Squeezing Market Data Costs: Why, When, Where and How

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, 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 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 consolidated, terminals eliminated or replaced with lower cost solutions, data hubs or warehouses consolidated or cheaper equally effective technology used.