Know Your Data Sources 1 Following the Dollar Trail

1.1       Know Your Data Sources, A Means to Many Ends

Everyone should now be well aware of ‘Know Your Client’.

Significantly, there has never been an equivalent impetus for ‘Know Your Source’, and in this case, ‘Know Your Data Source’. So why should information buyers now consider this as being relevant, or even significant, to them now?

Well there are 3 compelling business reasons:

Validation means ‘Know Your Data Sources’.

There has always been the ‘one out’ principle applied, i.e. know the immediate supplier, but less, if any, concern about who the ultimate vendor is behind that first line supplier. By implication, this means companies do not know their total and therefore risk exposure in market data and dollar terms to that ultimate supplier sitting in the background.

Why is this case? Especially when downstream market data vendors, ISVs, financial institutions, corporates, well everyone, is so dependent for their success of their business upon the information they ingest and consume in order to make investment decisions.

We take a look at the advantages of knowing the ultimate source of the business flow from a contractual and dollar perspective, and highlight the very real risks in not seeing the complete picture.

 In this paper’s follow up we go ‘On the Price and Data Trail’, and that’s where the real problems start.

1.2       KYS & Business Risk

The inability to understand where market data and financial information is being sourced from is a business weakness which should be addressed to meet 3 fundamental purposes.

  1. Intellectual Property Rights (IPRs). Not knowing the ultimate sources of the information supplied could well mean market data being used out of the scope of contracts, which can introduce liabilities when the source owners seek to claim their dues. Market Data vendors do not voluntarily pass on the source owners policies, or report usage unless specifically told to do so. Naturally the major exchanges insist on compliance, but it does mean there are sources which inadequately enforce their IPRs. This is changing.
  2. Understanding exposure to sources and distributors at each business level allows a better understanding of the total spend with each, and every, supplier (See Section 3.1). Increased awareness of how much is being spent on each supplier creates greater leverage for:
  • Generating bulk discounts.
  • Leveraging the relationship for greater use of specific suppliers’ products and services.
  • Enhances the Buy Side/Sell Side relationship for mutual benefit.

3. To gain a greater understanding of the source of the information contained within blended services  such as datafeeds. Datafeeds often consolidate different types of data, i.e. indicative prices and tradable prices, examples being OTC prices via TR DataScope or Bloomberg B-Pipe.

Not knowing your ultimate sources is a greater business risk from a service rather than a management stand point. But that is neither to negate the issue nor ignore it, as both are linked.

1.3       Regulatory Impacts

Regulatory impact on market data sourcing and consumption is changing profoundly, somewhat subtly, but surprisingly rapidly, the market place for data. Whereas previously regulators mandated institutions on how to price the market, for instance requiring two separate sources for OTC market valuations, new regulations are now more pro-active by defining how and what types of prices must be sourced.

Notable cases in point include the IOSCO Principles for Index Creation with its clearly defined requirements for due diligence in sourcing data, and the upcoming Fundamental Review of the Trading Book (FRTB) which regulates how a Bank’s trading book will be priced using tradable pricing. FRTB in particular, is causing consternation to Trading Heads who may be forced into pooling proprietary trading data with close competitors.

This places new and additional pressure on the data consumer to:

In this paper’s sister article, we go ‘On the Price and Data Trail’, and discuss in detail.

1.4       Why ‘Know Your Source’

There are practical business and management benefits for understanding the flow of information into your business.

Implementing a KYS strategy is straightforward, all the components exist within each business, it is a question of creating relationships through: