The front office is increasingly concerned with the quality and timeliness of corporate actions data as it assists in the identification of prime trading opportunities and risks, according to Joseph Haddock, manager at data giant Bloomberg. Speaking at this week’s CorpActions 2011 conference, Haddock noted that increasing volume of corporate actions data that is being consumed by the front office is highlighting the need for greater standardisation of this data.
It is therefore not just the back office that is concerned with the quality and accuracy of corporate actions data: it can be used to drive front office trading strategies and to identify potential risks in the market. Moreover, Haddock also pointed to exchange traded funds (ETFs) providers who use corporate actions data to determine the structure and key dates for their dividend payouts.
Opportunities for trading can stem from merger arbitrage activity, where firms trade on the corporate action’s impact on share price spread. However, this impact is not always predictable, as a potential merger will not always tighten the spread. To this end, Haddock highlighted a recent Canadian example where TMX Group received bids from the London Stock Exchange (LSE) and Canadian-based Maple Group but instead of tightening, the share price spread widened because of potential regulatory issues stemming from a Maple Group takeover.
Corporate actions can also have a solely negative impact on the value of a stock if they cause “confusion” about the structure of a firm, explained Haddock. He described a recent complex series of corporate actions at a Swiss firm to illustrate the point, noting that this level of uncertainty therefore raises the risks associated with that firm.
Adam Stern, managing director of Ibacas Consultancy, suggested that there are two main types of front office client for corporate actions data: event driven funds and those that use the data to make decisions regarding areas such as borrowing or for accrual calculations. He also indicated that rather than relying on the back office for this data, the front office is seeking its own sources for corporate actions data.
“Although the most sophisticated vendor and in-house solutions have evolved around the aggregation and validation of corporate actions data, if the front office and back office are using separate sources for this data, there can be internal validation conflicts,” said Stern. This therefore results in the requirement for an internal reconciliation process for this data to ensure consistency, thus adding more cost.
Stern also noted that due to the trend towards multi-prime broker relationships within the hedge fund community, some prime brokers are differentiating their services on the basis of corporate actions data support in order to retain a larger share of the market.
Panellists agreed that there is some conflict between the front and the back office in terms of timescales for internally set deadlines for elections (a topic that has been raised a number of times recently). Max Mansur, global market manager for Asset Servicing at Swift, indicated that there is some pressure for data compression from the front office community in order to minimise impact on share price, which conflicts with the back office’s desire to be able to process the data in time.
On the topic of the push towards real-time or near real-time data, Haddock indicated that Bloomberg has developed a service to provide near real-time data that has seen some take up but not as much as the vendor first hoped. Perhaps this is something that will take time to be adopted, like so much else in the corporate actions space?
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