All Checked In, Can’t Check Out (and many, many, many, apologies to a great song)
Trapped by Data, Trapped by Technologies, Trapped by Contracts
In a capitalist world, gaining a monopoly is the unspoken (bare naked greed being politically incorrect in today’s world) objective of any self-respecting business, with a duopoly being a close second, and failing that a functional oligopoly will suffice.
Business on a global scale does gravitate towards a small number of providers, especially where software is involved. Given the percentages involved when looking at market shares in Search Engines and PC Operating Systems, it is very hard to claim that any obvious monopoly exists in the market data industry, however as we shall see micro-monopolies, and new oligopolies are forming in the proprietary information space.
Information and market data is obviously not software (but needs it for access), nor hardware (but needs to have something to be displayed), but there are business characteristics in usage it does share.
In our DataCompliance reports and articles, we have seen there exists value in both possessing a dominant position within a market (Bloomberg Terminals & Refinitiv’s Thomson Reuters Enterprise Platform/TREP), and more crucially in owning the IPRs of original source of data (i.e. Exchanges, Index Creation and Valuations/Evaluated Price Creation). We can now add the burgeoning multi-billion dollar Regtech market to the equation.
The major point of difference between comparing global market share of say a Google Chrome Browser, or a MS Windows OS, and the market data and information industry can be summed up simply.
Stealth Monopolies in Action
The question still remains, how do these monopolies and micro-monopolies work in action?
• If you want a Bloomberg terminal it is going to cost you US$48,000 per 2-year contract, with a virtually guaranteed 5% increase each time the contract rolls over, and there are approximately 325,000 terminal subscriptions.
• If a Bank uses TREP, it can be distributing data to multiple sites and applications, using Refinitiv’s datafeed. As Banks systems have become so complicated it is virtually impossible to track data flows, then changes to the data will almost impact a mission critical application somewhere, making TREP very hard to displace, so providing a strong revenue stream.
• While the Index Creators do compete, there is still only one S&P500 (Market Cap 30/9/2019 is US$25,614,569 Million), or one FTSE100. These may not seem monopolies, but they are, because, yes, others can create imitations, the alternatives are just not the real thing. As index consumers seem overly fixated on ‘brand’, licences for use can be licence to print money, and that’s not even counting the futures trading spin offs.
• The evaluated price of a specific bond from ICE Data is not the same as the evaluated price of the same bond from SIX Financial, so once the data has entered into a client systems, it becomes a ‘de facto’ monopoly price, because it is so hard to displace once inside. The reduction in the number of valuations businesses is leading to less competition, and in segments of the Credit markets, IHS Markit is virtually there.
• But the big battle is going to come in RegTech…………………………………………………………….. •
In conclusion, quasi-monopolies do exist in the market data world. They are just not readily obvious, and to an extent it could be argued that their customers reluctance to change is more the cause of their existence than the absence of meaningful competition (but perhaps not in all cases).