Babis Theodoulidis, Jennifer Wilby and David Diaz Centre for Service Research

1. Knowledge-Intensive Service Systems in the Financial Domain Babis Theodoulidis, Jennifer Wilby and David Diaz Centre for Service Research The University of Manchester, England

2. Context • Financial Domain • financial markets • monitoring and surveillance • Applying Service System Modelling

3. 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

4. Financial Markets – Key Drivers • Technologies • telecommunications • automated trading • Globalisation • cross-market, cross-jurisdiction • Competition • Market venues, products, jurisdictions

5. 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

6. 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)

7. 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(Maglioet 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

8. 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

9. FSS - Resources Based on Maglio et al, 2010

10. FSS - System Behaviour From Wilby et al, 2011

11. FSS - System Principles • 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

12. 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

13. 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

14. 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

15. Emergence • behaviour not previously predictable • Creates the so-called “emergent properties” • Relates to the other principles • FSS • New manipulation scenarios

16. FSS – System Structure • Service Customer • Investors, regulators • Service Provider • SROs, non-SROs, regulators, third party providers Customer Service Provider Service Experience Taken from (Kwan et al, 2008)

17. Market Monitoring Value Propositions Value Proposition Focal Relationship SRO Regulator Value Proposition Value Proposition Customer’s Network Provider Partner Network Monitoring & Surveillance Text Mining Service Provider Central Tape Manager External Data External Data Provider Based on (Kwan et al, 2008)

18. Market Monitoring Worldview Regulator Central Tape Manager Output Management Offline Engine Venue A InformationManagement Real Time Engine Live Data Feed Provider Text Mining SS Provider Internal SROData Factiva Based on (Kwan et al, 2008)

19. Service Network – Single Jurisdiction Based on (Kwan et al, 2008)

20. 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

21. Back Up Slides

22. Systems Thinking • 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) From Schoderbeket al, 1990

23. 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.

24. Intentionally Holistic KISS From Wilby et al, 2011