Babis Theodoulidis, Jennifer Wilby and David Diaz

Centre for Service ResearchThe University of Manchester, England

Knowledge-Intensive Service

Systems in the Financial Domain

Context

• Financial Domain– financial markets – monitoring and surveillance

• Applying Service System Modelling

Financial Markets - Overview

• The most efficient and effective mechanism to economic prosperity

• Structure– Stakeholders: customer, broker, regulatory body, data

and market venues – Market Venues: exchanges, electronic, Alternative Trading

System, Over-The-Counter, Systematic Internalisers

– Products: equities, derivatives and bonds– Jurisdictions: national, regional or global

• Principles– Market integrity– Market efficiency

Financial Markets – Key Drivers

• Technologies– telecommunications– automated trading

• Globalisation– cross-market, cross-jurisdiction

• Competition– Market venues, products, jurisdictions

FM - Monitoring and Surveillance

• Complexity of Financial Markets has increased dramatically

• High profile failures – Sub-prime mortgages, derivative contracts– HFT and flash crash

• Market efficiency and integrity have suffered

• SEC and EU public consultations to restructure financial markets

Knowledge-Intensive Services

• Service is the application of competence for the benefit of another entity; every exchange process needs to be understood as a service (Vargo & Lusch, 2004)

• service is value co-creation, i.e. useful exchange that results from communications, planning, or other purposeful and knowledge-intensive interactions between distinct entities (Maglio et al. 2010)

• KIS are services that rely on a continuous process of generation, acquisition and use of new information and knowledge or new combinations of existing information and knowledge (Madhaven and Grover, 1998)

Service Systems

• a configuration of people, technologies, organisations and shared information, able to create and deliver value to providers, users, and other interested entities through service (Maglio et al. 2008)

• Modelling “financial services” as service systems allows us to study their structure, reason about their properties and behaviour, understand their processes and test their validity in practice

FSS - Concepts

• Service– Trader – Venue: display book, company news, etc– Venue – Regulator: best bid, suspicious transactions,

etc

• Value-in-exchange– When a quote or bid is submitted and

accepted by the venue

• Value-in-use– When a trade closes

8

  Rights No-rights

Physical 1. People

Individual investors, manipulators, traders, surveillance teams, broker dealers, head of SEC or FSA, etc.

2. Technology

ECNs, trading platforms, servers, data

warehouses, etc.

Not-

physical

3. Organizations

Regulators, broker-dealer companies, investment

companies, stock markets, etc.

4. Shared Information

Trading information, news, corporate information, etc.

FSS - Resources

Based on Maglio et al, 2010

FSS - System Behaviour

From Wilby et al, 2011

• Four-fingerprints of complex systems (Casti, 1992)– Irreducibility– Instability– Adaptability– Emergence

• Provide framework for classifications of relevant principles applicable

• Examine in the context of Financial Service System

FSS - System Principles

Irreducibility

• Study the “whole” as well as the relationships between the “parts” of the whole– Properties that cannot be discerned from the

individual study of the parts

• Holistic vs Reductionist– Decide what is relevant to the study (scope)

• FSS – Cross-Product– Cross-market– Cross-jurisdiction

Instability

• Complex systems are inherently unstable, moving between states of behaviour

• Instability is introduced by elements within the boundaries of the service system or the environment

• Maintaining the viability of service systems

• FSS– New technologies, new venues, new products– Regulations and policies

Adaptability

• Actors in service systems are not rational agents

• Their decisions and actions cannot be anticipated

• Learning and adaptation

• FSS– monitoring and surveillance– Auditing– Automated/manual adaptations

Emergence

• behaviour not previously predictable

• Creates the so-called “emergent properties”

• Relates to the other principles

• FSS– New manipulation scenarios

FSS – System Structure

• Service Customer– Investors, regulators

• Service Provider– SROs, non-SROs, regulators, third party providers

Customer

ServiceExperience

ServiceProvider

Taken from (Kwan et al, 2008)

Market Monitoring Value Propositions

Customer’s

NetworkMonitoring

& Surveillance

Value Proposition

Focal

Relationship

Value Proposition

Provider Partner

Network

Value Propositio

n

Regulator SRO

Central Tape

Manager

External Data

External Data

Provider

Text Mining

Service Provider

Based on (Kwan et al, 2008)

Market Monitoring Worldview

OutputManagement

OfflineEngine

Real TimeEngine

InformationManagement

Regulator

Live Data FeedProvider Internal SRO

Data

Factiva

Central TapeManager

Venue A

Text MiningSS Provider

Based on (Kwan et al, 2008)

Service Network – Single Jurisdiction

Based on (Kwan et al, 2008)

Summary

• Examine Financial Markets and especially, monitoring and surveillance processes as service systems

• Methodology to examine system behaviour as system of systems

• Produce a framework for the design of financial market monitoring systems (open – closed approach)

• Work in progress

Back Up Slides

• a collection of parts together with their relationships that forms a whole that serves a purpose that is meaningful to the system alone, that is, not to its parts or their relationships' (Boardman et al. 2008)

Systems Thinking

From Schoderbek et al, 1990

Archetypes

• stereotypical systemic configurations of entities and relationships

• Archetypes are composed of one or more types of relationships among variables, but in general, it is possible to identify two main types of relationships (Senge 1994). These are:– Reinforcing relationships, which consider

feedback interactions or loops– Balancing relationships, which consider tradeoffs

between variables, i.e., inverse relationships between them, for e.g., when one increase the other decrease, when one is activated, the other is deactivated, etc.

Intentionally Holistic KISS

From Wilby et al, 2011