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Squeezing Market Data Costs: Why, When, Where and How
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Squeezing Market Data Costs: Why,
When, Where and How
JANUARY 29, 2016 BY CHRIS KENTOURIS — LEAVE A COMMENT
Market data may be the life blood of financial firms, but
it’s also a massive expense to them.
Often quick to blame exchanges and market data
vendors for overcharging them, financial firms eventually
have to face the fact that the buck stops with them. If they
want to reduce their data spend, they have to get their
own houses in order.
The need for controlling market data costs is greater than
ever before, because increasingly complex trading strategies and new data-intensive regulations such as
Solvency II and the Basel Accord require more data used in more ways. The surge in data acquisition and
usage has prompted new waves of audits from data providers looking to ensure they are getting paid what
they think they are entitled to.
The cost of data is typically based not only on specific feeds or data sets, but also the number of users who
access the data and how and where the data is being used. Financial firms that break the terms of their
contracts, even accidentally, can face hefty penalties. Naturally, financial organizations complain they are
being ruthlessly squeezed — and even overcharged — by those data providers.
No one at the buy or sell-side firm contacted by FinOps Report was willing to point the finger at any
particular exchange or market data vendor causing the most grief. Likewise, none of the exchanges or
market data providers wanted to comment for this article. “Let’s just say that they like to show up
for surprise audits. They always claim we are violating the terms of our contract so we have to pay more.
Unfortunately, they’re a lot better at finding our breaches of contract than we are at figuring out where
they’re overcharging us,” a procurement manager at an East Coast fund management firm tells FinOps.
If the strident tone of a grass roots movement by Portugal’s investor advocacy group Associacao de
Investidores (Association of Investors) is any indication, some financial firms are fed up with exchanges
turning market data fees into a cash cow. Charging for quotes and then charging for transactions is no
different than a restaurant double-billing a customer, says the association which calls exchange fees for
market data a “story of unfairness” and a “history of immoral fees.” Apparently, it wants the European
Commission to ensure that the second version of the Markets in Financial Instruments Directive (MiFID) won’t
allow European exchanges to make too much money, if any, on data licensing fees. So far, the association
has received 800 signatures for its petition to the EC, a copy of which can be found at the Stop Market Data
Fees website.
Because there is no single definition of market data or accepted industry formula for what the costs include,
it is difficult to estimate with any certainty just how much cost-cutting financial firms can do. Some narrowly
define market data as the price of identified stocks and other financial instruments as traded, while others
incorporate counterparties, reference data, trading venues, corporate actions data, factors, ratings, indices,
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foreign exchange rates, and benchmarks. When it comes to discussing the pricetag, some firms only include
the basic licensing fees for data feeds, while others add the costs of terminals and other connecting
applications. Yet others also include the “hidden” costs of staff involved with data hubs and warehouses,
extraction and transformation tools and personnel performing data management tasks as part of their
dedicated roles or part-time.
Regardless of how it is defined, market data is in the top five operating expenses for a bank or broker-dealer.
Recent research indicates that investment firms typically spend anywhere from about US$1 million a year to
as much as US$25 million a year in licensing fees alone. For broker-dealers and banks, the figure could be
exponentially higher.
Getting a Grip
In trying to take contol of their data costs, firms have their work cut out for them. “Managing market data
costs can be challenging depending on the number of data contracts, the number of users, the type of
usage and how many resources a firm will spend on controlling the costs,” explains Debra Heffernan, senior
consultant for market data management services at consultancy Jordan & Jordan in New York. It’s even
worse when recent mergers or acquisitions of business lines are involved.
The good news: it’s possible to save anywhere from a five percent to a ten percent just on licensing fees
Many of the largest banks and broker-dealers already have experience in keeping keep tabs on their
market data with technology tools, dedicated staff and, when needed, consultants in data management.
Market data specialists at five tier-one banks and broker-dealers contacted by FinOps confirm that their
organizations conduct periodic internal audits and rely on data management software tools as well as
market data management gurus to keep a check on unnecessary usage.
What about small to mid-tier buy-side firms? They might think they shouldn’t have a problem managing
their data costs because of their size. Or they might think spending the time isn’t worth the potential savings.
However, many fund management firms are waking up to the fact that their laissez faire attitude is an
invitation to spiraling costs — especially when they are using innovate trading strategies. That is particularly
the case for alternative investment fund management shops.
Operations directors at three US hedge fund management firms tell FinOps Report they are only now
starting to impose cost curtailment policies. “We’re having talks with the compliance department, trading
desks, portfolio measurement and analytics desks, and client reporting desks to see how we can cut,
consolidate and control our data usage. And that means before the vendors come calling to audit us,” says
one operations manager at an East Coast hedge fund management shop.
Cut Those Extras
At a bare minimum, recommend market data management specialists, firms have to know whether they are
being charged for individuals who really need the data, or if the functional areas of the firm are getting the
right data set for efficiency without waste. “It stands to reason that as employees are transferred between
departments, retire, or leave the firm voluntarily the number of individuals receiving the data might be far
more than necessary,” explains Steve Matthews, chief executive of The Roberts Group, a New York-based
market data management software firm. “It is critical that firms use the appropriate technology tools and
internal controls to manage the spend.” Those who don’t risk being overcharged for their own inefficiency.
At core, market data application tools such as those offered by The Roberts Group, rival MDSL or exchange
and vendor reporting tools provided by Jordan & Jordan help financial firms compare the terms of licensing
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contracts with invoices and the actual usage of the data. They produce their own estimates of what the
invoice should be. In particular, these applications use current information about new hires and departures
to check the accuracy of the number of users defined in the contract.
Also critical is mapping just where the licensed data is flowing inside and outside of the organization.
Although specifics might differ, as a rule of thumb market data vendors and exchanges charge on the basis
of the types of internal applications which use the data and how broadly the data is distributed in-house and
externally. The re-use of data for external distribution or derived data products are often points of
contention with data vendors, say market data management experts, who cite client reporting and creation
of indices as common examples.
“Determining the correct usage is critical and market data providers differ widely in their contractual
requirements,” says Simon Thomson, chief operating officer for the Americas at MDSL in New York. The
legalese can be so complicated that even the most diligent financial firms can fall astray, and market data
providers are unlikely to buy into the argument any unauthorized use was unintentional. His answer: have all
of the users of the data input the application name, data owner, cost code and origin of the data content into
a number crunching engine such as that offered by MDSL.
Market Data CPAs
Optimizing internal usage is the next step, and it requires heavy scrutiny of how the data is being used. For
example, if some trading desks might need far more data than others, the firm may have to make tough
decisions who gets access which data sets. Some large banks and broker-dealers have set up dedicated
centralized market data units to make the call. Data users often sign attestations that they are need the data,
but they don’t have the final say, explains Thomson. Traders who might once have relished their unlimited
buying power are finding that market data managers will keep them in line by verifying that the data is really
of value through peer profiles. Those determine whether colleagues in the same department fulfilling the
same function are using the same amount of data and how often.
Often reporting to procurement managers holding the pursestrings, market data managers also monitor
results from market data management applications and try to correct any inaccurate bills from exchanges
and other data providers. They may be called upon to mediate any disputes, recommend changing the
terms of the contract or eliminating the vendor altogether. Last but not least, market data managers must
keep a watchful on regulatory changes that may affect data usage.
Of course, market data management teams are not SWAT teams that can be called to fix a crisis and then
disappear until needed again. “Market data managers must work with business lines– the market data
owners — to come up with the policies on which data to use and when,” says Heffernan. “The managers
must then implement the policies and monitor the usage. Without ongoing maintenance, the error and
overspend creep factors return. ”
In an ideal cost-cutting scenario, data management experts at buy-side firms tell FinOps Report, getting a
handle on licensing fees will be just one part of the overall cost curtailment program handled by market
data management teams. “Analyzing costs in a broader sense can help firms understand and manage them
better,” advises one operations manager at an East Coast fund management firm.
His recommendations for filling in the big picture: start by adding up the personnel costs related to ensuring
data accuracy and consistency either on a full-time or part-time basis, costs related to terminals or GUIs,
data storage, internal data distribution or connectivity channels. Then decide what tasks can be
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consolidated, terminals eliminated or replaced with lower cost solutions, data hubs or warehouses
consolidated or cheaper equally effective technology used.
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