IPR 2 Minefields, Ownership & IPRs: Treading Carefully
“A fact cannot be owned”. It is the uncomfortable truth that data sources face when considering how to protect their ownership rights over ‘their’ market data.
Theoretically any organisation can take the price of say General Motors and distribute it as much as they like, as this represents a fact. The catch lies in receiving that price from the exchange, because it comes in distinct and proprietary formats, backed by strict legally enforceable contracts stipulating the rights and obligations of the subscriber.
The contracts clearly state where source IPRs start and end (they don’t unless they become something else which usually requires its own licence to permit).
The exchanges, and other data sources, then police their agreements to ensure usage compliance, some more aggressively than others by conducting mandatory audits.
The majority of subscribing financial institutions work hard to be compliant, but face serious challenges which are likely to increase in complexity as data sources expand their rights and regulators extend their influence on data sourcing.
The challenges faced are varied in context and application, both in terms of contractual obligations and on the job management.
Issues with Contracts.
- There is no common agreement amongst exchanges to standardise and define terms and meanings within contracts. For instance, derived data can mean many things.
- Each exchange has evolved within its own domestic environment, which is not only reflected in the services offered but the way their agreements are constructed.
- At the point at which an exchange creates a new contract, they apply a snapshot in time view, which reflects a current mindset, rarely taking into account future applications. This makes it easier for the subscribers to start using market data in out of scope ways, though it is very hard to future proof contracts in this revolutionary age.
- Within Banks, end users do not necessarily consider scope of usage when creating new ways to consume and leverage the market data available to them.
- Exchanges are often slow to respond to new licence requests, with a tendency to dither and procrastinate, so dragging out the set-up process.
Issues with Management
- Banks, and market data vendors, do not necessarily provide sufficient resources to their market data teams to manage licences and policies effectively.
- Increasingly Banks are moving their market data management teams into either Central Procurement or back into Information Technology. They are replacing specialists with generalists who can lack market data experience and expertise.
- This opens the gates to audit liability findings and costs.
- Existing sourcing qualification and re-qualification processes are often inefficient, and cursory in application.
- On-going service validation and performance is often carried out in name only, despite data governance guidelines.
- Document management for contracts and services suffer from poor structure and methodology, meaning usage rights go unused and out of scope usage goes unnoticed.
The result of poor management of contracts and licences can be summarised in two ways:
- Higher than necessary market data costs.
- Lower levels of market data utilisation.
Real World Issues. Examples, which are only too common.
- It took 6 months for a vendor to put in place 30+ licences with exchanges and other data sources, and this was considered quick.
- One exchange did not receive any reporting of application usage because it had not informed its market data vendors to ensure there was reporting. This resulted in a serious loss of revenue.
- Lacking proper documentation methodology one Bank was unable to identify and retrieve contracts, letters and other related communications from exchanges. Proved to be an auditors dream, and the CFO’s nightmare.
- Another vendor did not provide its Content Management team with licences to grant access to their contract management system. The result, relationship managers were unable to discuss contracts and issues with their suppliers.
- One Bank had contracts in place which had not been updated since the 1990s.
- One data source granted perpetual rights to a vendor for peppercorn fees, because they did not conduct due diligence on the value their content.
Where are the real sources of all Price Data?
This is harder than the 19th Century search for the Source of the Nile, which in any case turned out to have multiple sources. There is definitely not a straight answer as there are arguments regarding the circular nature of the transaction cycle, i.e. one trade leads on to another ad infinitum.
So, are exchanges and, to a lesser extent other venues like IDB’s, true sources of market data and prices? The reality is they are aggregators of pricing and transaction data, however with key and important characteristics.
- They are licensed venues offering complete trading venue services from start to finish.
- There is no competition in many markets, making their venues unique, though this is breaking down in the US, UK and Europe.
- This means most have a monopoly of supplying a complete trading and traded view of their specific market place.
- However, the individual Bid and Asks are originally sent from the brokers, obviously external to the exchanges.
- Yet, even before that, it is the investor who places that bid/ask order with the broker for transaction on the exchange.
The graphic below highlights the flow of price data to and from an exchange in a summary format.
Equally Brokers putting up their own prices to an exchange seemingly have a strong claim to ask the question “This is our data, why are we paying?”
- Only the exchanges have a clear view of their entire market, with some competitive exceptions.
- Their IPR and ownership is founded on this total market view strengthened by their standardised format for accessing and viewing their market.
- As market data licence sales are lucrative, exchanges enforce contractual compliance vigorously and often.
- However, the time-period between introducing new contracts creates ambiguities in real world usage.
- Contractual issues are exacerbated by a lack of global common terminology and definitions.