In my 5 predictions for what will happen in the market data world for 2021, (www.marketdata.guru/2021/01/05/2021-market-data-predictions-5-crystal-balls) my third was to argue that data sources, exchanges, and even the vendors will finally wake up to the realisation their core client base, the financial institutions, have hit data saturation point.
The Banks have too much data and wastage is endemic. Equally as all institutions all have the same data it is hard to compete, so the Banks are searching for new sources and investment decision tools to create advantages. This means the data producers and distributors will set off on the adventure of discovering new markets.
What we are looking at are new markets for existing data services and these can be found in three worlds:
- Financial Institutions in the areas of Regtech & Compliance, historical data, and third party data processing, & data facilitation
2. Wealth management, and High Net Worth Individuals
3. Mass digital markets
One slight problem, existing data sources do not have the right business models. There is a large barrier between financial institutions who grudgingly pay for data, and players operating in new low cost markets where respect for Intellectual Property is not a given
2021’s question is what 5 specific areas are likely to be of interest and why?
I SPY FROM THE CROWS NEST
There is no suggestion that exchanges and others abandon financial markets, they are stable, high value, and dependent upon quality data delivered in an accurate, consistent, and timely manner. These new markets must be seen as a progression, almost an explosion of data usage. Whereas 20 years ago few outside of dealing rooms had access to market data, now it is ubiquitous across the Banks. At the same few outside financial markets had access to data, now everyone with access to the internet can get basic delayed quotes, historical charts and market commentary, and demand growth may be slow but cheap data and competitive instinct will spur evolution towards more real time usage
So which 5 areas grab our particular attention?
- Compliance & RegTech. Not exactly a surprise given the raft of regulations and reporting requirements the 2010s have produced. It is an area the vendors are embracing rapidly, notably Bloomberg and SIX Financial, but the data sources are behind the curve.
What the market has belatedly realised is that MiFID2, FRTB and their brethren are data driven initiatives, that cannot function without data, and the regulators switch from focusing on ‘What’ to ‘How’ not only drives data consumption but as a by-product produces even more data. 2021 will see the development of more compliance friendly services aimed directly at the regtech market
2. Historic Data. Always an afterthought, in 2021 historic data will come into its own as its real value to investment decision tools becomes more apparent. Traditionally end of day price histories have been distributed free, only for others to make money out of it.
However more advanced analytical models feeding trading engines now leverage intraday and tick histories (which includes last, bid, offer, day high, day low, and volume) to create sophisticated algorithms which predict market performance. This places a premium on historic data that it never existed before, and nor has there been effective commercial models which reflect it’s worth. This is changing, and as a twist it is also a compliance/regtech play
3. Data Facilitation. Into 2021 Banks are trying to reduce the amount of data processing and management in-house, when what they really require are the outputs from processed data. There is already a precedent in Securities & Fund services business, however, in the future mass processing can be more efficiently, and cheaply, carried out by third parties supporting multiple clients.
These clients can use their own models and parameters running on the data facilitators solutions covering areas as diverse as reporting, portfolio management, client management, potentially even risk for smaller institutions. These facilitators are a hybrid of vendor and consumer and do not easily fall into an established client category, nor are they easily visible along the data workflow, making direct relationships a challenge
4. Wealth Management. This industry flourished in the 2010s and dependent upon COVID has a bright future. Traditionally this has been a low cost sector, free delayed data proving perfectly adequate for advisory and portfolio management, but this is already changing thanks to the emergence of Wealthtech, and the fervour Private Equity has embraced by investing in Wealthtech solutions.
Cost will remain a consideration but the introduction of outsourced wealthtech service providers into a fiercely competitive market is forcing increased levels of higher margin data consumption in 2021. This is being followed by catering to the HNWI segment, especially across the Asia-Pacific region and to a lesser extent the US, UK, and Middle East
5. Mass Digital Markets. This may be retail MacDonald’s hamburgers to financial institutions Moreton’s Steak House, but the sheer potential size must have its attraction. In 2021 the challenge is to transform existing business and pricing models to leverage the digital markets’ many variants. At the moment the internet and media behemoths of Google, Microsoft, Verizon, and their fellow travellers provide a vast array of financial data, which costs them next to nothing, out into the market place which draws users in to the services from which Big Tech benefits immensely.
This data is distributed via multiple digital mediums, naturally the internet, but also other multi-media, television, and mobile phone services which increasingly function in similar ways fulfilling the same purpose. These are markets where volume is king, and smart pricing is about adapting to the innovative ways these business use and create revenue out of the data
CHALLENGES & INCENTIVES
As stated above the major inducement is to grow and build revenues out of existing data sets and to expand beyond the existing client base, by:
• Creating new revenues from data that had previously been undervalued
• Building new relationships which can be leveraged to offer new products and services
• Generating new revenues from new clients
• Expanding the universe of clients while reducing reliance upon an existing data saturated consumer base
• Inspiring innovation in business and pricing models that can be used to enter more new markets
There needs to be a greater understanding by existing market data businesses of how these new markets consume market data, its purpose, and value to them, which in many ways defy traditional market norms. This includes:
• Getting to know new markets, building new relationships
• Understanding how new data workflows function, which are non-linear in application
• Developing new price models and pricing principles for data that had previously been undervalued, i.e. historic datasets
• Implementing new business, price models and pricing principles for digital mass markets where traditional institutional models will prove ineffective, or even worse, counter-productive
• For new markets coming to terms and adapting to players who need to be educated in respecting intellectual property rights
The focus of these predictions is to look at how market data sources and vendors can do more with what they already have from a data perspective. The good news is there are intriguing opportunities out there waiting to be exploited, while introducing new levels of flexibility to maximise revenue flows. Naturally, this is not as straightforward as it would appear
Businesses must ask themselves 3 key questions:
- What data do they possess that currently is being under-utilised?
- Where do the new markets exist and who are the developing players that must have the data?
- How to establish an effective presence in the world’s largest digital markets? Oh, and gain a reasonable revenue share.
It will be interesting to review what happens in 2021 at the end of the year
Keiren Harris 24/01/2021
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