IPR 3 Ownership & IPRs: Ignorance is a Costly Bliss
Data governance is fundamental to the effective functioning of market data as an industry, in fact to anything relating to ownership of information, including that which is contentious, which market data can be.
Exchanges, other data sources, and vendors, are careful to de-emphasise ownership by highlighting their services in terms of delivery and usage. It is very much the ‘iron fist hidden in the velvet glove’ approach while avoiding potentially awkward questions.
To be fair, the majority of market data managers at financial institutions, their legal officers, and even some end users understand the ownership principles. However, there are many applications managers, end users, ISVs who see simple and practical ways to use and distribute price data without even considering the implications of their actions, much less consult the market data manager.
This means that there are numerous, and not always readily identifiable grey areas which constantly and materially affect the business of providing information services now and into the future. These can be summarised as:
- As described in Section 5.1 Contracts are in reality, a snap shot in time. They only reflect data usage when the contract has been entered into and often do not take into consideration the evolution of market data usage.
- Users and re-distributors can and do find ways to use data in ways the original contracts did not envisage.
- A good example is the Spreadbetting industry where synthetic indices are being created based on non-reversible algorithms using underlying indices. Certain exchanges quickly identified Spreadbetting as another way to increase their revenues.
- There can be a lack of understanding of the available usage rights and policies, either through lack of access to documents, or lack of interest in reading what is in those documents.
- Ongoing database maintenance, is a definite grey area especially after termination of an agreement. Regulators insist on continued maintenance of price data for substantial periods, and it becomes easy for ‘cancelled’ data to mingle with ‘live’ market data.
- Derived data usage. Creating new data out of old creates new ownership rights, but the parameters and ground rules must be clearly established. A lack of common acceptance of what derived data is generates confusion.
- The greater the number of users over as wide a geographical area as possible is an objective of exchanges and vendors. It creates revenue streams. Yet distributing market data to who, what, where, internally, and externally within an inter linked global technology infrastructure and then having complete control, monitoring, and reporting tools in place is a challenge.
- Creation of value added products such as Indices. Technically Indices are a form of derived data, however their ubiquity of usage to create new products such as tradable futures create a whole new value proposition to both the sources of price data and the index providers.
- It is no accident arguably the most aggressive protectors of their IPRs are index creators, notably MSCI and to a lesser extent FTSE Russell.
- Again as discussed, and this really should have been consigned to the history books by the market data industry, there is a lack of common standards by the data sources in terms of policies and usage rights, along with terminologies and definitions.
What all this requires is clear line of sight of the flow of market data from its genesis within the exchange via a distribution channel to the final output. This means there must be accurate and well-maintained audit trails.
This utopian scenario only exists in the simplest of environments. Financial institutions and market data vendors can at best only attempt to meet their compliance obligations. This usually also means they are not capable of maximising the associated usage rights.
It is all too common to find:
- Vendors and financial institutions do not have an accurate or complete market data and information inventory.
- Neither have vendors and financial institutions complete nor accurate contract and document management systems, which means associated terms and conditions may not be met.
- Both employ poor contract and document management processes and methodologies.
- The larger the user, the harder it is to track, monitor and record actual market data usage in a complex environment.
- Unintentional compliance failures become exploited by some exchanges as an easy revenue enhancer.
In the Real World, The Dollar Cost of Ignorance
Ignorance of Market Data Ownership does not bring bliss, only invoices.
Case 1. Getting it Wrong.
It cost one UK Bank almost US$10 Million in liability payments because they wilfully ignored the advice their consultant gave them, which was “Stop!”. This institution had linked a shared drive direct to their Thomson Reuters platform and was distributing TR price data across over 800 users without licences or control.
Inevitably, Thomson Reuters became aware and presented the Bank with that large invoice.
Why did this occur? Poor data governance, lack of management control, ignorance of their contractual obligations and source/vendor licence rights.
The subsequent bill would have been lower had the Bank’s management acted once informed of the issue.
Effective management kills unnecessary multi-million dollar liability payments.
Case 2. Getting it Right.
On another occasion, an enthusiastic research support manager found a way to distribute real time foreign exchange data via excel spreadsheets to all the analysts in the department who were only paying for equity data.
This manager understood the internal processes and requested senior approval. What could have resulted in an US$500,000 PA liability was avoided.
- Ownership and IPRs are the font of the market data industry.
- Understanding market data ownership is not rocket science. Exchanges, data sources, and vendors rely on IPRs to make money.
- Getting lost in the market data ownership minefield is an expensive mistake.