By Mark Schaedel, Strategy Advisor of DataBP
Data consumption methods have changed dramatically in a relatively short period of time, driven by technology advances and the use of automation necessitated by today’s highly competitive (read: fragmented) markets. Tools and automation are allowing for consumption of granular raw data at massive scale, supporting quantitative investment strategies which surface insights through artificial intelligence and microstructure behavioural analysis to improve the efficiency of liquidity sourcing. The implementation of these strategies is galvanising demand for more granular and timely data, while the growth of passive investment trends and global connectivity calls for a greater diversity of asset classes and geographic regions.
These fundamental shifts are putting enormous pressure on providers of data, particularly for global exchanges which often still rely on outdated business models and business processes developed to support local, wholesale markets. As market data has evolved from being a byproduct of transaction business to a primary function of an exchange, the supporting business functions are being integrated into the core product, sales & marketing functions from what was once largely a standalone fulfillment function. Consolidation between data vendors and exchanges are disrupting distributional channels and blurring the lines between providers of liquidity and data. Many exchanges are seeking to establish direct relationships with data consumers and a broader diversity of redistributors.
From users to applications
Even the world’s most sophisticated exchanges are struggling with the transition from a realm of hardwired vendor display terminals serving users performing discreet business functions, to a place where interconnected robots running algorithms support a broad range of interdisciplinary functions. These changes have resulted in a drastic reduction of traditional users, and an explosion of applications which consume raw data via APIs and create derived analytics. As exchanges race to meet these demands through new policies, the data governance resources which customers rely on are often unable to cope with the changes and diversity of business rules which need to be accommodated. The exchanges’ customers, on the other hand, faced with rising costs associated with increased demand for data, are often focused on managing cost reductions rather than investing in changes to data governance. The resulting data compliance challenges are becoming increasingly problematic, frustrating both exchanges and customers.
A more sophisticated approach is required to manage the use of the derived data and direct relationships. New commercial policies need to be built around these new types of consumption, categorised by the exchanges as ‘non-display policies’. The policies need to address the scale at which data is licenced, and the need to manage direct relationships. While global exchanges have growth strategies built around data (such as cloud technology, content for algorithmic consumers, historical data, etc.), many are still running on outdated processes. This runs the risk that the new types of products which exchanges want to develop are sitting on a very shaky foundation.
Exchange leaders, therefore, need a rethink. They need to start treating data with the forethought it deserves by positioning the distribution of market data as more of a core product. This is backed up by the ever-growing demand for exchange data, playing an important role in price discovery, as well as driving many other constituents of the financial services community, including risk, hedging passive investment trends, and fed into indices, benchmarks and derivatives.
The devil is in the detail
The exchanges face a problem in that, up until only recently, they have effectively been disintermediated by the likes of Thomson Reuters and Bloomberg. There are a number of resulting difficulties which occur when third parties fall in between provider and client, such as lack of visibility, an inflexibility in licensing to accommodate use cases, inaccuracy and untimeliness of customer data, or lack of communication with regards to changes or reported usage. Problems in these areas then have a knock-on effect to billing, compliance and relatively larger audit findings. All these can impact the bottom line with research showing that global exchanges can lose an average of 22% in data revenue per year due to inaccurate reporting or billing errors.
Exchanges also tend to have complex usage policies (such as enhanced programmes around netting and non-display policies), and suffer from a lack of consistency across exchanges. These exchange policies are fraught with non-compliance issues, and the processes involved with manual licencing are based on either homegrown spreadsheet systems or CRM extensions, which are simply open to error and are unable to scale.
Introducing market data administration platforms
Through our conversations with some of the world’s leading exchanges, we have observed not only a policy convergence, but a process of divergence as well, which leads to inefficiencies and an exacerbation of compliance issues. A degree of convention needs to be brought to the table to take a common approach to data policies in order to be successfully integrated into common data governance practices.
A shared platform, such as DataBP, can support process convergence and introduce these efficiencies. By innovating the entire lifecycle through which data is licensed, data can then become more available and consumable. As a result, the relationship between the subscriber and the exchange around the data licensing can become much smoother. The platform allows exchanges to build a very accurate and clear picture of who their clients are, what their clients are licensed for, and which vendors service those clients. From these relationships, business intelligence is formed which can provide actionable insights and in turn drive automated processes, improve the customer experience, and bring opportunities for cross selling. Clients can either subscribe or enter into a license agreement online in a fully customisable, user-friendly portal. Salespeople can also be supported in their dialogue with the client with the ability to completely capture the process online, so there is a very clear record for parties on all sides of who is receiving licences and for what purpose.
Ultimately, the opportunity to grow the market data business depends on exchanges’ ability to increase and diversify the number of products they offer and the licensing policies they introduce to accomodate more use cases. Through simple configuration and the introduction of cloud capabilities, exchanges can also automate the direct distribution of data and control of permissioning (which they lose when vendors are in the way). Vendors can then reach a broader scale of users and integrate the data across exchanges. These distribution channels can be maintained and managed centrally with direct distribution, even with a common customer receiving data both ways, which allows for packaged pricing amongst other things.
Answering client needs
Exchanges and regulated trading platforms provide the highest quality data for capital markets participants. The transparency upheld by platforms protects investors and provides the global ecosystem of financial markets with reference prices that support the insights needed for sourcing liquidity, managing risk, compliance, market monitoring and surveillance activities.
With the quest for data at an all-time high, progressive exchange leaders are trying to alter the disintermediated state that represents their past, and instead are trying to better tap into the specific needs of their clients. Market data administration platforms can go a long way towards facilitating this process. By making friendly tools available, the clients of an exchange can go to a website and see exactly what they are licensed for. Exchanges can then focus on making data painless to consume for their customers, and making it available at the most appropriate price.
