The IMD Wrap: Price you gotta pay

So, I have this weird, recurring dream: I’m in the supermarket, trying to do my shopping on a budget. But there are no prices on the shelves. I ask one of the employees, “Excuse me, how much is a dozen eggs?” And the employee replies, “I’ll tell you, but it will cost you 10 cents for each price. And on top of that, it depends on what you want to use the eggs for. If you want to boil an egg, that’s one price, but if you’re planning on making a ‘derived’ work, like a cake, that will cost more. And if you plan to share the cake with others, that will cost even more. AND you have to use the self-checkout machine, but if you scan any items incorrectly, we’ll charge a penalty.”

And then I realize I’m naked.

This—minus the part about being naked (at least, I assume minus that part)—isn’t just a dream; it’s an ongoing nightmare for many market data professionals at banks and buy-side firms, who have historically likened paying for market data to paying to look at a price list. After all, they don’t really want to buy the data itself; they want to buy the stock, bond, or derivative—but first, they need to know how much it costs.

(And yes, I know there’s a whole separate conversation about how data—though often not traditional market data that I’m describing here—is itself becoming the asset, and has intrinsic value to those who would use it to gain greater insights. Perhaps that’ll be the subject of a future column—get in touch to share your thoughts on that!)

So, how did this situation come to be? Surprise! It’s these firms’ own fault.

Back when everyone traded on an exchange floor, prices were communicated by yelling or on big, wall-mounted electronic displays. Then, with the advent of electronic trading, firms wanted to trade from their own floors. And a cottage industry sprang up collecting market data from exchanges and distributing it to firm’s offices elsewhere via first-generation terminals from companies like Quotron, Telerate, and ADP (yes, the same ADP).

And of course, the vendors charged for the costs of data collection, aggregation, distribution, display, and the development they put into it. And they charged more on top—in some cases, so much so that vendors were literally rolling in cash based on products that pretty much sold themselves. And exchanges also got in on the act, realizing there was a perceived advantage in capturing data directly from the exchange via a digital datafeed.

To be sure, data sources and distributors do incur considerable costs to do their jobs. But while market data managers have always argued that fees are too high, and haul their vendor reps over the coals in response to every price increase, fees are increasingly attracting the scrutiny of regulators, such as the UK’s Financial Conduct Authority, which is working on a Wholesale Market Data Study to examine the costs of data. The FCA has just closed a comment period and is expected to publish its findings next year.

Why is there extra interest now? Because budgets are under pressure. As Keiren Harris, a Hong Kong-based market data consultant and principal of MarketDataGuru, recently told WatersTechnology in an article about data catalogs, this year’s economic uncertainty, interest rate hikes, bank collapses, and geopolitical concerns such as the wars in Ukraine and Gaza have prompted firms to tighten their purse strings.

“Banks now are not only saying they need to control costs, but—where some parts of their business aren’t making money—to cut costs. And often, the first thing to go is the market data managers who know what they’re doing,” Harris said. “So, people have to cope with far more complicated products than five or six years ago, but don’t have the experience or training. And when you’re dealing with 300 or 400 vendors, that’s too much.”

Seems like the perfect opportunity to slip in a price hike or two, right? I mean, it’s not like they’ll notice. Except, of course, people did notice.

Aside from regulators, London-based research firm Substantive Research, which recently published a study on market data pricing, noted that ratings agencies and index providers have been aggressively raising prices during contract renewals, with increases of around 12% to 13%, but with “a small number of providers … repricing clients by up to 600%.” Now, it’s true to say that interest rates and inflation are high, and that any price increases multiply the effect of that burden. Plus, these may be outlier deals, and there may be extenuating circumstances around some of these higher multiples, but the study—which surveyed 40 asset managers in Europe and North America—shows an alarming trend of increases.

Index provider MSCI’s recent Q3 financial results demonstrate several of these forces at work. On the one hand, the vendor demonstrated impressive retention rates of 95%—though critics of index providers have long noted that benchmarks are incredibly “sticky” and hard to move away from, especially if investor clients have investments tied to a specific vendor’s index. On the other hand, it also acknowledged increasing prices, while also admitting that clients’ budgets are “under pressure”. Officials also noted that when the company does increase prices, it tries to tie those to an increase in value that it can offer to clients.

For example, MSCI highlighted its recent acquisitions of Burgiss, a provider of data on private assets, and carbon markets data provider Trove Research. With Burgiss, MSCI can now provide transparency that’s highly needed by investors across public and private assets held in their portfolios, said chairman and CEO Henry Fernandez on the vendor’s earnings call. He added that combined with MSCI’s existing private real estate data, “MSCI now has the world’s largest, highest-quality database of private assets, covering $63 trillion.”

Meanwhile, Trove strengthens MSCI’s growing climate and ESG data businesses. “As the world pushes for net zero emissions, investors need to understand how companies are making progress towards that, and how they are using carbon credits,” Fernandez said. “By integrating the data and capabilities of Trove with our own climate solutions, MSCI will have a robust set of tools to provide transparency in the global carbon markets.”

The value proposition for clients—and the revenue-generating opportunity for MSCI—is by combining the two, augmenting them with MSCI’s existing data, and leveraging MSCI’s distribution channels, salesforce, and client relationships, and developing new tools that will provide “a whole portfolio of investment tools used by investment managers and allocators,” Fernandez said.

“One of the most frequent questions from clients is, will we develop better benchmark indexes for private assets … and private credit and climate,” Fernandez said, before delivering this nugget: “We believe that the Burgiss product line is fairly under-sold among LPs around the world, and we’re taking steps to change that by having out salespeople work with Burgiss’ salespeople around the world.”

All of which may well help clients gain more value from MSCI’s tools, but which will undoubtedly come at a price. So, what needs to change? Just as how streaming movies busted Blockbuster, and on-demand TV is shaking up cable and satellite programming, people have been talking in hushed tones about data-on-demand for many years. The challenge was twofold: technical, and commercial—i.e., how to price data differently, and who would demonstrate the will to do it.

The technical challenge has largely been solved. Thanks to the cloud, the industry now has the technical capabilities to offer an online shopping-like environment. Indeed, online data marketplaces already exist, and though they may have met with limited success thus far, their use is almost certain to take off in the retail, non-professional, and active trader space as new aggregators such as Quasar Markets reinvent how data is licensed and distributed, and in my opinion, this will ultimately drive greater usage up the value chain into the institutional user space. And with a more transparent pricing and procurement interface, APIs, automation of ordering, approval, inventory management and billing, and data catalogs that streamline data management and aid discoverability, we’re really not that far away from buying data in the same way that many people now buy everything from books and CDs—and there’s a whole separate discussion to be had about how physical objects needed to evolve into online books and MP3 downloads, whereas market data is already digital and has been for more than 40 years—to groceries.

Not far away, but just far enough that it will still require both a carrot and a stick to make it happen. That includes demand from data consumers, and a willingness on the part of vendors to modernize. And—like rival Formula One teams scrutinizing the lap times of the first driver to switch from wet to slick tires on a drying track—it will probably take one fairly substantial vendor to figure it out and make the leap, and to be successful doing it, before we see other data providers pile on.

Whenever any game-changing development comes along, people usually say it’ll take 3 to 5 years, or 2 to 10 years to take hold. And you can bet that means someone out there is already doing it. With the cloud now well adopted, with data catalogs set to drive change in procurement practices, and with online marketplaces licensing their point-of-sale tools to online retailers, the elements of change are all in place. It only takes someone willing to put them together.

Know someone already doing this? Maybe you’re already doing this?? Let me know at max.bowie@infopro-digital.com