Market data: The emergence of a specialist business
The surge in the need for market data over the past 10 years now requires players in the financial sector to more fully determine their requirements and improve their knowledge of the constraints of data providers in terms of distribution and user rights in order to optimise their costs.
What does “market data” really mean?
Market data is often defined in very different terms from one financial institution to another. So what is it exactly?
- Means all data relating to third-parties associated with stocks (issuers, guarantors, etc.) and financial instruments (characteristics, price, securities transactions, etc.) stemming from the markets, issuers and companies;
- Is used in all banking processes from pre-trade to front-to-back accounting, throughout the management cycle, ranging from decision-taking to risk management and involving reporting as well as the valuation of financial portfolios; market data is of different types and may relate to pricing data such as the prices of listed or OTC securities, the bid/ask spread, a calculated price, sensitivity, a rate curve, or the characteristics of a share such as its issuer, its rating or its code. It may also involve securities transactions such as dividend payments, the date of a future coupon, etc;
- In addition to its type, market data is also characterised by the frequency with which it is updated, whether daily, weekly or monthly.
Market data is central and vital for the functioning of all financial processes.
An explosion in the quantity of market data to exploit, increased demand in terms of quality
A spectacular increase in the use of market data has been seen in recent years. Having started in the 1980s with the financialisation of the economy and the securitisation of certain financial products, the trend picked up after the financial crisis of 2008.
Indeed, the crisis prompted the emergence and the implementation of numerous national and European regulations aimed at protecting end-investors by imposing new obligations on financial institutions, especially insurers, asset managers and banks.
These regulations required certain information concerning financial portfolios to be reported to the supervisory authorities, implying the need to provide an increasing amount of financial data. The directives at the root of these reporting obligations include AIFMD1, UCITS2, FATCA3, Solvency II4 and more recently, MIFID II5.
In addition to the regulations, the explosion in market data requirements has also been driven by the increased complexity of financial instruments in recent years. As an example, for the pricing of certain contracts, financial engineers are required to undertake complicated calculations using mathematical models that need a large amount of market data.
Used in virtually all decision-making tools, this data must meet high standards in terms of quality, availability, latency etc., and be the subject of very strict controls.
As a result of this increased need for market data, players in the financial sector are facing the need to bolster their knowledge to ensure that data meets all the compliance and quality criteria imposed by applicants, providers and regulators.
A small number of providers control the market
Against this backdrop, financial establishments need to pick the best data providers. The path to becoming a data provider is demanding, and few players have the infrastructure, connectivity and control resources required to carry on the business. The data provider market is therefore concentrated and grouped into three categories.
- The first is made up of traditional, generalist players such as Bloomberg, Refinitive (formerly Thomson Reuters), Six Financial, ICE, etc. which are investing heavily in collecting, distributing and controlling the use of data. Financial institutions have limited room to negotiate with these players, primarily due to the balance of power, with the majority of financial institutions only representing a low percentage of their revenue;
- The second category is made up of index and rating specialists. The level of concentration is heightened at ratings providers, with the market in the hands of a few main players (S&P, Moody’s, Fitch, FTSE, MSCI), which controlled 93% of the global market in 20176. Once again, room to negotiate is limited in respect of this type of data;
- The last group is made up of players positioned in niche markets. These include, for example. IHS Markit, Advantage Data and Value & Risk.
Each market data provider works differently in terms of the rights relating to the distribution of their data, how their data can be accessed (by unit or in bulk form by type of data) and the terms of invoicing, to mention only the main criteria that govern contracts and help a company to select a provider.
The data industry is rapidly changing and data provider models (invoicing, distribution terms) are regularly altered, with constantly rising if not exponential growth. In this concentrated and restrictive market, with limited room for manoeuvre, the way data providers work needs to be properly understood if market data is to be used optimally and at the best cost.
As such, in addition to becoming familiar with market data, knowledge of market data providers and how they work is a key factor today in optimising the use of the data they offer and meeting, as closely as possible, the banking needs of players in the financial sector.
New areas of expertise and new expert businesses are emerging
Financial establishments have organised themselves to strengthen their market data expertise in-house, to be able to:
- Appropriately meet internal needs - not all banking needs, even if they use identical data, have the same demands; and
- Optimise the exponential costs of their data providers.
The areas of expertise needed to fully understand the subject cover several dimensions:
- Market knowledge, supervisory activities, new financial products and regulatory projects;
- Knowledge of the technological developments specific to entering data into reference systems and related processes in order to choose the strongest tools to manage data volume levels, their processing and their control, as well as to pick those capable of managing multi-provider systems and inverting them if necessary;
- Legal skills to be provide clout in negotiations with providers;
- Knowledge of data providers' invoicing models, their coverage and the possibilities of using their data to meet the needs of businesses at the best possible cost;
- Finally, commercial know-how, to be able to meet the increasing need of clients to outsource management of their financial data.
In this respect, we can see the emergence of new expert business lines within financial institutions:
- Data Manager
- Specialists in purchasing market data
- Legal experts that specialise in these activities
- Market data business experts
Expertise in market data is therefore key, now more than ever. Through optimised management, it helps generate substantial savings in the financial industries, which are undergoing substantial change.
In this context, Société Générale Securities Services has been developing expertise in market data for more than 10 years, in all countries in which we operate. Our critical mass and our robust tools capable of managing multiple data providers enable us to offer value-added services to our asset manager, institutional and insurer clients, such as post-market report production (Solvency II, AIFMD, etc.), and the management of market data reference systems for third parties.
1 AIFMD: Alternative Investment Fund Managers Directive 2 UCITS: Undertakings for Collective Investment in Transferable Securities Directive 3 FATCA: Foreign Account Tax Compliance Act 4 Solvency II: directive 2009/138/EC 5 MIFID II: Markets in Financial Instruments Directive 6 Source: Article from Les Echos January 2017