Published on Tabb Forum in July 2021
This June, after 6 years of running the industry leading annual MIFID II / research unbundling events in London, New York and most recently online, we were delighted to be able to bring our focus to market data – a more mature market than research but one that faces even greater challenges for asset managers.
Hosting speakers from Barings, Columbia Threadneedle, Aberdeen Standard Investments, Liquidnet, Aegon, TRG Screen, Wellington Management and many more, three panels explored control and fee transparency challenges, the regulatory backdrop, and developments in supply including M&A and new market entrants.
We would like to thank all of our fantastic sponsors, speakers and delegates for their contributions and support. We look forward to seeing you all again next year (hopefully in person!).
If you registered on our virtual platform for this recent event, then feel free to login and watch back the replays (Link here). Alternatively, send an email to [email protected] with “replay” in the subject line. Note: We operate these events under Chatham House Rules, so please refrain from publishing any specific quotes from our speakers or redistributing footage without our explicit consent.
Here’s what the industry is thinking about:
1) The Asymmetry of Transparency:
One unsurprisingly enduring theme was concern and complaint about the complexity of licenses and procurement terms with providers. It is revealing that this is the only area we work in where “compliance” most often refers to obeying the supplier’s commercial rules, not the guidelines from the regulators. (Although of course that is also a key focus!)
Speakers referred to their data vendors referring to list prices that are never published, whilst devising new criteria to capture information without explanation on how that impacts prices. Others spoke about providers introducing new licenses for renewals without any notice. It was voiced that buyers currently have to be transparent in this market, but sellers do not, and many speakers underlined the importance of regulators now addressing this issue.
2) The Challenge to Control Budgets as Prices Increase:
Throughout the sessions speakers stated that market data providers are becoming more and more expensive and one participant said this had got to the point of endangering the business models of smaller buyside firms. Exchanges now charge for information that was previously free to access, and consumer use cases, rather than provider cost implications, are what drive this inflationary pricing.
We have seen a steady evolution of contractual terms, with some vendors using this as an opportunity to make things more complex, increase revenues, and put more pressure on their clients with the threat of an audit. Some speakers did say, however, that relationships are evolving with some vendors going forward, who are longer term in their approach and structure.
We asked the question of whether the buyside had actually properly tried to explore using alternatives in areas such as the index market. The answer is yes, they’ve identified alternative providers wherever possible in order to understand market supply and improve their negotiating positions, but in the ratings and index businesses particularly, the barriers to switching are very high. Asset owners and consultants drive the need to work with the incumbents (plus regulation in ratings) – but there is more opportunity to use alternative providers than a couple of years ago, and it’s a gradual process. Others were more convinced that despite perceptions to the contrary, the power still is in the buyers’ hands and the ability to use new lower cost competitors is greater than perceived. It’s all about stakeholder management and a determination to drive change internally.
If you do decide to try, it is a process which involves the whole firm, not just the market data manager and technology department. If you don’t have sales on board, they are not going to discuss the proposed change with the institutional client asset owners. You need the investment function’s buy-in, senior management’s support and a clear set of goals.
There is value in understanding your major suppliers in totality if you can. A holistic picture of your data providers can bring surprises and change how you decide to use and deal with them.
Another driver of change can be localising budgets to departments internally who can take responsibility and see the advantage of controlling costs. More success comes from becoming better at only asking for what you need. Despite the propensity to bundle in this industry, many buyside firms report good results from their requests for more individualised, specific products.
ESG was obviously a core topic, with speakers asserting that this area suffers from the same oligopolistic structure of major data vendors. The problems firms are having in ESG data are just a symptom of the wider issues in the industry overall.
3) Lack of Competition Amongst Providers:
There was input from many speakers that incumbents in all data segments were getting more powerful. For example, the exchange groups are currently building integrated value chains, purchasing data providers. Some speakers asserted that exchanges’ pricing structures could be seen to discriminate against potential competitors to those data providers, charging one price to their peers and another to firms they’d rather not compete against.
They added that not everyone is annoyed about prices being high. If you are a leading provider you might be fine with high pricing of your raw materials, because that provides another barrier to entry – you and your largest competitors are the only ones who can afford it!
So how have new entrants gained footholds? With many leading providers the moment you sign a contract, you know you’re very likely to be forced into a model that will lead to year on year material increases in pricing. Emerging competition is concentrating on greater transparency and more accommodative pricing structures, but market share dynamics are only changing slowly. For new entrants the key is to do the work for the prospective client on the business case, offer an extensive testing period, and invest in quality salespeople that can build partnerships.
If you feel handcuffed as an asset manager to an incumbent provider because your clients won’t let you change, then these measures can only help so much. And when you do succeed in finding a new and differentiated provider that provides more attractive terms, be prepared for that to only last so long before they get acquired by a market leader.
When dealing with the ever present issue of consolidation, buyside firms need to prepare their own strategy for future negotiations with those vendors as the dust settles. There will be overlap, confusion and redundancy in data and feeds and getting ahead of potential challenges is the only way to avoid multiple pain points.
4) Sourcing and Discovery is Evolving:
With the enormous amount of data now available, market data managers could spend most of their lives talking to new entrants which is not practical. Providers should engage the portfolio managers directly, but that doesn’t mean there are shortcuts to adoption. The bar is set high for new entrants to gain a foothold in large asset managers, driven by the need for a clear line that can be drawn from the dataset to eventual revenue. Data needs to be monetized.
Everyone wants to understand how the data they are buying is created and managed from a governance as well as a credibility perspective. In the hunt for alpha-generating data, backtesting is obviously key, but the capacity to do that at scale is not common. Rarity is a good thing, there is a premium to be paid for the uniqueness of a product, but that advantage will only last so long as others notice and invest in those datasets. Pricing in ESG and Alt-data is at an early stage: at the moment it is down to the investment teams to determine value, but we will get to a more structured market over the next couple of years.
5) Progress is Entirely Dependent on the Regulators:
Some speakers were very clear that change will only happen if regulators make decisions and stipulate rules and guidelines for data providers.
IOSCO (International Organization of Securities Commissions) is about to publish a report on market data costs which will make suggestions on how regulators can deal with the issue. The report is expected to be published over the summer. EFAMA (European Fund and Asset Management Association) and ICSA (International Council of Securities Association) released a memo on June 9th addressing index costs, which was a call to action on many of the concerns addressed above. The hope from some speakers was that there will be a recommendation from IOSCO to the national regulators authorities to begin a process that will result in new regulations.
The reform at the EU level is largely pioneered by DG FISMA. DG FISMA still has an open item from MiFID I, the implementation of the consolidated tape (i.e. a consolidated feed of ideally all bond and equity rating venues in Europe). The main objective is to improve market transparency and (maybe) lower costs of data.
ESMA (European Securities and Markets Authority) has started to look at the Reasonable Commercial Basis rules and has issued a consultation. A final report and guidelines were issued in early June, which scrutinises the proliferation of licences in the industry, but in the opinion of some speakers it left many key topics unaddressed. In the end it needs to be clear if “Reasonable Commercial Basis” as a term refers purely to cost or can incorporate value delivered, as either interpretation has significant implications.
It was asserted that for regulation to accelerate there needs to be an appreciation that market data pricing has an indirect but significant impact on end clients. Costs cannot be absorbed by the asset management industry indefinitely, and according to at least two speakers the FCA is really trying to understand this potential impact on the end client and come up with their recommendations later in 2021.
Others were especially focused on consolidated tape fixes, with currently billions of euros lost that could be value arriving with the end investor. Governments and regulators are more focused on the ESG discussion but it is all about the same things that are general challenges in data: standards and quality. Success in Europe’s consolidated tape project requires people to understand that it’s not a technical problem, there are hundreds of providers that can provide a consolidated tape tomorrow if a number of things were fixed, and standardization is one of them.
A Tipping Point?
From speakers’ contributions at our conference it seems the market data industry has been stuck in a cycle of frustrated procurers dealing with have-to-have providers that have been unsurprisingly keen to benefit from pricing power. The panels made it clear that gradual change is possible, with some providers taking a different approach, and regulators scrutinising this market for potential dysfunctionality. Add new technology and the ESG revolution to the mix and this becomes a fascinating landscape for us to track, benchmark and measure.
We can’t wait to get everyone together (physically next time!) in 2022 in London and New York – email us at [email protected] with “Market Data London” or “Market Data NYC” in the subject to ensure you get an invite!