Internet-of-Things (IoT) is a network of devices connected through either wired or wireless devices to interact and exchange data. The purpose of communicating amongst devices is to provide consumers with smarter products and services, better customer experience, and higher competitive advantage to the business. McKinsey estimates that the IoT has a potential economic impact of $3.9 trillion to $11.1 trillion a year by 2025. At the top end, that would be equivalent to about 11 percent of the world economy. Gartner on the other hand predicted over 20 billion devices will be connected to IoT by 2020.
How is IoT relevant to the capital markets industry? Think of a large corporate firm that needs to hedge coffee prices (or wheat prices). The reason for the hedge is the price uncertainty at a future date. How much more effective might it be if the risk manager had real-time data from both meteorological stations across the world and probes embedded in the soil on a South American coffee plantage. Modern capital markets operate on extensive implementations of multiple electronic, digital, computational and connectivity technologies. This is entirely appropriate because capital markets generate huge volumes of data on a regular basis.
Consequently, participants such as commercial banks, central banks, insurance operators, and hedge funds are using cutting-edge technologies to process market data. Some participants have deployed Artificial Intelligence (AI) and Machine Learning (ML) technologies to automate trading processes. Others are leveraging custom-designed algorithms to create recommendations for clients to hold or trade in various asset classes. The use of such technologies is also empowering market participants to generate powerful insights into the workings of modern capital markets.