout is its bias-correction capabilities. 

“It adjusts things like a reporter who tends to be negative and then suddenly becomes less negative, that would be registered as a positive signal,” Kinlaw said. 

A new kind of business

Custody banks like State Street are under pressure from low revenues as their large clients in financial services push them to lower fees on custody. In turn, they’re looking for new revenue opportunities. 

The plan for State Street is to bring insight tools like Versus and MKT onto the Charles River platform. 

“It could include our insights or distribute others,” Maiuri said. 

“They are painting it as a move toward a one stop buy-side technology shop to help the larger firms better rationalize their infrastructure,” Larry Tabb, founder of Tabb Group, said of the acquisition. “Not so heavy on the outsourcing model but really a much tighter integration from front to back and including wealth which can be scaled across State Street’s customer base, in addition to providing an open infrastructure for other custodians as well.”

That shift will likely translate into more and more data and analytic products like Versus and MKT. Maiuri said the firm is talking to big data companies to spin-out new ventures. 

“We will talk to Thomson Reuters and Bloomberg,” Maiuri said.

Already State Street is working with its asset management unit on a tool to help them make their front office more efficient. 

“It is going to plug right into Charles River,” Maiuri said. “I could see us at some point announcing a distribution partnership and I think you will see some more of this stuff roll out before the end of the year.”