Integreon

Simple changes in technology often herald larger changes in the financial world.  XBRL is the likely candidate for the “Next Big Thing.” Here’s why.

First, some quick background: the Extensible Business Reporting Language (XBRL) is a way to “mark-up” financial data with “tags” that describe the data. It’s similar to XML (Extensible Markup Language), and is to financial content what HTML (Hypertext Markup Language) is to layout and format.

XBRL’s most important benefit is to simplify reporting and data reuse. This is pretty big when you consider how Wall Street works. Let’s start with two big examples from recent decades.

Example 1:  In 1981, the Paperwork Reduction Act reduced government spending on storing documents.  The result? The army of couriers and professionals flying into DC every month to file documents in person with the SEC was grounded forever. The BIGGER result? Ubiquitous government and private websites where you can e-file forms.

Example 2:  In the 1980’s the UK deregulated and modernized the exchange floor.  The result?  Within weeks, the floor was almost deserted. Why? Almost as an afterthought, the exchange added online access, thus Exchange workers no longer needed to be physically present to work there. The BIGGER result? As the Internet matured, real-time stock data was readily available for free… which led to day trading, which led to the electronic revolution in stock trading, which led to… well, a lot more change.

The Likely Impact of XBRL:  Publicly-traded firms must file SEC and other other regulatory reports and also post them to their company websites.  This has resulted in a (literally) free flow of company data. That said, only a few expensive databases provide all of the “as reported” data. Free sources report “adjusted” data, which can significantly alter the analysis. (For example, reports are in dollars even if some operations are foreign, and reports are by calendar year even if some operations use a different fiscal year).

This seemingly minor anomaly has created a large market for vendors to collect and manage the data to fit consistent standards. Moreover, financial firms employ an army of workers (often two armies – one in Investment Banking and one in Equity Research) to recompile this data and recycle it into new reports and financial models. And all this is necessary because computers don’t “know” what the report data really means.

With XBRL, however, filers must tag data to identify what it means. This tagging allows software to do a lot more with the data. Soon, inexpensive computer power will do a lot more of the work, reducing the need for expensive and experienced labor to identify, extract and reuse the original data from company filings.  In short, XBRL allows data in the original filing to be tagged for future identification in a standard and reusable way.

The result? The armies of analysts in every financial and market data firm become redundant. Instead, data flows from market data services into new reports with less time and effort. The BIGGER result? XBRL’s robust design makes it easier to pull data directly from company websites, further simplifying the creation of new reports. Adopting a new industry standard for programming spurs an increase in new market data services, and the armies of young analysts and financial knowledge workers transition to different functions as the human labor needed to recycle the “raw” reported financial data fades away.

Of course, XBRL does not solve all consistency problems. There is still the matter of FAS versus IAS (the US versus the rest of the world’s accounting standards). But that is a story for another day.