• Romain Desbiolles

BlackRock Aladdin – Intelligent Finance: Why AI is shaping the future of banking


AI will lead to huge disruptions in the finance industry due to its ability to leverage unprecedented amounts of data, giving unprecedented insights into holdings, risks, and market simulations. Romain Desbiolles and Patricia Shevel-Bleikss take an in-depth look into this issue.




I. Introduction

As global technology has evolved over years, today we are smoothly and gradually adapting Artificial Intelligence into many industries, especially finance. Financial institutions are using AI-powered solutions to unlock revenue growth opportunities, minimise operating expenses, and automate manually intensive processes. Blackrock’s Aladdin is a central processing system for investment banking that can factor margin-based analytics into their pre- and post-trade decisions. This software focuses on bringing data together, enabling BlackRock and the companies who utilise the Aladdin software to efficiently analyse, oversee, and manage the total portfolio. And while the data collection and visualisation process was made easy with the invention of the Bloomberg Terminal in December 1982, Aladdin furthers this purpose by adding intelligence and insight into data. And with the current economic uncertainty, there has been a significant surge in client demand for better risk assessment, policy analysis, and portfolio visualisation tools making Aladdin even more central to the investment life cycle. (Whyte, 2020)


II. History of Blackrock’s Aladdin

In 1986 Larry Fink, working at First Boston, made a series of highly profitable trades followed by one massive failure which ended up costing his job, losing over $100 million in a matter of months. Analysis of this failure pointed towards leveraging on technology to avoid future mistakes. Aladdin would be the solution to this problem, possessing massive computing power analysing past data, which would allow Blackrock to build incredibly precise and complex pricing models of almost any asset with historical data.

BlackRock Aladdin’s development is continuing to evolve. In May 2019, eFront was acquired by BlackRock, combining both platforms. The move boosted Aladdin’s end-to-end processing capabilities in various alternative asset classes. Investors now have a holistic understanding of performance drivers of their investment exposures down to the single asset level and can pivot their exposures by dimensions such as geography and sector. The impact of this $1.3 billion takeover of eFront has driven a 30% surge in technology service revenue at BlackRock, totalling $259 million. (McDowell, 2019)

Figure 1: BlackRock’s tech revenue nears $1bn (Financial Times, 2020)


Since this AI has become a vital asset to BlackRock’s technological services, with Aladdin in 2020 creating $1.1 billion revenue, BlackRock has not stopped investing in the system. (Waterstechnology, 2021) In June 2021, BlackRock entered into a strategic partnership with derivatives analytics provider Cassini Systems. Cassini’s margin analytics capabilities will empower traders and portfolio managers to better understand and control margin requirements, including the ability to analyse drivers and movement in margin exposure, identify opportunities to optimize collateral, and maximize margin efficiencies. (Smith, 2021)

III. Role in ESG Analysis and Risk Management

The boom in ESG creates an increasing call from investors for financially material ESG data to be available. Advances in Aladdin’s Climate section will potentially help investors to collect and aggregate ESG data more effectively. Aladdin Climate is able to quantify climate risks in portfolios, physical toll of climate change and impact of policy changes. By doing so, Aladdin allows users to stress-test investments to estimate how they might perform in different climate scenarios like those outlined in the Paris Agreement. (FinExtra, 2020)

In terms of risk management, Aladdin’s risk systems (Aladdin Risk) allows clients to find correlations between the assets they own, assisting them in spotting over-expositions in their holdings. Take a more specific example, a client might hold positions in both the Nasdaq 100 and DJIA. By scanning the price data of both assets, Aladdin will highlight that these two assets are highly correlated as they are both indices based in the US. Consequently, the software will recommend different types of asset to avoid an over-exposure to North-American economic risks. Aside from that, Aladdin risk offers stress tests, shock tests and policy tests for clients to run simulations, allowing them to observe how their holdings might react to a rate change by the Fed, or how vulnerable they are to a sudden stock market crash. All these features culminate in adding tremendous value to asset managers who can apply these insights to increase their fund’s resiliency.


IV. Competition and Limitations

Although Aladdin is continuously striving to manage the financial ecosystem of the world, alternatives and competitors are slowly coming in to threaten their leading position. In 2019, two of BlackRock Aladdin’s competitors, Charles River Development and MSCI Analytics, set up a partnership. Charles River partnered with MSCI to integrate MSCI’s portfolio and risk analytics into its investment management system. MSCI Analytics clients, in turn, will be able to use Charles River’s platform for portfolio and data modelling. Both MSCI and Charles have already competed with Aladdin Risk and this partnership makes them even more of a threat to Aladdin’s future. (Whyte, 2019)


While Aladdin and systems alike provide extraordinary value to investors, they inherently bring in a new level of complexity and risks. As AI gains the trust of clients, investors may start to rely on technology to justify their ideas and avoid holistic qualitative judgement. In fact, an increasing number of academics in the sector indicate that portfolio managers could be entirely replaced by AI which would allow everyone, with capital of all sizes, to be advised by a personalised AI. This proposes an important risk due to the fact that technology is highly prone to errors from a coding point of view. For instance, black box trading firms which use highly complex algorithmic trading software caused the loss of more than $3 Billion during the flash crash of 2010. A sudden wave of market orders tricked bots to sell their shares, resulting in other bots following suit. In less than 6 minutes, algorithmic trading bots and banks from around the world sold the market down a massive 9%, a drop which lasted 36 minutes.

Figure 2: The Dow Jones Industrial Average, May 6th 2010 (ResearchGate, 2014)

AI models such as those that might be used in Aladdin are incredibly complex and are often called “black boxes”: while their input and outputs are known, their inner workings and the reasoning are unknown. This is particularly worrying as self-coding systems such as machine learning may develop biases with time– biases which would only reveal themselves during times of panic. This can lead to, at the very least, investor losses, and at most, dysfunctional security markets where the use of AI is so widespread that markets lose all human connection and are disconnected to reality, leading to speculation, and crises.

V. Conclusion:

Aladdin has fuelled BlackRock’s all-conquering rise by tightening its links with customers and diversifying its revenues. But the platform’s success has opened up new challenges. Competitors are fast developing rival platforms that are taking some of its business. Aladdin’s growth is reflected on BlackRock’s balance sheet. Technology revenue, dominated by Aladdin, hit $974m last year, just 7 per cent of the company’s total, but among the firm’s fastest-growing areas. Never has there been a time of more excitement, or potentially greater challenge, in banking.


Sources:

Financial Times (2020) BlackRock’s black box: the technology hub of modern finance [Online] Available at:

https://www.ft.com/content/5ba6f40e-4e4d-11ea-95a0-43d18ec715f5

(Accessed: 18/12/21)


FinExtra, (2020) BlackRock unveils Aladdin Climate module [Online] Available at:

https://www.finextra.com/pressarticle/85245/blackrock-unveils-aladdin-climate-module

(Accessed: 18/12/21)


McDowell, Hayley (2019) Aladdin and eFront takeover drives 30% surge in BlackRock technology revenues [Online] Available at: https://www.thetradenews.com/aladdin-efront-takeover-drives-30-surge-blackrock-technology-revenues/

(Accessed: 18/12/21)


ResearchGate, 2014 The Dow Jones Industrial Average, May 6th, 2010 [Online] Available at: https://www.researchgate.net/figure/The-Dow-Jones-Industrial-Average-May-6th-2010-Source_fig2_266021311

(Accessed: 20/12/21)

Smith, Annabel (2021) BlackRock adds margin analytics to Aladdin with Cassini integration [Online] Available at: https://www.thetradenews.com/blackrock-adds-margin-analytics-to-aladdin-with-cassini-integration/

(Accessed: 13/12/21)


Waterstechnology (2021) BST Award 2021: Best integrated front-office platform – BlackRock [Online] Available at:

https://www.waterstechnology.com/awards-rankings/7894406/bst-awards-2021-best-integrated-front-office-platform-blackrock

(Accessed: 10/12/21)


Whyte, Amy (2019) Two of BlackRock’s Aladdin Competitors Team Up [Online] Available at: https://www.institutionalinvestor.com/article/b1h7q2jlr0134l/Two-of-BlackRock-s-Aladdin-Competitors-Team-Up

(Accessed: 10/12/21)


Whyte, Amy (2020) The Relentless Ambition of BlackRock’s Aladdin [Online] Available at: https://www.institutionalinvestor.com/article/b1lprrf5v41rz2/The-Relentless-Ambition-of-BlackRock-s-Aladdin

(Accessed: 13/12/21)