When A Data Service Provider Becomes A Competitor

May 16th, 2013

One of the more interesting elements of the Bloomberg data scandal (the financial services company, not the may0r), is the realization that companies that historically provide data services to players in an established industry can easily become a competitor–using the very data the players provided.

Dealbook reports:

Long thought of as a company that serves the needs of Wall Street firms,Bloomberg L.P. is quietly becoming more like them, moving recently into businesses that have been the domain of the largest banks.

This relatively unheralded expansion by Bloomberg helps explain Wall Street’s consternation at recent disclosures that some customer data was freely available to reporters and others inside the company. The fear inside banks is that Bloomberg could use that data not only to write negative news articles but also to compete directly.

In recent years, Bloomberg has offered new ways to trade stocks, bonds and more complicated financial products, potentially taking revenue from subscribers to the ubiquitous Bloomberg desktop terminals, which contain a vast store of market data. The expansion is even leading Bloomberg to offer traditional Wall Street services like wealth management and research.

“If you add all this stuff up together, they do look increasingly like a brokerage business,” said Larry Tabb, founder of the consulting firm Tabb Group.

He said that Bloomberg was not yet a dominant force in these activities and had been careful to placate the concerns of subscribers. But, he said, “it makes some of these brokers think, are these guys friend or foe?”

Having access to data allows companies to compete in novel ways. Perhaps one example is Google. Google started off as a simple search engine that indexed other people data. But by aggregating and collecting all of the world’s information, and recording and tracking search behavior, which improves algorithm, now Google can compete in a host of different industries that were unforeseeable a decade ago. Now, when you do a search for something, a Google service is likely to come up at top.

There may be similar moves afoot in legal-data service companies that may begin selling legal services.

Recently I was chatting with the President of a legal tech startup. The tool provides innovative ways of allowing attorneys to conduct legal research based on legal rules. That is, instead of simply searching for keywords, and hoping a precedent pops up that is relevant, the tool can service answers based on searches for specific rules of law. The tool is amazing.

But, offering that service raises a host of questions. The algorithm will be refined based on searches by lawyers. It is not hard to see how tracking the types fo search and research a lawyer, from a specific firm, can reveal a lot of inside information about how a firm may be litigating a case. I’m sure WestLaw and Lexis have had access to this information for a very long time. But, what happens when the software becomes more sophisticated, and becomes more indicative of litigation strategy, rather than just research trails. This is very, very valuable information. Now, it could be used in an innocuous way–this firm is litigating a case in a certain manner that persuaded a judge, so lets train our algorithms to suggest that other lawyers litigate a case a similar way. Or, it could be used in a nefarious way–let’s obtain access to how opposing counsel is litigating a case during trial, whether by authorized, or unauthorized access.

Traditionally, the rules of professional conduct would inhibit such conflicts of interest, or even general breaches of fiduciary duty may limit this. But the very manner in which algorithms are improved is by analyzing previous usage. And when the data can be aggregated or attributed to a specific law firm–say for example a program can analyze how a particular attorney prosecutes a specific case–it gets tricky.

Bloomberg seems to be addressing this separation:

Bloomberg says its trading operations are walled off from its data operations and asserts that it has won the trust of clients over the years. The company is eager to protect both its revenue and the wealth of Michael R. Bloomberg, which are still primarily generated by the terminals business.

I’ll address this more in Robot, Esq.