How will firms respond - fight or flight?
The capital markets community has become more vocal in its displeasure over rising costs to receive core market data, especially as market participants cannot meet their regulatory best execution requirements without this information. As the lobbying effort begins to gain momentum, European exchanges still continue to operate fairly monopolistically, but how long will it be before the music slows or even abruptly stops?
If you look across the pond to see what has happened in the US markets - Back in 2018 the Securities & Exchange Commission (SEC) rejected price increases proposed by NYSE and Nasdaq. No doubt this was welcomed by many brokers and also sent a clear warning towards US Exchanges trying to increase prices without sound justification going forward.
Similarly the European Securities and Markets Authority (ESMA) acknowledged last December that MiFID II has not delivered on its objective to reduce market data costs. ESMA intends to start working on supervisory guidance to provide market data on a reasonable commercial basis while also working towards the so far elusive goal of establishing a European consolidated tape to help drive down costs.
Exchanges also are acutely aware that the regulatory spotlight is on market data. Many are morphing into diversified business models betting big on a significant shift in the financial markets, as data will power all areas of investing in capital markets. A prime example of this was when Intercontinental Exchange Inc. (ICE) acquired Interactive Data Holdings (IDC) in 2015 and more recently the London Stock Exchange (LSE) acquisition of Refinitiv for $27bn, to diversify revenue streams and create a data and trading giant, which reportedly will generate more than 70% of LSE group earnings, coming from annual data subscriptions rather than the trading on the exchange.
"The key message being that firms must morph into much more agile and diversified enterprises or simply face annihilation."
The key message being that firms must morph into much more agile and diversified enterprises or simply face annihilation. Prime examples of this have been Deutsche Bank and Macquarie making the tough decision to exit European Equities and more recently HSBC announcing they plan to downsize headcount in their Equities business as they struggle to generate meaningful profits.
What is driving increased data consumption?
One of the major drivers for larger data consumption still remains regulation rather than pure innovation. Huge investment continues to be made due to firms attempting to meet regulatory and compliance obligations. Preparations for MiFID II that came into effect on Jan 3, 2018 cost firms an estimated total of $2.1B according to a report by Expand. Furthermore now that Brexit has finally happened further changes to parts of MiFID II will surely propagate accordingly.
While waiting for ESMA to flex their super regulator arms towards reducing market data costs, capital market firms are finding alternative ways to innovate in regards to their data strategy. These firms are becoming laser focused on the delivery methods and consumption of their market data, realising the need for data is likely to grow significantly in the future and not shrink, regardless of rising data costs.
Can cloud technology help firms to withstand the rising data costs and shrinking commissions?
Advances in technology have allowed firms to capture, store and process data more efficiently and we are seeing a new wave of innovation with the development of in house machine learning and AI based tools, partly to gain competitive edge, partly due to the fear of being left behind. These new smart tools have a necessity for large data sets to perform.
In response to this greater data demand, some firms are investing in moving away from traditional methods of on-premise storage, away from legacy data centres and moving their market data and applications to the cloud. Firms now have a greater choice as to when to move from capital expense (Capex) to Operating expense (Opex) as they choose from a menu of options based on the frequency and size of data consumed.
"Taking advantage of cloud technology sounds like the smart play to rising data costs but be aware of the small print!"
The cloud simplifies and accelerates access to the data and enables advanced analytics on demand - without the traditional heavy infrastructure costs of replication of data. It comes as no surprise that Google Cloud and Amazon's (AWS) first foray into the financial markets is in cloud computing as they predict exponential growth in the next 5 years. Taking advantage of cloud technology sounds like the smart play to rising data costs but be aware of the small print! There can be hidden costs with cloud storage - yes it may reduce your infrastructure costs in the short run, however many providers charge high fees for you to access your data once stored in the cloud.
Data Strategy - Is there a silver bullet?
One thing is clear that the data strategy for a firm is no longer simply a utility for doing business but has become a paramount factor for firms to scale for the future. Choosing the right market data and partners to provide is only part of the puzzle, how you store and access that data from within your trading ecosystem as efficiently as possible is equally important and not a decision to be taken lightly. I expect there to be some big wins and losses for capital market firms based on taking different data strategy approaches over the next few years.In the meantime I must get back to saving the world with my daughter and the Power Rangers.