At a time when global exchanges are snapping up over-the-counter (OTC) securities and derivatives marketplaces that have traditionally been the domain of brokerage firms, industry observers say (and not always in a good way) that brokers are conversely becoming more like exchange operators—not necessarily in terms of the markets or instruments they trade, but rather in their approach to licensing the market data generated from their broking operations.

Some of this is not a bad thing: Many firms beyond the largest interdealer brokers (IDBs) have under-utilized their data assets over the years, giving data away only to trading clients, and ignoring potential interest from other areas within the financial markets. And those that have tried to capitalize on this interest have found themselves unprepared to handle the commercial demands of running a data business add-on, both in terms of having the appropriate commercial terms, pricing, and data-usage policies in place, and in terms of staffing, with brokers sometimes taking on additional duties for data sales.

Tom Roberts is the founder and CEO of UK-based energy, freight, and commodity brokerage Arraco Global Markets. He says that as the main exchange markets and their data become more commoditized, traders are turning to less liquid listed and OTC marketplaces to achieve greater profits, and brokers are finding their expertise in these less liquid assets—and, crucially, their data—is in high demand, and therefore more valuable than ever before.

Price discovery in these less-liquid markets is more difficult, and new entrants to these niche fields face a knowledge gap, Roberts contends. This creates opportunities for brokers who can corral and structure this information.

“We’re generating data that’s useful and that we can monetize,” he says. “And I’m not just talking about regular Brent Crude prices—these are highly-illiquid markets,” that only a handful of players operate in.

And the broker is looking to capitalize. Arraco is in the early stages of creating a dedicated data business. Currently, the broker doesn’t monetize its data directly, but makes some price data available via TMX-owned energy trading software vendor Trayport, and produces a daily “Closing Run” report of interesting trades, high volumes, and other notable factors.

“I’ve been talking to our board about how we can use our data to attract interest in the markets that we broker,” Roberts says. “So we’re definitely exploring it—the question is, how do we make our data available to clients.”

Arraco is far from the only IDB trying to figure out an appropriate data-monetization scheme.

Stick and Carrot

To sell their data to a wider audience and protect the value of that data, brokers need to establish policies and processes. The fear, though, is that they may follow the kinds of policies that have been established among exchanges.

These policies are often geared toward generating higher data revenues for the source, and to protect those revenues, exchanges use the stick of a data audit to keep users in line. Audits scrutinize a client’s data usage for any evidence of use beyond the strict terms of their contract, but they can be time-consuming and operationally burdensome for clients.

Today, Frank Desmond is the director of data advisory for FXD Data, but prior to that he was CEO of TP Icap’s Data and Analytics division and was global head of content at Reuters before that. He says that while exchanges were “the original architects of audits,” IDBs are taking notice and staffing up. “I’ve heard in the market that certain large brokers have been increasing their auditing capacity.” 

Mike Kirby, managing director of MWK Data Services, has more than 30 years of experience working at IDBs, including 20 years in senior data roles at Prebon Yamane and subsequently Tullett Prebon Information as head of the Americas, where he served alongside Desmond. He says that historically, auditing was “not something IDBs ever really did.” This is set to change, though, because brokers see how exchanges have turned data sales into a substantial percentage of overall revenues, and want to follow suit.

“I believe that those times [of brokers not practicing audits] have changed and, currently, interdealer brokers are trying to be more like exchanges, not only by performing more audits, but also by changing how they package and sell data,” Kirby says.

As an example, IDBs are now becoming more granular in how they break down metrics like derived data redistribution and index/benchmark creation. “They are under great pressure to increase data revenues,” he says.

Aaron Garforth echoes this sentiment. The co-founder and CIO of exchange data policy information provider Axon Financial Systems, and chief content officer at parent company TRG Screen, says his company is having more conversations over the last few years with brokers looking to monetize their data.

“Some are taking a lead from exchanges as they realize their data has value for other uses beyond just trading with them,” he says. “For example, we were talking with one broker that was initially keen to follow exchange best practices, but the person in charge needed to achieve a revenue target.”

To further highlight the point, some industry observers are concerned that the largest IDB, TP Icap, may be adopting a more aggressive approach to enforcing licensing after hiring Eric Sinclair, former head of data at Canadian exchange TMX Group.

Over the past two years, the broker has also hired other former exchange data executives, including Caroline Watson, former head of the customer compliance unit at Deutsche Borse, as chief data compliance officer, and Noemi Lusztig, who was named Waton’s deputy. Lusztig was previously a sales manager in the Intercontinental Exchange’s pricing and analytics department, and she had spent more than 11 years as director of market data at the Budapest Stock Exchange.

Sinclair tells WatersTechnology that these hires are part of a strategy to grow TP Icap’s data business overall. During the last three years, the firm has hired 20 employees in product management. Included in these new hires is Jonathan Cooper, who was named global head of sales in 2019. Cooper has previous sales experience at S&P Global Platts, FTSE Russell, TradingScreen, and Bloomberg. Sinclair says Cooper will continue to add resources this year to focus on segments including the buy side, corporates, and energy and commodities markets.

“We have hired proven people from a variety of organizations, including market data vendors, benchmark and index providers, risk management providers, regtech solutions [providers], regulators and exchanges,” Sinclair says. “Given that the other industry sectors have more experience in market data relative to the IDBs, we accelerate our learning from hiring experienced veterans.”

He says that rather than seeking to emulate exchanges, the brokerage industry is simply playing catch-up to data vendors and exchanges. He believes that these companies are “much more advanced than the IDBs in terms of commercial practices relating to data.”

Having recognized this, TP Icap is addressing the issue by making strategic hires, such as adding Mark Ellul as head of commercial policy. Ellul is the former head of sales for StatPro’s StatPro:Source unit. He has also held senior roles at the London Stock Exchange Group (LSEG) and Rimes Technologies relating to sales and strategic partnerships. “We’re going further in terms of shaping a new future,” Sinclair says, which includes new types of policies to serve new types of data consumption, such as cloud distribution.

Different Strokes for Different ‘Brokes’

Because of its dominant market share, TP Icap may be suited to adopting a model similar to exchanges, which typically have monopolistic features insofar as they control trading in certain instruments—and, therefore, their market data—whereas the broker space has traditionally been more competitive, says one former broker data executive, who adds that each commands a different skillset.

“The further away you get from cash, the more complicated the instrument becomes, and if you’re selling to an analyst or someone in independent price verification, you need to understand the product—because they will,” says the source, speaking anonymously because his current role involves consulting with various brokerages. “Selling cash equities data has always been more about taking orders, while derivatives has always been a harder, more sales-oriented business.”

However, this model is changing. Regulatory bodies around the globe are taking harder looks at exchange monopolies and data practices, but at the same time, the IDB universe has seen significant consolidation, leaving the largest institutions—including TP Icap (itself the result of consolidation between various brokers over the years, most recently Tullett Prebon and Icap), the combined BGC–GFI, and Tradition—to command a more dominant share of the market.

As a result, Suzanne Lock, founder and CEO of EOSE Data, which helps data owners set up their own data businesses, says it’s not surprising that brokers would start to behave more like exchanges when it comes to licensing data. Lock, who in previous roles conducted audits for an exchange and spent 13 years in data product management and sales roles at interdealer broker Tradition, adds that unlike exchanges, the complexity of how data on OTC asset classes is used also makes it harder to establish standard data policies.

“It really does vary customer-to-customer. You can’t ‘rinse and repeat’ with the same license and policy, because every use case is different. The use case for foreign exchange is different from commodities. The users are different, and how the data is used is different,” she says, adding that she doesn’t recommend heavy-handed audit approaches to data owners who are trying to be agile about getting their data to market—especially since under-reporting is now rarely intentional, and usually results from mis-interpreting descriptions within contracts. “If you ask the right questions, you often get better answers than an audit, where a client might be trying to hide any mis-use.”

During his tenure at TP Icap, FXD’s Desmond says a collaborative approach always yielded better results, and that while the firm always reserved the right to audit, it only exercised that right sparingly and in extreme cases where clients were clearly breaking the rules around how they used the broker’s data. “When working with content owners in this area, my advice has been to follow a more collaborative, less confrontational approach. Overly aggressive tactics have, in certain circumstances, proved counterproductive.”

‘Just Good Business’

So while the introduction of formal policies by brokers might make clients worry that fees and audits will automatically increase, many say it’s just good business, and that regardless of a broker’s plans, anyone in the business of providing data to others should have a proper licensing process in place, says Mark Schaedel, a former NYSE and Markit exec who is now serving as a strategic advisor to DataBP, a company that builds client-facing marketplaces for organizations to automate data sales activity.

“Before a broker can diversify its revenues, it needs to know where its data is going, and to manage those customer relationships. That’s the stage at which we see most companies at the moment,” he says. “Without that baseline, you can’t have any kind of negotiation with clients around compliance.”

A broker’s role as an intermediary is built on relationships, and therein lies the rub—implementing new data fees and restrictions on how their data can be used, while necessary, can be tricky and place strain on client relationships, especially where the usage of data has become more complex, Desmond warns.

“Counting ‘bums on seats’ used to be a pretty straightforward exercise,” he says. “But if you take broker data being used in complex IT environments such as risk management and other downstream activities around the world, then an audit can become fairly intrusive, often involving very sensitive underlying client systems. And if the relationship with the client is not strong, it can create or exacerbate a situation.”

However, he adds that in cases where a client is not deliberately misusing or mis-stating data usage, an audit—conducted properly and with the findings presented openly and transparently—can provide a useful tool for the client to obtain and allocate budget to fix the problem. And in the “limited situations where there is a failure to engage or indeed comply with agreed usage rights,” an audit can justify “harsher measures [that] may be necessary to protect the content owners’ commercial interests,” he adds.

Beyond protecting revenues, there’s another reason why audits are likely to become increasingly more commonplace for IDBs: intellectual property, says TP Icap’s Sinclair.

“Licensing of IP—which is effectively what proprietary data is—is well understood and accepted in a whole host of other industries, be it film, media, whatever. Data is no different,” he says, adding that “in a world where data is increasingly important and valued, scrutiny about how data is used should be understood and welcomed.”

One audit specialist already sees evidence of brokers more strictly managing their licenses, and they expect this to increase, especially since some usage trends seen among exchange data customers should also impact demand for broker data.

The source says that today about 20% of exchange-data clients are paying for application usage of data—a far cry from what that number should be. “Since this [data] would be used by everybody calculating risk in real time to meet regulatory requirements, that figure should be higher—more like 80% or 90%,” they say.

T&Cs Need TLC

Identifying these instances can be a challenge at the best of times, but especially when each marketplace’s terms and conditions differ. And despite some industry efforts to standardize exchange contracts, these remain largely individual, and use different definitions, creating confusion among clients. So even though brokers may want to follow exchanges’ examples on commercializing data, getting the fine print right may still prove a challenge. And if exchanges don’t offer the best-practice model for brokers to follow, where should they look for guidance instead?

Clearly one benefit of hiring former exchange staff, like TP Icap has done, is that they bring with them a working knowledge of how exchanges structure and enforce agreements. But while it may appreciate exchanges’ abilities to generate revenues from data, that doesn’t mean the broker will go about it the same way.

In fact, Sinclair says he believes that end-user subscriptions will be “less significant over time,” and as such, TP Icap is “unlikely to make this a core part of our license policy,” calling it an exception and not the norm for the firm’s business model going forward. “Instead, our priority is to consider new use cases, including commercial policy relating to meeting our clients in the public cloud,” he says.

But whatever strategy a broker employs towards licensing, Arraco’s Roberts says it’s important that policies make it clear that data has a cost, and that those costs are easy to understand. “You have to establish at the start what purpose the data is for, and what is being asked of it,” he says.

New Normal? More Like No Normal

In reality, there is no “norm,” with brokers mostly appearing to forge their own paths independently of one another. In fact, some are still grappling with updating legacy contracts to be able to properly manage the agreements they already have, let alone embarking on new initiatives.

“Brokers don’t have standardized contracts,” the audit specialist says. “The bigger IDBs are trying to standardize those internally to level the playing field so that they don’t have some clients with special deals, because it’s hard to manage if you have one set of rules for Bank A and a different set of rules for Bank B. It makes customers’ lives easier, but the main driver is that it makes the brokers’ lives easier.”

Beyond standardized contracts, brokers face a potentially larger obstacle toward monetizing their data, in that they don’t always know fully how their own data is even being used, adds Axon’s Garforth.

“Brokers seem to be working in a bit of a vacuum,” he says. “Broker data has typically been delivered and contracted via vendors like Refinitiv, so a broker doesn’t always necessarily know everywhere that their data is being used.”

And that’s key: Once a broker realizes its data has value, it needs to obtain an understanding of how its data is being used, so it can determine the appropriate level of controls to put in place, and create policies and pricing structures that address all the use cases for its data.

James Watson, global head of sales at TraditionData, the data arm of interdealer broker Tradition, argues that this is where his company is looking to create a differentiated service. He claims to be taking a different route from other brokers, by unbundling data packages and selling data a-la-carte on an “iTunes-style” model where consumers can buy their favorite songs without having to purchase an entire album.

Watson devised the strategy with global head of TraditionData and CEO of the broker’s swap execution facility (SEF), Scott Fitzpatrick, with whom Watson had worked earlier in his career at rival broker GFI. Once reunited at Tradition, the pair set out to differentiate Tradition’s approach to data from its rivals.

The strategy works both ways: It allows clients to add data as needed, without having to sign up for more expensive bundles just to obtain one specific dataset, but it also allows them to turn off specific datasets, rather than renegotiating their entire spend with the broker. “If you’ve already integrated the right pricing and support model, then if a client needs to cull data from other sources, they just come to you for advice,” Watson says.

One area where the new model almost hit a snag was the broker’s relationship with data vendors that traditionally served as the sales and distribution network for its data. Vendors have traditionally provided a conduit to end users for brokers’ data. Where data is particularly valuable, vendors have signed exclusive distribution agreements for sought-after datasets, but in many cases, brokers—especially those beyond the bulge-bracket IDBs—did not derive large revenues from vendor relationships.

“In the past, we’d been very dependent on vendors for sales and distribution, and arguably our business model was over-weighted in favor of the vendors managing the end-to-end process, so we got some push-back from the vendor salespeople when we started talking directly to the clients about content,” Watson says.

So TraditionData had to undertake an education campaign, explaining that the broker wouldn’t undercut the vendor and that they would still sell Tradition’s data over the vendor’s platform. The vendors have since come on board, he says. “In addition to expanding our ability to provide data to customers directly, we have worked well with the vendors and their global sales teams to improve that working model and how efficiently we engage with them.”

Size Matters, So Does True Value

Watson says any broker must first determine what makes its data unique versus what is commoditized. From there, it can then assess the true value of that data, and what the broker can charge for it. Once it has determined that “true value” price point, it must then decide how much it is willing to give up to a vendor or partner to distribute the data, if the broker itself is unable or unwilling to create its own direct sales organization and delivery mechanisms for its data.

How long it takes for a broker to get to a point where it can feel confident that its data is both generating revenue while protected against abuse depends on how far along they are in the process to begin with.

Once a broker has established its policy, it needs to enforce the execution of new license agreements with clients who receive the data, regardless of whether they have a trading relationship with the broker, and that the license clearly explains what restrictions are placed on the data.

Of course, as one of the largest IDBs, Tradition can afford to throw its weight around. But what about smaller brokers that in the past haven’t had the heft to command fees for their data—or have simply chosen not to charge for it—but now see it as an important potential revenue line?

This is part of what Kirby’s advisory firm aims to help rising brokers address. “If a broker is looking to grow its revenues from market data, I would want to ensure it has an extensive policy document to provide to subscribers, which is reflected in its license, and which includes audit rights, regardless of whether or not they plan to use those rights … but so that, for example, if the broker thinks someone’s usage doesn’t reflect what they’re paying, the broker has the right to protect itself,” he says.

And in this respect, though end-user firms are those that end up subjected to audits, Kirby says brokers must first make sure their own house is in order and that their staff are not contributing to clients’ non-compliance, such as ensuring that brokers, as well as clients, are fully aware of new policies, and know not to distribute proprietary and fee-liable data—such as pricing spreadsheets—to clients as they might have in the past.

“That’s what I would advise to help brokers generate revenue from market data: First, stop giving it away, or maybe only give it to those doing more than a certain amount of business with you every month. And second, exercise control: If a client sends your data to the wrong person, or even sends it to another broker to get a better price, that would be a breach—if you have a policy in place,” Kirby says. “You can still be a nice guy about it. You’re just doing things properly.”