In Aladdin We Trust

We grapple with a fundamental degree of uncertainty in our lives. It presents itself in a different form each day, ranging from what the weather will be like to what financial instrument we choose to invest in — we ultimately surrender to volatility that remains beyond our control.

Regardless of this thought, opposing philosophies have remained prevalent and arguably outperformed embracing uncertainty, as the renowned statistician, Nassim Taleb, stated that "the inability to predict outliers implies the inability to predict the course of history."

Significant confidence on mitigating these risks has now been placed on technology. It has shaped conversations of whether these capabilities will dictate our economic states. While some still believe that a future where technology singlehandedly informs our investment decisions or plays a critical role in government is light years away.

But the truth is that predictive technology has facilitated financial transactions for decades. In fact, the U.S. Department of Treasury stands as the epitome of this statement when it solicited BlackRock’s assistance in managing the toxic mortgage securities of the infamous Lehman Brothers, Bear Stearns, and Freddie Mac back in 2008.

It places a spotlight on the dependency of the dollar on a timed-and-true risk management platform which has been automatically managing trillions of funds each day for 23 years — the outwardly successful software known as BlackRock's Aladdin.

The Genesis of BlackRock

Larry Fink founded BlackRock in 1988. It began with Fink's previous employer firing him at the expense of a mathematical error that happened with another department, causing him to lose over $100 million dollars. It quickly became Fink's mission to build precise tools that accurately measured and responded to risk.

Charles Hallac was the first employee Fink hired to pioneer the technology of Aladdin. BlackRock positioned itself on building out a capability that could wholeheartedly understand “each and every asset, benchmark, and portfolio.”

Within a few years, BlackRock had the unique advantage of capturing trades electronically, displaying colourful dashboards, and digitally managing workflows in real-time — an exceedingly rare phenomenon in the 1990s.

Today, Aladdin informs each move of BlackRock and its clients as a versatile software-as-a-service (SaaS) portfolio management platform. It has gradually developed into an enterprise system supporting various business processes.

Ultimately, Aladdin has been coined as "the central nervous system" of whoever solicits its use. With that said, what is the technology that resides within this platform and how does it operate to inform some of our most influential institutional investors and sovereignties?

What Lies Underneath Aladdin’s Surface

It goes without saying that to understand BlackRock, “one must understand Aladdin,” stated Robert Goldstein, the Chief Operating Officer of BlackRock.

Aladdin leverages a systematic investment approach, wherein data points such as foot tracking, credit card swipes, e-commerce transactions, and drive time, are all fed into the platform to identify patterns and trends in consumer consumption. It serves as an example of how Aladdin attempts to forecast and accordingly respond to threats in the broader macroeconomic environment.

While the data points may at first seem abstract, their use is far-reaching and can be used to visualize various behavioral tendencies of consumers. Below serves as one example of how the data collected may be manipulated to forecast changes in the markets.

For instance, analyzing drive time in multiple intervals can provide insight into the commonalities of consumers that may live fifteen, twenty, and thirty minutes away from a location of interest. This information, in turn, can be constructed into an isochrone map, allowing for the data to be visualized. Neighbouring regions on the map essentially become converted into “comparables” and can be used to evaluate regional successes for a particular industry, and more importantly, to take note of what other correlating factors contribute to such outcomes.

The display of an isochrone map with each colour indicating a different drive time.

Photo Source: Data Viz Catalogue

With that said, Aladdin also monitors over 2,000 risk factors, including analytics from emerging markets, sustainability, inflation, interest rates, and default risk. It also analyses risk in accordance with different investor beliefs, such as accounting for the size of a business, stock volatility, and considering personal income. Beyond that, Aladdin performs over 5,000 portfolio stress tests daily and 180 million option-adjusted calculations weekly.

It boasts convenience to clients as a software that assesses hundreds of risk and exposure metrics personalized for a business’ performance in the market. It has the technical infrastructure, system administration, interface, data providers, and industry utilities all taken care of — offering a more seamless experience relative to that of their competitors that deploy multiple workflows for market analysis. With the platform’s origin rooted in precision, are there factors or pieces of information that they have missed?

The Overlooked Risk Factor of Technocracy

A cutting-edge service that has remained an industry staple for decades, Aladdin accounted for a significant portion of BlackRock’s technology service revenue stream, bringing in more than $1.3 billion dollars. Public opinion on BlackRock lies across a spectrum, with some commenting on BlackRock’s invisible role as “the fourth branch of government” and maintaining a position as “a mainstay of the marketplace,” to others noting how players in the industry are “increasingly relying” on a small and concentrated set of firms to perform such services.

There is a rising concern over the oligopolistic nature of Aladdin, with direct competitors of BlackRock even given access to use the service, such as State Street. While others, like the Los Angeles County Employee Retirement Association — a $58 billion dollar pension fund — completely refute using the platform so as to not succumb to the risk of groupthink bias that Aladdin can encompass.

With substantial stakes in major corporations like Apple ($171 billion), Microsoft ($155 billion), Amazon ($63 billion), and Meta ($32 billion), BlackRock reaffirms its position as one of the top shareholders in most listed companies around the world. But the relationship between each firm and BlackRock goes beyond shareholder in nature. In fact, Apple and BlackRock share more in common than you might think. Sue Wagner, a financial executive who co-founded BlackRock, currently sits on the board of directors for both firms. This dual board membership not only accentuates BlackRock’s impact but highlights a newfound emergence of technocracy.

BlackRock’s increasing technology revenue through the years (2008-2019).

Source: The Financial Times

Aladdin is BlackRock’s double-edged sword. While remaining an impressive feature for the firm to this day, it is clear that it is equally BlackRock’s largest liability. In 2013, the platform managed $11 trillion dollars, or 7% of global financial assets, a figure that would soon balloon to $21.6 trillion by 2020. This growth corresponds to one-third of its 240 clients and 10% of the world’s stocks and bonds.

BlackRock is interwoven and arguably a regulator’s both nightmare and dream. A singular event can resurrect the systemic risk that Aladdin inevitably carries to life.

With the firm ceasing the release of future financial reports for over six years now, the increase in a lack of transparency emphasizes a need for regulators to assess the importance of maintaining the portfolio management platform as one that is isolated in nature or one that is dispersed among competitors. Perhaps, the lesson of Aladdin ultimately signals to the nature of risk: that it is cyclical, inevitable, and if mitigated, simply manifests in a different form.