The evolution of modern finance: From legacy systems to data-driven ecosystems

Technological evolution has played an important role in the development of finance for thousands of years. The emergence of Pax Romana and the use of paper money in ancient Chinese civilizations, the efficiency provided by double-entry accounting and its circumvention in the Medici administration, the point-to-point telegraph system that conveyed the first commercial messages, and the advent of securitization to finance the construction of the Atlantic Cable during the British Financial Revolution all played a part in history from the bottom up. Once upon a time, we started creating legacy systems. Over time, these systems were orchestrated and synergized into modern financial markets. The broad principles underlying their behavior, rewards, and flaws are now well understood. Such is not the case for the data-driven ecosystem evolving within a new paradigm based on big data. Data overtakes transaction data as the locus of market value. Data per se, and through their ownership and manipulation, exert strong governance over value-maximizing suits and the associated composition of financial conglomerates.

This chapter systematizes the known economics about the use of data in finance, as well as some prerequisite technical knowledge. Because data-driven finance was also evolving quite quickly, this may not be a complete survey. Our focus remains on the economic forces that are shaping the data-driven financial markets, products, and the platform industry that caters to them.