The market-data industry is going through unprecedented change. Irrespective of whether you are a classic information vendor, a trading venue, a broker or a niche information provider, this change will affect your business.
New technologies, new business models and regulation are some of the disruptive forces at work.
Market data consumption patterns are changing. This impacts trading venues and information vendors alike. In a world where margins are under constant attack and where today’s premium product is tomorrow’s commoditized offering, there is a relentless drive to innovate, re-engineer and shape shift to be relevant to the ever-changing demands of customers.
There is an inexorable trend towards voracious consumption of data by machines rather than being viewed on screens. These machines require richer and richer data from more and more sources and more and more asset classes. This paradigm shift is affecting the entire industry.
Market data is no longer about just the raw market data. This is true across the value chain except in a few niches such as low latency trading or very low liquidity and obscure assets. The key dynamic is about data and analytics in the appropriate bundle. In a world where the tendency towards an oligopoly was relentless, this bundling of analytics and data is creating a fundamentally complicated ecosystem which will allow numerous small firms to flourish.
Intelligent data and visualization which generate insights for investors are the norm as financial markets and instruments become increasingly complex. Quantitative analysts need detailed data sets to fuel their computerized strategies and mathematical models for predicting market moves. Market participants without the right datasets and analytical capabilities run the risk in being left behind in what is becoming a data arms race.
In this brave new world, investment institutions, exchanges and market-data vendors need to make decisions now to ensure they are relevant in this new information age and best placed to reap the rewards in terms of increased market share and enhanced revenues, those who are not prepared will miss out, stranded like beached whales. Investment institutions, exchange operators and market-data vendors face rapidly evolving business dynamics and competition. Seizing opportunities is therefore immensely important.
More and more asset managers are turning to non-traditional information, seeking out unique, powerful and actionable alternative datasets that can give them an investment edge, justifying their fees and generating alpha. Alternative data is becoming mainstream fueling trading algorithms and investment models for many of the leading buy-side and sell-side firms. To ignore alternative data is to put their business at risk. Exchanges are in an arms-race developing new data products, data distribution methods and analytics to fuel this demand.
“Our clients are increasingly looking to complement the proprietary real-time market data that they get from exchanges with a range of alternative datasets to help them generate alpha or manage their risk exposure. One of the biggest problems that they face when buying these niche datasets is how to overcome the on-boarding and due diligence challenges associated with buying data from multiple different companies who are often very small and not well-established.” Said Nicolas Rivard, Head of Advanced Data Services, Euronext. “Exchanges like Euronext can help clients to overcome these challenges by offering access to a range of innovative products, whether using our own proprietary analytics data or through acting as a trusted single source of validated third party content.”
Buy-side estimated total annual spend for alternative data is expected to hit USD2.6bn by 2020 with the alternative data industry projected to be worth USD350m in 2020. A recent study indicates that in 2018 budgets for alternative data increased by 52 percent, on top of an increase of 76 percent the previous year. This confirms that the alternative-data space is exploding. The buy side is fully alert to the transformative power of data and the ability to make data-driven recommendations that can give them an investment edge. However, there are many different types of data being offered, some of which will add value and some which will not. There is lots of noise so alternative data buyers need to be selective to ensure they decide on and choose the right data for their business to ensure it adds value/can generate alpha. This is and can be a massive challenge, so it is important they get it right. “Data alone is just noise and single points or single sources don’t provide context; what matters is how you tune into signals, aggregate for trends and analyze for relationships.” said, Andrew Simpson, advisor on strategy and market structure to Bolsas y Mercados Españoles, Grupo BME. “It’s critical to ask the right questions of the data in order to obtain useful output. “
Key concerns for buyers of alternative data include whether providers back test their data against a broad series of trading and investing models and benchmarks. “Data also needs to be trustworthy and so Exchanges have an important role to play as a regulated golden source for aggregation. Competition is and will continue to be fierce and exchanges have to respond to that, but their part in the data landscape is as important now as it ever has been delivering assurance and trust for customers.” Says Simpson.
One provider of alternative data is Trendrating who provide a unique methodology to rate medium to-long term trends. The rating (A, B, C, D) measures the direction & the quality of price trends using a proprietary multi-factor model, using flexible time windows. Benefit – faster capturing of trend reversals, higher returns, lower risks. Trendrating provides next generation analytics designed to capture trends early, identifying most of the winners and avoiding a significant part of the losers within a yearly time horizon. Institutional investors can consume Trendrating’s data confidently knowing it has been thoroughly validated with a clear and verifiable history. Trendrating has the history, it can and has been tested over many different periods and the results can be validated and the value add quantifiable. These advanced analytics are also a perfect complement to fundamental data in order to improve the selection and allocation process and to be in synch with actual price trends. They say that a picture is worth a thousand words, thus it is with Trendrating’s insights. Trendrating’s analysis comes with a pictorial representation, and as the market knows data will sell better if it is driving a picture, revealing patterns that were previously hidden and make otherwise unknown relationships visible.
“With buy side participants under increasing pressure to deliver higher standards of performance, profitability and efficiency, the availability of innovative, intelligent data and advanced analytics is seen as critical to achieving that goal. The clear trend of adopting new, mission critical content is growing rapidly, and these forms of new data have become a must have in many investment management firms.” said Roland Jordan, Chief Revenue Officer at Trendrating. “They will have a huge impact in the years ahead and those intermediaries and distribution channels who innovate and lead the way in offering to customers insightful and intelligent data whose value is measurable and actionable will capture the resulting benefits.”
Data is nothing without insight and the capabilities needed to make sense and use of alternative data, such as artificial intelligence and machine learning is quickly evolving. Until recently such “dark arts” were the domain of quantitative hedge funds, but now alternative data methods are spreading to mainstream investing and alternative data providers are now a must have in the dealing room, so much so that there is already speculation as to which specialist data provider will be acquired next.
Criticism of exchanges’ business models is starting to boil over on both sides of the Atlantic with some members of the trading community arguing that exchanges charge unjustly high prices for real-time trading data banks and brokers need. The exchanges, on the other hand, argue that their market-data prices are warranted given the competitive environment they operate within. Alternative datasets provide a new revenue stream for exchanges at a time when traditional market data charges are under increased scrutiny.
The LSEG’s Refinity acquisition, is but the latest indicator of the direction of travel with exchange groups morphing from utility-like trading centres to being hubs of financial data and technology, where exchanges partner with data and technology providers to leverage their brand and market reach and generate new streams of repetitive revenues while growing their profile as innovation leaders. Deutsche Boerse’s recent acquisition of Axioma and Nasdaq’s acquisition of Quandl at the end of last year and now the LSEG’s acquisition of Refinitiv indicate that a strategic repositioning of exchange groups and market data vendors is now well underway.
In the medium term the large dominant players will need to, as they say, right size and become more agile partnering or even acquiring niche players to deliver innovative solutions across the financial markets value chain. How they do this will be one of the more interesting business stories in the coming years.