In recent years, nearly all major banks have introduced a central market data platform for their risk control environment to harmonize sprawling processes and escalating costs. These platforms typically integrate data acquisition, quality checks, the creation of data curves, surfaces and dashboards, and the distribution of data to several units, while maintaining a ‘golden’ copy. Only a few vendor deliveries still take place outside of these platforms, due to special technical setups, external responsibilities, or intermingled cost calculations. The positive outcomes of these market data centralization efforts can be clearly seen today with banks having more control, lower costs, and better data traceability.
In the last decade, the asset managers’ market data requirements were less extensive and the cost of external data did not matter as much in times of high profit margins. External market data points were purchased directly from vendors and put into operating systems by different responsible managers without central coordination. In some cases, asset managers still rely on interactive brokers for complex pricing algorithms.
But the market has changed. On the one hand, margins are now much lower compared to the underlying risk throughout the market which leaves less money to cover external market data costs. The cost of data is currently one of the largest for asset managers, along with personnel and infrastructure costs. On the other hand, the increase in external data from multiple sources has made it a necessity to provide a robust and comprehensive overview for traders and risk managers, especially in recent turbulent times. External pricing solutions are currently being cut off to reduce costs, but this in turn requires even more of qualified market data to perform complex pricing.
In this paper, we examine the six main challenges with external market data for asset managers and describe potential solutions.
Practice has shown that institutions on the buy side usually have a central procurement office but often do not have a dedicated market data governance that sets the strategy for procuring and the framework for delivering external data for all units. A clear picture of the current market data state is missing within organizations, and at the same time, the market data landscape is evolving continuously. There is a lack of guidelines regarding the necessary changes, provider selection, and how to align requirements between businesses and the corresponding IT.
A global governance framework, including a list of responsibilities and a clear data delivery matrix, should be set up for all external market data procurement operations. Through a governance framework everyone can understand the overall procedure, know the person to contact in case of changes and observe all purchased market data sources in a dedicated place.
Creating a central role for market data delivery is not mandatory but can stand data governance head and shoulders above existing processes by overseeing the full range of data contributors from real-time trading, daily risk management, and long-term research units. This role should be able to clearly understand the necessity of requirements from the front and back offices, and the appropriate market solutions.
When it comes to IT architecture, often an historically grown infrastructure serves as the basis for market data. For sure, it usually delivers all required data for a department in a well-established way. However, it can often be seen that the data is assembled through different platforms and from multiple providers, lacking the overarching scope. For example, there are multiple systems fetching data from vendors, multiple ways for revision of quality constraints, extension by norms, bootstrapping and vola-surface methods that are not shared with other systems. Sometimes there are even multiple access types for getting the exact same market data items in different systems.
There are two ways to address this problem:
A clear delineation and classification of market data costs is essential to distinguish these from costs for infrastructure to provide the data. It is not uncommon for asset managers to see several types of cost items being classified in the context of market data without clear guidelines. For example, the following cost types can be differentiated:
Firstly, a uniform classification of market data and allocation of cost items should be mandatory for an institution and be recorded in the context of the market data framework. Secondly, by implementing a central role, all cost-related items can be observed and reconciled with care and clarity. Non-market-data items should be considered separately in other cost centers.
Often, market data contracts are discussed with and signed by regular contract managers who are also responsible for software, licenses, and other resources. However, the purchase of market data in various options and the holding of long-term contracts in data delivery are highly complex and far beyond the scope of other contracts. Poor communication between the market data end-users and the central purchase management amplifies these shortcomings. Overall, it can be a great challenge to identify the best solution to manage the vendors in the best possible way.
The management of supplier contracts for market data should not be performed using a spreadsheet solution. It has become a necessity to have a central contract database focused on market data contracts. Most vendors of such central contract databases have products that are very specific to the asset management market where specific market data contract information can also be managed. Such information can add significant value not only for managing contracts but also in setting up and using the software.
A further deficiency in the management of market data can result from insufficient transparency of the actual use of the data. It is common to find some kind of systemic data that is not used in a personalized way but distributed to a larger group for review and comparison. In addition, market data consumption creates an enormous volume and comes with complex billing from vendors. The degree of complexity increases with volume-driven billing models, which makes the analysis of the used market data much more difficult.
It is often the case that you find a complete data package purchased from a provider, but where only a very specific data point is used. Changes in procurement needs are not always recognized and often eventually abandoned. Data that is no longer needed is not cancelled and licensing risks can arise as a result of improper use of cancelled data.
A central role can check the requirements and suitability of market data, regularly question its use and discuss alternatives. The list of review tasks is usually specified in the database and the results should be evaluated at least once a year. A properly designed cost-sharing model can address the reasoning of data requests while departments trigger the cancellation of feeds to reduce costs.
The reasons why market data is obtained vary depending on the company and its business. Market data can be used, for example, to develop investment strategies, accounting activities and performance measures, to name just a few. Having diverse providers for several departments but no central place to look up existing requests can result in the same data being queried from vendors more than once. In some cases, automated market data queries are not being monitored or reviewed for some time. Such automated macro data queries can incur large amounts of costs over time due to redundant queries initiated by different departments for different purposes. Similar errors can occur at both banks and asset managers due to the sheer volume of data being retrieved.
A way forward would be to log all external data requests in terms of necessity or purpose. A central market data platform can deliver any data for reuse that has already been requested elsewhere and hence avoid redundant queries. Moreover, a system can continuously check incoming market data queries against existing holdings and underlying regulatory requirements preventing a repeat delivery of the same data.
To sum up, firstly, a centralized market data management role, including governance and contract management is key for asset managers to control and reduce their cost base effectively. A market data manager can unify data requests from different departments for various purposes, conduct regular audits, review business requirements, and interact with every vendor when requesting additional data.
Secondly, an assessment of all purchased market data and its consumers, such as asset management, risk and research, needs to be conducted. This should result in a clear overview of the market data and its contractually permitted scope of use, contractual key figures, and the associated costs. In short, a clear picture of the asset managers’ requirements in terms of the depth and breadth of market data is needed.
It is important to keep in mind that a centralized approach and a central data management role will take away singular decision-making power from many players within asset management firms. However, this can lead to harmonization, better collaboration between units and a lower overall cost base. The challenge is to get all relevant departments behind the idea.
Capco has had numerous successes with optimizing market data for various major financial services clients across Europe. To manage the complexities described in this paper, we have developed automated data processing tools specifically designed for market data analysis. With these tools, large amounts of data can be processed in an efficient and effective way. This helps to fully understand the market data billing models, reconstruct invoices and identify improvements to be made.
Now is the time to focus on the business case for solving these challenges and decide on which approaches or combinations of approaches above to take. Capco has deep and extensive experience in resolving market data issues and generating significant cost savings for clients. Asset managers, like any other financial business units, need to look at cost saving initiatives to maintain profitability and protect the bottom line. Contact us to find out how we can help you achieve cost savings and deliver these benefits.
Andreas Pfeil, Partner
M +49 17 2165 3932