Market data suppliers and consumers continue to argue over the complexity of different market data licensing models—something that represents an increased challenge for firms simultaneously grappling with demand for more data and potential budget cuts resulting from the Covid-19 outbreak.

This comes at a time when vendors and exchanges are considering the option of bespoke data packages in a bid to resolve some of the issues around cost and complex data agreements.

“The industry has been complaining about the fact that we have very lengthy data agreements, that these data agreements change all the time, and that exchanges always come up with different fees for things we don’t always understand,” the head of regulatory policy at a US-based hedge fund tells WatersTechnology. “We have audits that take place all the time, sometimes the industry gets fined because they have missed a line that has changed in a new agreement, and you basically have to have an army in your own firm [reviewing the contracts] in order to make sure that you’re not missing any changes.”

According to James Watson, head of global sales at Swiss interdealer broker Tradition, the answer to this is disaggregation—breaking down bundled datasets into smaller chunks that consumers prefer to buy separately.

About three years ago, Watson and Scott Fitzpatrick, CEO of the broker’s TraditionSEF swap execution facility, set out to disaggregate Tradition’s data packages. The idea was to enable clients to pick and choose the data they want to pay for. In June 2019, Tradition restructured its data and information services division and relaunched it as TraditionDATA, together with an in-house delivery channel. Fitzpatrick became its head, while retaining his role at the SEF.

“I’m a great believer in disaggregation. The Financial Conduct Authority and the European Securities and Markets Authority said the industry had to look to disaggregate data, so we took the chance and lot of people laughed at us, a lot of people said that you are going to take a hit on our bottom line. But what we ended up building was two important things: trust and belief, which in turn led to transparency from the clients,” said Watson, speaking during a webinar held by data industry association FISD on May 12.

Watson said his idea found some critics in the enterprise data industry. Some warned that dividing up packages could impact revenues. But he said that clients had felt trapped in enterprise agreements. Regulatory shifts in the EU in 2018—namely the unbundling of execution and research under Mifid II—were also a motivator for the firm at the time.

‘Fallacy’

But the idea of data disaggregation isn’t popular with all market participants. Some worry that data providers would charge higher fees for each unbundled dataset, making it more expensive to acquire the same data overall. 

Watson cited iTunes (now Apple Music) as an example of consumer behavior—enabling people to choose the songs they want to listen to and to create their own playlists, rather than being forced to buy an entire album, similar to buying an entire enterprise data package. Yet, Stephen Dorrian, head of market at Cboe Europe, who also participated in the webinar, said it would be a “fallacy” to think that an Apple Music or Spotify model for distributing market data would solve content licensing issues, as they are controlled platforms, and the content providers (i.e., the musicians) own the rights to their songs. Applied to market data licensing, problems arise when it comes to proving usage, making sure the client is getting what they paid for, and netting the cost of the data across the vendor platform and third parties.

There is no one-size-fits-all approach that suits every type of firm that consumes market data. There is a case for offering concise data packages, such as per-instrument pricing information, Dorrian said, adding that there is also still a place for enterprise data packages, as many tend to include a discounted price for firm-wide or multiple-use, compared to per-user prices. Cboe Europe, for example, caps its internal user fees for a firm at 200 users, as an internal enterprise license.

Pricing for specific data packages tends also to scale less proportionally, meaning that a firm can end up saving less than expected if it needs to include more and more bespoke packages. Licensing new packages and having to get additional budgetary approvals for more data if demand goes up throughout the year can also be difficult. And conversely, these agreements are typically inflexible when it comes to reflecting firms’ evolving priorities and needs—for example if the current Covid-19 pandemic upsets businesses and budgets.

“I think you can look at it both ways. It’s really about getting the right fit for the right customer. And to the point about ‘Are they [enterprise data packages] attractive in a downward market or a declining market’, these are not set in stone. The caps certainly are, but firms can always switch to pay per user, which becomes more cost-effective,” Dorrian said.

Enterprise data packages typically offer all-you-can-eat access to data, but do not realistically suit all companies because they can come at a hefty price tag. And while heavyweight investment firms have the appetite and the financial means to buy into these deals, they are less accessible to smaller hedge funds and banks. These offerings tend to include a set fee for the datafeed, along with a variety of other charges, depending on the number of users, applications, and how the data is used—for example, whether it is used in data displays, in non-display applications such as pricing engines or algorithmic trading systems, or for distribution to other users internally.

A Complex Barrier

However, one of the biggest sources of contention to date surrounds the complexity of the data agreements, where some data vendors and exchanges update their fee structures as often as every six months, or less. Users of the data, who are typically members of several exchanges or source data from multiple providers, need to have dedicated teams of compliance professionals responsible for reviewing these legal contracts and amendments.

“I think the complexity point is a good one. At least when we’ve tried to offer more and more packages, we get confused and then we think, ‘Well goodness, if we are confused, the clients are probably going to be confused about what’s actually available in each package, and which is the most suitable price for them,’” said Daniel Smith, SVP of strategy at Dow Jones, during the webinar, referring to the company’s media business and its news content. “It’s something that can quickly become unmanageable. On top of that, you would then need to add in all the various legal rights that may go with different packages and try to evaluate them also.”

Another key concern is that exchanges do not publicly disclose how they calculate their pricing models to clients—an issue that has received greater attention since last year, when the Securities and Exchange Commission (SEC) rolled out regulatory guidelines for exchanges to submit detailed disclosures for any fee changes. In October 2018, the SEC also blocked both the New York Stock Exchange and Nasdaq from raising some market data fees, saying the exchanges failed to justify the increases.

“Exchanges are not very transparent when it comes to explaining how they charge for the data and on which basis, because if it’s supposed to be related to their cost, they should want to justify how much they’re charging the industry. They’re supposed to provide this information,” the head of regulatory policy says.