2.1 Pathways: Past Tense, Future Perfect.
As we discussed in Section 1.2 Open Skies: New Technology Horizons, there has been a radical progression from linear delivery, through networked environments to a multi-dimensional universe of relationships.
But we have also arrived at our current environment through the questions asked when defining market data in three stages, within which a question regarding usage is prefaced by one of the ‘5Ws+1H’.
It is a measure of the parochial tendencies of the market data industry that Stage 1, a period up to the 2000s, is somewhat binary in the questions asked, i.e. ‘‘What? Where? Who? When?’ These are all questions that can be answered without interpretation, they can be both countable and quantifiable, and crucially they all relate to the input of information.
They define the datasets and are descriptive in nature, and provide information regarding the flow of information from source to end user. But what is important is these are the questions that created the market data industry as it exists today in terms of fees, licences, policies, and relationships.
While the Stage 1 approach definitely made life simpler, as General von Moltke famously pronounced “All plans fail on first contact with the enemy”, in practice the ways financial markets themselves have developed, expanded, been shaped by events, and importantly how technology has been applied has meant there has always been catch up between what is happening on the frontline and how exchanges, data sources and vendors have applied their own business principles.
It is almost axiomatic that in general terms, and with honourable exceptions there is a disconnect between the suppliers of market data information and services and the people that actually use it.
This is the fault of all sides, those in the trenches want to deal with fee payers not data suppliers and want as much as possible paying for as little as possible, leading to the rise of the gatekeepers, better known as market data managers. On the other side both vendors, and exchanges, do not have the resources to understand every single user so prefer the one to one relationships market data managers provide.
What this created was Stage 2 ‘How’, an understanding of how market data is being used. The growth in market data usage off the desk and across the enterprise generated a new information business as market data was fed into applications used in multiple ways by a completely new set of users, all of who should naturally pay fees. It has proven to be the best example yet of the same piece of data being used for countless purposes.
It has also been the major driver of expenditure by financial institutions on market data. The necessity to ensure the best market data is available electronically in all systems across the trading cycle, for reporting, for databasing and numerous other uses led to the era of the datafeed.
It also enabled new players to come to the market, such as Activ Financial, Tenfore (Morningstar Realtime) and Xignite. Other players without the terminal presence of Bloomberg and Thomson Reuters such as IDC, and S&P GMI could offer feeds into a client’s network without having to provide an usage infrastructure.
The ability to feed raw data, along with the right API, introduced new competition, lowered barriers to entry (at least for exchange sourced data, not OTC nor contributed data), as well as costs.
The flip side of the coin has been datafeeds have not proven to be a serious money maker as a standalone service it is too easy to enter the market and compete, so depressing yields, but for those able to leverage its added value properties, i.e. Thomson Reuters DataScope/TREP it locks in clients.
Curiously, it has seemed to me, that sources, and vendors, only cared that someone was paying for market data and information, and lacked, perhaps feigned, interest in what it was used for.
There is a certain dark humour in asking sales representatives from vendors and exchanges “Please tell me what is my business?” I guess sometimes ignorance is bliss. I have had Customer Relations Executives showing an equity salesman FX rates but not how to access prices for their own market. Though my personal favourite was a Reuters lady showing proprietary traders the best way to display Telerate data.
This does somewhat unfairly denigrate the competency of the many talented individuals who work in the provision of information. For example, the panellists and speakers at events such as the ones run by FISD. The sheer knowledge of their subject matter is impressive, and there are many who truly know their market. I would suggest though this is a relatively recent phenomenon, and then there is the issue of specialisation at the expense of knowledge breadth, but that is what experts are for.
So, what has changed? Unlike in the past, there is a real need to know Why market data and information is being used. It comes from regulators who have moved from what information is required to defining that data’s characteristics backed by justifying why a specific data source is being used.
This changes the nature of the game, and while primarily regulatory driven, it is also client driven where reports being generated are based upon factors including preferred sources.
If one takes a funds services business, they need to subscribe to data specified by their clients, such as MSCI or FTSE Indices or prefer to use the same data sources as their clients. An example being corporate actions. Bloomberg is widely used, so funds services houses use Bloomberg for corporate actions. This is not because Bloomberg is any better as a corporate actions provider, it is because if the Funds Services administrator has the same information there will not be a conflict, even if Bloomberg gets it wrong.
Until recently market data and information in general has been seen as a cost of business, when the reality is without the market data there is no ability to compete, let alone function, as a financial markets participant.
Market Data is should now be called what it is, a resource, yes it costs money, but it is also the information the creates profitability through populating the investment decision tools.
It changes the price dynamic from cost of service to dollar return. In order to maximise that return, the data sources, information providers, vendors, ISVs and other service providers need to understand and be familiar with why market data is being used.
There is an example, the development of the Spread betting industry is based upon advanced algorithms to create synthetic products. ISVs have been creating a whole new ‘why’ which is highly profitable for themselves and their clients. Monecor, LCG, FINSA are a new breed of financial institution, and in order to provide them services, there is the need to know why do they need the prices they subscribe to.
Communication by which clients work with their suppliers to ensure knowledge of why market data is being used and for what purpose is to often lacking, and inhibits both sides.
Are there genuine partnerships in the market data business, or is it a binary supplier/user relationship?