If it ain’t broke, broker it: IDBs explore new ways of selling data

The world of broker data has seen its ups and downs over the years. In a few famous cases, vendors would sign lucrative, exclusive contracts to carry certain broker datasets—such as Telerate’s exclusive deal to carry Cantor Fitzgerald’s US Treasury data—though in most cases, brokers gave away their data to get exposure to vendors’ client base so as to drive interest in trading with them.

Now, brokers are selling direct to customers. Traders, seeking new sources of alpha, are turning to new markets, specifically looking for illiquid, less crowded, and less well understood asset classes. But targeting these markets—whether thinly-traded, on-exchange contracts, or over-the counter asset classes—presents challenges, notably a lack of knowledge of how these markets behave, and difficulties in obtaining reliable data.

That’s where brokers come in: Two good examples are Swiss commodities broker SCB, which began setting up a formal data sales division in 2019, and UK-based energy and freight broker Arraco, which is starting the process now. In both cases, the brokers realized that they command leading market share in certain asset classes, where their expertise makes them the broker of choice. As such, their data is the gold standard for those assets, making it potentially much more valuable than something that is only given away to firms who actively trade with them. Instead, they want to sell it to others who can use it to support trading in similar assets, or for pricing and risk management, or who want to better understand those markets. 

This takes a fair amount of effort: first, packaging data into a product, and understanding how users want to consume it; second, building out product management, development, and sales staff; and third (and crucially), putting in place a legal framework to govern how that data can be used, and what it costs. That’s a major challenge: figuring out the data’s true value, then knowing what restrictions to place on it, and how to articulate these within formal and enforceable license agreements. Thankfully, there are experts who’ve been through the brokerage business who now work as hired guns, guiding firms through these difficulties.

Even the largest interdealer brokers that already have big data operations are rethinking how they structure them, noting how exchanges have been able to repackage data and raise data revenues. Some are even following the exchanges’ examples around data license policies and measures such as data audits. Others are seeking to differentiate themselves by figuring out new approaches.

Another possibility is that these large IDBs could offer smaller peers access to their own distribution network under joint ventures, broadening the potential client base for small brokers—and importantly, making that process much easier, quicker, and potentially cheaper—while also making the IDB’s data group a go-to for clients in search of all types of data, from the common to the niche. 

In 2019, Interactive Brokers set up a Swiss data vendor subsidiary that consolidated market data along with more than 100 sources of news and research. Others could take a similar approach, becoming a storefront for OTC data and valuable commentary and analysis—the Amazon of broker data, if you will. They could also offer Amazon-style payment and fulfillment services, signing up clients, e-signing contracts, and leaving the smaller broker to just package up their data, ship it out, and wait for payment. There’s another benefit to brokers willing to take this approach: Not just streamlining the data license policies associated with broker data, but potentially standardizing them. 

A broker’s proprietary data is its IP—and it is proprietary, unlike exchange prices, which are a public record of bids and offers by participatints—and understandably, brokers want to protect that, which is why they include the right to perform data audits in their contracts. However, burdensome and intrusive audits make even the most contract-abiding clients wary—not just that the broker might discover unintentional misuse, but that it will consume time and resources. But get the licensing right, use easy-to-understand standards, and you may never need to exercise that audit clause.