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Jack Ma, chairman of Alibaba Group, is seeking to use technology to remake the merchant banking business.   © AP
Business Insight

Jack Ma puts his data magic to work at a Hong Kong brokerage

Traditional model abandoned at Yunfeng in favor of hardcore information analysis

After conquering Chinese online retail and carving out strong positions in sectors ranging from mobile payments to movie ticketing, Alibaba Group Holding founder Jack Ma Yun is quietly making his presence felt in the Hong Kong investment banking world even as his ambitions of buying U.S. funds transfer service MoneyGram International have fallen apart.

Yunfeng Financial Group, backed by Ma, is showing promise of radically changing the way brokerages do business in Asia's top financial center via technology, a long-expected transformation that is finally taking shape. Via his own private equity fund, Ma in 2015 bought 11% of Reorient Group, an investment bank founded by Johnson Ko, who had built a reputation as a terrific stock picker with a nose for value. Ko still maintains a 9% stake while David Yu Feng, another partner, controls 26%. Reorient has been recast as Yunfeng Financial Group, combining the Chinese personal names of Ma and Yu.

Yunfeng is poised to become Alibaba's most successful affiliate since Ant Financial Services Group, the operator of the Alipay mobile payment service, and should be making the broker/dealer community quake in their boots.

Ting Li was plucked from State Street Global Advisors to be Yunfeng's chief executive two years ago. The company had 90 employees when Ma bought into it but almost all of the original staff, apart from Ko, have moved on. Company headcount fell as low as 20 before Li and her team began to build it back up again to more than 200.

Rather than the traditional brokerage lineup of sales, trading and research staff, Li's team hired almost 70 information scientists, computer engineers and data geeks. They get it. They know that the center of the broking business is not the transaction or the research or the trade: It is the data. From rigorous analysis of data, a host of new products can be created and sold across multiple businesses.

Many traditional brokers have had this dream of "really understanding" their client for years. They thought they could do this through internal meetings, phone conversations among and between divisions, and manual logs of discussions with clients as well as by making assumptions about trading positions.

More to study

Those of us who worked for banks for many years look back on this and laugh when we see what is possible now with the harvesting of millions of data pieces in just a few seconds. That is what Yunfeng is doing. The company looks at data from clients' stock and bond trades and pieces together a detailed composite about what the customer may want or avoid in the future.

Yunfeng's data reach is poised for a big expansion. In August, the company reached a 13 billion Hong Kong dollar ($1.66 billion) agreement to lead the acquisition of the Asian operations of U.S.-based Massachusetts Mutual Life Insurance. This deal could go a long way to creating a European-style bancassurance business in which the banking and insurance businesses can cross-sell to each other's clients. Yunfeng will be able to use MassMutual data to offer targeted new products to millions of customers in Hong Kong, Macau and China. It can be a one-stop shop for securities, banking, insurance and lifestyle products. The deal will also give MassMutual nearly a 25% stake in Yunfeng.

Aside from this pending purchase, Yunfeng is focusing on four areas: trading, wealth management, corporate finance and research. None of its researchers are like those of the past. They are scientists who use sophisticated data sorters rather than Microsoft Excel. Instead of spending weeks trying to forecast earnings for a company, in large part using information from the corporation itself, Yunfeng staff will use more sophisticated analyses of supplier trends by counting pieces of equipment.

They might use drones in their research. With help from Alibaba and Alipay, they might be able to anticipate economic activity in a sector by aggregating data collected from national product sales. They will analyze clusters of data to offer new products based on customers' likes and dislikes culled from a host of their activities on social media. It will be a bold new world of research.

Meanwhile, Tencent Holdings, Alibaba's top rival in internet services, in September took a 4.95% stake in brokerage China International Capital Corp. The clunky world of traditional brokers with slippery traders, slick salesmen and young analysts playing around on Excel spreadsheets is nearing death. Alibaba and Ant, and their rivals, are spreading their wings quickly and are teaching the rest of the region the power of harvesting vast amounts of data in new and innovative ways.

The failure of the Committee on Foreign Investment in the United States to authorize Ant Financial's $1.2 billion acquisition of MoneyGram is a speed bump for Ma but should not hamper his global expansion plans. This sadly looks to be another data point of an American retreat from internationalism in a generational cycle of U.S. pullback from global engagement. In this vacuum, China stretches its arms out. The Alibaba group is moving out into the world to support the Chinese boom in tourism and foreign direct investment just as U.S. banks like Chase Manhattan and Citi expanded internationally in the 1950s and 1960s to support American post-war expansion.

Yunfeng will blaze a new trail in the Hong Kong broking community. The remarkable thing is not that this is happening but that it has taken so long. When the change comes, it will be lightning fast. It is too soon to enjoy the fruits of the transformation and too soon to see it in Yunfeng's earnings. But based on the past success of Ant and Alibaba, this business model should bear fruit in Hong Kong quickly.

Long live the new world of the dominance of data scientists in broker/dealer firms. It is a trend that is 10 years late, but better late than never. Note to Hong Kong banks and brokers: Change or die.

Paul Schulte

Paul Schulte is the founder of emerging markets research group Schulte Research and theSchulte Institute for Financial Innovation and a research fellow at Hong Kong University of Science and Technology. He was previouslyhead of global banking strategy at CCB International Securities.

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