Unleashing the Power of Intraday Data
As in any industry, real disruption in the index construction space is rare, requiring state-of-the-art technology and a few people with a vision.
The idea itself, of creating a wrapper to track a portfolio of investments with common characteristics, was in its own time a disruptive innovation. John Bogle’s idea to create the First Index Investment Trust on December 31, 1975, was largely considered “un-American” and seen as “Bogle’s folly.”
Presently, however, according to statista.com, worldwide ETF assets under management exceed 7.75 trillion U.S. dollars.
Over the past two decades, the Index industry has seen a couple of breakthroughs:
- The introduction of volatility management techniques, including volatility caps and volatility control mechanisms, that allow an asset to leverage up and down its exposure depending on market conditions in a way that mimics the constant proportion portfolio investment strategy first elaborated by Black and Perold in the late 80’s.
- The democratization of factor investing pioneered by Fama and French in 1992 led to a dramatic increase in the number of indices offered, as stocks can now be categorized and weighted by their risk attributes rather than by countries of incorporation or sectors. The rise of thematic indices is a by-product of factor investing.
In this blogger’s opinion, there is a major disruption currently under way in the Index space that will be changing index construction durably: the use of intraday data.
Less flashy than sentiment data or the use of artificial intelligence in stock selection, intraday price data is quietly changing the index space by further bridging the gap between active and passive investment.
Sophisticated investors have long used intraday data to implement their systematic investment strategies. Embedding intraday data into an Index allows for enhanced transparency and accountability, eventually giving the broad market access to best-in class index construction.
In practical terms, intraday data allows an index or strategy to have minimal delay between the observation of a set of data and investment decisions (signal, leverage, etc) based on such data.
This changes index construction in two fundamental ways:
- It allows for new types of strategies that aim to monetize intraday patterns.
- By reducing the lag between observation and execution time, indices are more reactive and more accurate in achieving their purpose.
The use of intraday data in indices has its challenges — data cleaning, disruption handling, time references — all of which can be addressed to provide index users with full transparency.
MerQube is at the forefront of the use of intraday data, partnering with global exchanges across the world to ingest, calculate, and transmit index signals and calculations on a live basis.
In the next few months, we will explore in more details how the use of intraday data can create improved indices.
