The IMD Wrap: Exchange, data vendor audits continue to rankle end-users—what will change in 2024?

During a market data audit, an exchange or data vendor—or a third party acting on their behalf—conducts an in-depth assessment of the data a firm uses from them. The goal is to ensure the end-user is using the data in accordance with its contract and license. That may range from counting how many human recipients can display a particular source’s data on their workstations, or tracking data from server to server, checking whether data is being used anywhere outside the scope of their agreement—for example, in a non-display app that likely has a different fee structure than for display on a terminal.

Suppose the data source discovers a discrepancy between what the firm has paid for and what it’s actually been using. In that case, the data source expects to be repaid for the lost revenue for however long they can show the discrepancy has existed. Also, depending on the terms of their contract, the provider may charge penalties and interest. So, what may have started as a small oversight can quickly add up to a substantial amount of money. Consultancy MarketDataGuru estimates that financial institutions owe an average of $3.9 million in back fees per data source, per audit, which would add up to billions, industry-wide.

In one of my proudest moments as a journalist, after exposing a £6.4 million fine paid by Citigroup to the London Stock Exchange Group for under-reporting its data usage, one consultant confided that they had urged clients to adopt what they christened “The Max Bowie Rule”—never report all your audit recoveries in one lump sum in your financial results, lest a nosy journalist spots them. In this March 2021 post outlining the challenges of dealing with audits, consultancy CJC cites a 6% increase in data revenues in a single quarter at Nasdaq due to higher audit recoveries.

These audits are, unsurprisingly, highly unpopular with end-user firms. Even firms with an impeccable track record of ensuring compliance with their agreements must still submit to regular inspections. 

Meeting the demands of an audit, producing reports, and performing the required checks takes time, resources, and staff—staff with full-time day jobs addressing other essential matters. And they have to do that for each exchange or vendor who insists on an audit. While not every exchange or vendor audits the same firms every year, users say it’s not uncommon for large firms to face half a dozen to a dozen audits per year, depending on the number of data sources they use and the complexity of their operations—in fact, Keiren Harris of MarketDataGuru says some banks can be forced to manage more than 20 audits simultaneously.

Obviously, no exchange or auditor can access a firm’s systems without permission, but the alternative is potentially getting their data switched off. Of course, this doesn’t make exchanges evil empires—nor do audits. There’s nothing wrong with protecting one’s IP—especially when it’s enshrined in a license that firms have already agreed to adhere to. Firms can rightly object to costs or terms of their licenses during the negotiation process, but once they decide to treat data in accordance with it, they need to abide by those terms. It’s a prickly topic, and complex to keep track of. 

Not long ago, in an effort to reduce the burden on both exchanges and end users, and to reduce the tension and hostility that can exist during this process, Canadian exchange group TMX introduced a new approach to the process, getting rid of intrusive audits in exchange for a series of “true-ups” and honesty statements. I’ve been told that another large exchange has followed this example, but I have not seen any proof to back those claims up.

Others, though, are expanding their range of targets. As larger firms get their house in order, exchanges are taking aim at second-tier banks, asset managers, hedge funds, and retail brokerages, among others, according to MarketDataGuru.

And with the cost of market data continuing to rise, there’s more at stake: exchanges and vendors have more to lose if they don’t aggressively audit and recover lost revenues, and with global economies still hanging in the balance and major consolidations targeting cost savings, user firms have a greater incentive to try to cut costs.

But these efforts need to be strategic and long-term, and rooted in proper data governance, rather than quick fixes designed to reduce data costs in the short term. Simply trying to slash usage overnight is more likely to lead to errors and “shadow IT”-like, off-book data purchases by individual traders, desks, or data scientists. These data sources are not centrally tracked and reconciled in a firm’s central inventory management and billing systems. They’re also exempt from the skilled oversight of experienced market data professionals. 

But, as reported previously by myself and then Anthony Malakian, there’s a brain drain underway in the world of data: experienced professionals are retiring, while others are being lured away by other exciting opportunities. For all the sexy topics like AI, the basics still matter most of all. Get the foundation wrong, and everything you build on top is destined to fall.

Data managers are much like the goalkeepers of financial markets: typically overlooked, rarely thanked for their saves, and usually only recognized when something slips through the net. But they’re the ones who will either save you from—or expose you to—the dangers of data audits. Correctly done, with thought and knowledge, a data manager can save firms money. Conversely, forced into reactionary cost cuts or layoffs, firms potentially expose themselves to greater risk—and larger fees and penalties in the long term.

I hate to end the year on such a largely pessimistic and cautionary note, so let me also say this: a good data professional who understands not only the perils and pitfalls of data licensing, but also the business as a whole, can be your greatest ally in procuring the data assets that will fuel expansions and new business initiatives. 

All too often, firms wade into a new business without understanding the data implications. For example, they will create index-linked investments without properly licensing the index data itself. Data managers not only know this, but will also be able to help you assess the cost burden of data on any strategy and its ultimate bottom line.

This is the fifth installment of the IMD Wrap. For those that don’t know what “IMD” stands for, it’s Inside Market Data. 

Inside Market Data (originally titled Micro Ticker Report) is the oldest of the WatersTechnology brands, originally appearing in 1985. And I was proud to serve as editor of IMD for more than a decade before it was merged with Inside Reference Data and combined into the site you’re reading today. While the name went away a few years back (don’t get me started), Inside Market Data’s ethos still drives our data coverage on WatersTechnology.com.

The IMD Wrap will appear biweekly in 2024, usually on Mondays, unless it’s a holiday (like New Year’s Day). Otherwise, it will go up on a Tuesday. On the weeks that the IMD Wrap doesn’t go up, the Waters Wrap, written by the aforementioned Anthony Malakian, will go live and will focus more on technology and business strategy. If you have ideas for ways that we can provide more value with these more opinionated columns, please let me know: max.bowie@infopro-digital.com.