October 17, 2011

Inside Market Data - Special Report

Cost, Compliance, Collaboration Drive WFIC Debate

Cost containment remains a top concern across the market data industry, leaving market participants grappling with the challenges of budgetary constraints in the face of changing regulation, new technologies and competitive pressures, according to panelists representing end-user firms, exchanges and vendors at industry association FISD’s World Financial Information Conference in San Francisco last week.

To address increasing regulation, vendors said they are building capabilities into their products to ensure clients are ready to meet upcoming regulatory requirements. For example, Mark Hepsworth, president of institutional business at Interactive Data, says the vendor is striving to understand the compliance-related processes around data that clients need to perform, and is providing capabilities to help clients complete the processes more efficiently—for example, by offering more transparency around evaluated pricing services and enabling users to drill into prices and export their research.

However, in addition to compliance with new regulations, end-user firms also face the challenge of being in compliance with exchange data usage policies—a topic that prompted frustration among end-user panelists at WFIC.

In particular, inconsistent pricing models, policies and auditing requirements across different exchanges greatly increases firms’ administrative burden, prompting them to develop inventory management systems geared towards the strictest rules to ensure compliance, which can result in overpaying some exchanges at a time when budgets remain tight, according to end-users, who called for exchanges to develop a universal standard so that a firm can undergo a single audit that encompasses all exchanges. However, an exchange executive noted that the different policies adopted by exchanges reflect their individual business strategies, and said it would be a challenge for all exchanges to agree to a single standard.

Exchange representatives also noted that policy changes always lag behind advances in technology, and that exchanges are reacting to the new and different ways in which data is being used. For example, while exchanges offer non-display usage licenses to creators of derived data, such as index providers, with clear criteria for what qualifies derived data as an original work—mainly that it cannot be reverse-engineered or be intended to substitute the primary data—the lines can become blurred when companies want to use the primary data to create prices for their own markets, which may intermingle data from multiple venues.

Move Closer
Speakers across the board agreed that a closer relationship between end-users and content providers is key to creating the right licensing models while protecting the value of data. “From an FISD perspective, it’s evident that there is still a lot of work to be done with our members to continue to address policy and best practices to find win-win opportunities regarding exchange and content provider policies,” says Tom Davin, managing director of FISD.

Vendor executives spoke of greater collaboration with end-user clients to educate them more about products to help them derive more value, and offer more flexibility around how they package their content—even offering short-term contracts to shoulder some of the risk as end-users look to explore new business areas, said an executive from a data vendor.

Some end-users are even asking for consumption-based licensing, to pay only for what they actually use, which Netik chief operating officer John Mason likens to Apple’s iTunes model, where users can purchase only specific songs from an album rather than buying an entire album for the sake of owning one or two songs.

Such demands lend well to cloud technology, which continues to gain ground amid cost pressures, and which Davin expects to feature even more prominently at the next WFIC in 2013.

Data and technology has always been closely tied, and while one data vendor representative proclaimed, “Data is still king,” a technology vendor executive said it is the supporting technology, which provides the data in a clean and timely manner, that makes it relevant.

For example, Neil McGovern, senior director of marketing at Sybase, says that while complex event processing engines were initially used to execute high-frequency trading strategies, high-speed demands are increasingly outpacing software’s ability to keep up, so CEP is now more often used for monitoring trading systems and strategy augmentation instead.

Jeff Wells, vice president of product marketing at Exegy, adds that technology is crucial in allowing firms to tackle capacity in light of record market data volumes, such as Friday, Oct. 7’s new peak of 6.65 million messages per second. One bank executive said the main capacity challenge is dealing with microbursts, and that the issue is exacerbated by a lack of standards around how capacity is measured, such as in five-second or one-second peaks, or by Megabits or Gigabits per second.

But while technology is an enabler for data vendors, it is rarely sustainable as a differentiator on its own, since the rapid pace of technological advances closes the gap between competitors, says Douglas B Taylor, managing partner at Burton-Taylor International Consulting LLC. To have a viable profit model, a data vendor must instead focus on delivering unique content, such as proprietary news or indexes, and unique capabilities, such as visualization tools to assimilate data quickly, Taylor adds.

Adapting to changes in the industry is crucial to maintaining success, said one data vendor speaker, stressing that vendors must regularly reinvent themselves, which may even include cooperating with vendors normally considered to be competitors.

“Our industry is not huge, but it is a truly global industry. Bringing so many people together from all over the world for these discussions reveals for everybody that regardless of where you are, a lot of the same issues and challenges that you’re facing appear on the other side of the world, too,” Davin says.
by Vicki Chan