Price gouging? New study finds market data providers consistently inconsistent in pricing, discounts

James Davenport has spent the better part of 25 years working in the field of vendor management in the capital markets, the last seven of them at Columbia Threadneedle Investments. For the past five years, he’s served as the global head of data management for the firm, which manages close to $600 billion of assets.

In this role, Davenport is responsible for all contract activities and negotiations at Columbia Threadneedle, giving him full visibility into the “inflation-busting” price increases that have been levied on the asset manager year after year. He’s also an executive at Ipug, the UK’s principal organization representing users of market data services on a technical, administrative, and strategic level.

“There is a particular problem with index providers, as there is an oligopoly of three, as you know—S&P, MSCI, and FTSE Russell. And they employ price power pressure to clients because they know that the opportunity to displace and find an alternative just doesn’t exist,” Davenport tells WatersTechnology.

End-users lamenting the ever-increasing cost of vendor data is a time-honored tradition. But a new report soon to be released by Substantive Research suggests that Davenport—together with numerous other data professionals—isn’t inventing imaginary opponents. 

When you look at inconsistency, it’s everywhere. It’s not just in the products and it’s not just in the licenses, it’s in the discounts as well

Mike Carrodus, Substantive Research

In March, the UK’s Financial Conduct Authority (FCA) is expected to release its findings after observing data vendors since last year as part of its Wholesale Market Data Study. The aim is to determine whether the benchmarks, credit, ratings, and market data service providers are functioning as they should when it comes to competition, as well as to measure any potential harm to investors if they’re not.

Ahead of that report, Substantive Research conducted its own analysis of the market—which WatersTechnology has obtained ahead of publication—and found that some market data users are paying hundreds of percentage points more than their peers for the same data and services, for the same use cases, from the same providers. 

The new study, which took two-and-a-half years to complete, measured the inconsistencies in the pricing models and discounts offered by major data providers to 40 buy-side firms, representing $17 trillion of assets under management, and 20 sell-side firms, representing $20 trillion of assets. It follows Substantive’s smaller study from last year, which found price disparities between asset managers buying comparable products and services from the same providers can reach as high as 2,632% in the ratings, ESG, and index data markets.

Mike Carrodus, founder and CEO of Substantive Research, says the study doesn’t seek to compare one market data provider with another. Rather, its point is to measure the providers against their own communicated pricing models. And, according to the study, they don’t stack up well. 

In the index world, the ranges of pricing from lowest to highest for the main three providers were 323%, 1,410%, and 402%, respectively. The study also found some firms are paying 14 times more than others for identical products and use cases—an improvement on 2022, when the widest range ran up to 26 times for identical products.

Ratings, ESG, and terminal providers didn’t fare any better in the study. Inconsistency in ratings pricing remained high, with pricing ranges for identical use cases for controlled peer groups at 263%, 354%, and 475%. 

As with index providers, when clients renew contracts with ratings providers, the proposed notional list price tends to increase significantly compared to the previous contract, the study found. However, the discounts offered to clients—ranging from 20% to 50%, depending on specific proposals—exhibited more uniformity than the quoted list prices, averaging 39%, versus list prices that can vary by as much as 200%.

Last year’s numbers for terminals showed inconsistency in pricing for the same access among firms of similar size and strategies with ranges of 578%, 337%, and 326% for three unidentified providers, while ESG prices experienced substantial annual increases, averaging around 33% for renewals and 35% for year-on-year increases. However, the study notes that the price of ESG contracts in general is dwarfed by other market data products, and some increases can be attributed to transitioning from heavily discounted trial rates to regular pricing structures as trial periods end.

“When you look at inconsistency, it’s everywhere,” Carrodus says. “It’s not just in the products and it’s not just in the licenses, it’s in the discounts as well. The original number is inconsistent, the amount that’s discounted is inconsistent, and the numbers that are discounted line by line as you expand your relationship are inconsistent.”

Of ‘monopolies and oligopolies’

The cost of data fees and complexities in licensing contracts has been a point of consternation for users over decades, largely thanks to a culture of price opacity, product bundling, and a lack of options. But some users are hopeful that a sea change may be ahead, as they await the FCA’s findings as well as a ruling from the Southern District of New York on anti-trust complaints against Cusip Global Services and its affiliates.

Davenport, Carrodus, and others in the industry describe nearly the same cost problem faced by users and perpetuated by the providers—and, somewhat counterintuitively, it has to do with discounts. 

“The feedback I hear from other Ipug members is that ratings vendors say, ‘You’re not on the list price. You’ve had a substantial discount, so we’ve got to put your prices up by X percent.’ X percent can be double digits,” Davenport says. “Three years pass, you have the next renewal, and then you get the same story. There’s no reference point, so it basically allows those vendors to go out and create fictional price points to increase their revenue, which is beyond really the price of production and dissemination.” 

Wherever you are using data and for what purpose, it enables them to bundle products [and] to find new ideas about how to license

Rudolf Siebel, BVI

Davenport, who says the work that Substantive is doing is helping to “shine a light” on the vendors’ pricing practices, contends that price disparities that run north of 500% to more than 1,000% “is crazy; that can’t happen.”

From the perspective of other European funds, it’s the same story. To that end, Rudolf Siebel, managing director of the German asset management and investment fund trade association BVI, says price transparency and, specifically, published price lists continue to be a demand in the association’s lobbying efforts.

In the European Securities and Markets Authority’s final guidelines on the Mifid II/Mifir obligations on market data, released in 2021, Esma said providers’ cost accounting methodologies should demonstrate how the price for market data is based on the costs of the production and dissemination of market data, and that market data providers should explain in their methodologies whether a margin is included and how that margin has been determined. And while exchanges and trading venues that disseminate market data have followed these guidelines to the letter of the law, Siebel says their disclosures are formulaic and usually contain only a few figures. Credit ratings, he says, have no such requirement, and Esma’s Benchmarks Regulation contains only one sentence—Article 22—that relates to mitigating the market power of critical benchmark administrators.

“We are faced with the commercial situation, and we are faced with monopolies and oligopolies,” Siebel says. “Wherever you are using data and for what purpose—which obviously can go far beyond the idea of what data you’re really needing and what data you should pay for—it enables them to bundle products [and] to find new ideas about how to license.”

Is change coming?

An update report on the FCA’s study published by the regulator in August of last year said that based on preliminary analysis, the data market is highly concentrated among the big three credit ratings agencies—Fitch, Moody’s and S&P. Its analysis also focused on seven market data providers, including Bloomberg and Refinitiv, which together account for a large majority of the UK market data vendor revenue among the sample of firms from which the FCA has collected data. That data, the update says, also “appears to portray a highly concentrated market.”

Ipug and buy-side trade body the Investment Association have been working in conjunction with the FCA on the Wholesale Data Market Study. Davenport says the industry is looking for price transparency, while trading firms want fees, related policies, and contractual clauses to be publicly published. Once the fees and related policies are out in the open, the FCA will be able to conduct future studies to assess whether these are fair and reasonable, he says.

“Action from the FCA is our one and only chance of changing current practices from these vendors and preventing future market disruption for end-consumers,” says Davenport, who estimates that market data costs for global asset managers must be in the tens of millions for each firm, though he declined to comment on his own firm’s market data bill.

If I’m honest with you, I can’t see it happening. It seems to me the FCA is toothless

UK market data consultant with 25 years’ experience

But others aren’t so convinced of the FCA’s impact on the matter. A UK-based market data consultant—also with more than 25 years’ experience in the field—agrees that price transparency is a massive problem in the market. The consultant would also like to see a published price list for products and services mandated. But they don’t believe they will see one—and if they do, they don’t believe it’ll go far enough.

“If I’m honest with you, I can’t see it happening. It seems to me the FCA is toothless. They’ve spent so many years just lifting the lid and dropping it back down again—posturing. It’s all kicking the tires. I don’t see the FCA making a difference,” they say, asking to speak anonymously, as they work with both end-users and the data vendors. 

The consultant, who says they're an optimist by nature, points to the fact that the FCA has already decided not to refer any markets in the scope of the Wholesale Market Data Study to the Competition and Markets Authority for a market investigation reference as one justification for their cynicism on the matter.

If there’s anything to take away from the study, Carrodus says, it’s the confirmation of an “entrenched culture” where the user is “never going to catch up.” Some of the study’s participating firms modeled out their market data bills using the current system of price increases over a decade or two to identify the point where paying for it will become economically unviable. And some firms, says Columbia Threadneedle’s Davenport, have already reached that point as smaller asset management firms have either shut their doors or been swallowed by larger entities based on profitability concerns. 

If it’s true that competition begets lower costs and higher innovation, then the inverse must also be true—not just in the provider markets but in the end-user realm, where, down the line, even the average investor may feel squeezed.