x Abu Dhabi, UAEFriday 21 July 2017

For update overlord, it all comes down to risk

As president of the division of Thomson Reuters that provides two million price updates per second, David Craig believes the deluge of information will help prevent future crises.

David Craig, the president of the financial and risk division of Thomson Reuters, says the crisis was caused by poor information. Jaime Puebla / The National
David Craig, the president of the financial and risk division of Thomson Reuters, says the crisis was caused by poor information. Jaime Puebla / The National

One of the most often quoted aphorisms of the legendary investor Warren Buffett is "risk comes from not knowing what you're doing", and that also sums up the business philosophy of David Craig.

Mr Craig isn't quite as well known as the "sage of Omaha", but he plays a significant role in the supply of information that oils the machinery of the global financial markets.

As president of the financial and risk division of Thomson Reuters (TR), one of the largest providers of global financial information, he is responsible for the systems that deliver 6 billion price updates per day on stocks and other securities traded in world markets.

"That's two million price updates per second," he estimates, adding: "It's the Google of the financial markets."

The purpose of this deluge of financial information, he believes, is to lessen the vulnerability to risk that brought about the financial crisis of 2008 and which continues to plague markets today.

He is in no doubt as to the basic reason for the crisis: "Some people saw it coming, but they didn't have adequate information to take the necessary steps to avoid it. It was caused by poor information, especially around the pricing of financial instruments that were supposed to be liquid but which turned out not to be and by conflicts of interest around the rating of debt."

Mr Craig joined TR in 2007 from the management consultants McKinsey and was put in charge of strategy in its London office. In 2009, as the financial crisis was at its height, TR set up the governance, risk and compliance business with Mr Craig at its head.

It was designed to exploit the post-crisis environment and was a shrewd business decision for TR. It is the fastest growing area within TR's markets division and is a major contributor to the business that generates 55 per cent of TR revenues.

Some commentators talk about the "new normal" in global financial markets, referring to the way in which banks and other financial institutions have had to adapt to the new environment of post-crisis world. "I think there is a 'new normal' out there. It will be more cautious. It won't let debt and risk build up," says Mr Craig.

"And it will be smaller. There will be fewer global banks and more regional banks. These will inevitably become bigger, as we have seen in Dubai with its role as a regional hub between Asia and Africa."

The "new normal" also involves different patterns of capital flows, he says. "Some global patterns will remain, but the overall trend will be different. It will not be all directed towards the USA and Europe. It will involve more south-to-south capital flows," he says.

So has the financial world learnt a lesson from the crisis? Is the global financial system fixed? "Some aspects of the financial system have recovered, to some degree. Capital flows, foreign exchange transactions and foreign direct investment have improved. Assets are growing despite the crisis."

But Mr Craig also sounds a warning note. "There is still a lot of work to do, still a lot of risk out there. In some ways, risk is inherent in the global financial system. It's the banks' job to take risks but also to manage and price it accordingly," he says.

"This represents a serious challenge for governance. The new climate is more cautious and judicious about capital flows, and Basel III [the new international regime for banking] will step up capital requirements for banks."

Gulf and Asian banks are on the whole better capitalised than their western counterparts. Even in Dubai, where the crisis hit the financial system badly, he detects a cautious confidence among the emirate's financiers.

TR has recently been enhancing its presence in the region. The acquisition of Zawya in 2011 added to its capabilities in regional financial news and information, especially in the areas of Islamic finance and big family businesses. The Zawya brand will be retained "at least in the short term", he says.

The Reuters news operation remains at the core of the TR global business, but is being supplemented by a series of what Mr Craig calls "communities of news" — online forums involving economists, analysts and buy-side investors, moderated by Reuters journalists.

"It's a Twitter-type environment with more controls. We set out to create something more secure and moderated, with audit and identification requirements. We control who comes in. It's largely wholesale investors, but journalists love it," he says.

Another area of expansion is the provision of regulatory and legal information to financial institutions, aiming to get the big banks to outsource many of their information needs to TR and thereby cut costs. "We are an information utility," Mr Craig says.

In the end, however, it all comes down to risk. Asked which of the many financial, economic and geopolitical dangers facing the global system represent the most serious risk, he replies: "All of the above."


fkane@thenational.ae