Tag Archives: #Content in Context

Who’s making money from market data?

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In recent years, market data vendors and their clients have been fixated on supporting the demand for low-latency feeds to support high-frequency, algorithmic and dark pool trading while simultaneously responding to the post-GFC regulatory environment. New regulations continue to place increased operating burdens and costs on market participants, with a current focus on know your customer (KYC), pre-trade analytics and benchmark transparency.

For banks and asset managers, the cost of managing data is now seen as big an issue as the cost of acquiring the data itself. Furthermore, the need to meet regulatory obligations at every stage of every client transaction is adding to operating expenses – costs which cannot easily be recovered, thereby diminishing previously healthy transactional margins.

I was in Hong Kong recently, and had the opportunity to attend the Asia Pacific Financial Information Conference, courtesy of FISD. This annual event, the largest of its kind in the region, brings together stock exchanges, data vendors and financial institutions. It has been a few years since I last attended this conference, so it was encouraging to see that delegate numbers have continued to grow, although of the many stock exchanges in the region, only a few had taken exhibition stands; and representation from among buy-side institutions and asset managers was still comparatively low. However, many major sell-side institutions and plenty of vendors were in attendance, along with a growing number of service providers across data networking, hosting and management.

Speaking to delegates, it was clear that there is a risk of regulation overload: not just the volume, but also the complexity and cost of compliance. Plus, it felt like that despite frequent industry consultation, there appears to be limited co-ordination between the various market regulators, resulting in overlap between jurisdictions and duplication across different regulatory functions. Are any of these regulations having the desired effect, or simply creating unforeseen outcomes?

One major post-GFC development has been the establishment of a common legal entity identifier (LEI) for issuers of securities and their counterparts. (This was in direct response to the Lehman collapse, as a result of a failure or inability to correctly and accurately identify counterparty risk in their trading portfolios, especially for derivatives such as credit default swaps.)  However, despite a coordinated international effort, a published standard for the common identifier, and a network of approved LEI issuers, progress in assigning LEIs has been slow (especially in Asia Pacific), and coverage does not reflect market depth. For example, one data manager estimated that of the 20,000 reportable entities that his bank deals with, only 5,000 had so far been assigned LEIs.

Financial institutions need to consume ever more market data, for more complex purposes, and at multiple stages of the securities trading life-cycle:

  • pre-trade analysis (especially to meet KYC obligations);
  • trade transaction (often using best execution forums);
  • post-trade confirmation, settlement and payment;
  • portfolio reconciliation;
  • asset valuation (and in the absence of mark-to-market pricing, meaning evaluated pricing, often requiring more than one independent source);
  • processing corporate actions (in a consistent and timely fashion, and taking account of different taxation rules);
  • financial reporting and accounting standards (local and global); and
  • a requirement to provide more transparency around benchmarks (and other underlying data used in the creation and administration of market indices, and in constructing investable products).

Yet with lower trading volumes and increased compliance costs, this inevitably means that operating margins are being squeezed. Which is likely having most impact on data vendors, since data is increasingly seen as a commodity, and the cost of acquiring new data sets has to be offset against both the on boarding and switching costs and the costs of moving data around to multiple users, applications and locations.

The overloaded data managers from the major financial institutions said they wished stock exchanges and vendors would adopt more common industry standards for data licensing and pricing. Which seems reasonable, until you hear the same data managers claim they each have their own particular requirements, and therefore a “one size fits all” approach won’t work for them. Besides, whereas in the past, data was either sold on an enterprise-wide basis, or on a per-user basis, now data usage is divided between:

  • human users and machine consumption;
  • full access versus non-display only;
  • internal and external use;
  • “as is” compared to derived applications; and
  • pre-trade and post-trade execution.

Oh, and then there’s the ongoing separation of real-time, intraday, end-of-day and static data.

This all raises the obvious question: if more data consumption does not necessarily mean better margins for data vendors (despite the need to use the same data for multiple purposes), who is making money from market data?

While the stock exchanges are the primary source of market data for listed equities and exchange-traded securities, pricing data for OTC securities and derivatives has to be sourced from dealers, inter-bank brokers, contributing traders and order confirmation platforms. The major data vendors have done a good job over the years of collecting, aggregating and distributing this data – but now, with a combination of cost pressures and advances in technology, new providers are offering to help clients to manage the sourcing, processing, transmission and delivery of data. One conference delegate commented that the next development will be in microbilling (i.e., pricing based on actual consumption of each data item by individual users for specific purposes) and suggested this was an opportunity for a disruptive newcomer.

Finally, other emerging developments included the use of social media in market sentiment analysis (e.g., for algo-based trading), data visualisation, and the deployment of dedicated apps to manage “big data” analytics.

Next week: Australia 3.0

Yet another #co-working space opens in #Melbourne – what’s going on?

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Co-working spaces continue to pop-up all over Melbourne. The latest I’ve heard about is LSX (aka Lennox Street Exchange, in the heart of Richmond’s startup zone), which opened in September.

I’ve not had the opportunity to visit all of these venues – but I’ve been able to spend some time in a few of them such as York Butter Factory, the Hub, inspire9, Launchpad and Queens Collective. The decor and ambience are usually New York loft conversion meets warehouse chic meets funky cafe meets London Free School. Some offer little more than a serviced office with some added startup appeal; several are closely linked to incubator programmes and angel investors; and a couple want to create a whole philosophical/spiritual experience around personal development, collaboration and sustainability.

A key attraction of co-working spaces for early-stage startups and budding entrepreneurs is the relatively low-cost business accommodation. Plus, if you are new to being self-employed/freelance, or if you are just starting your own business, going to an office (at least once a week) can instil some discipline, provide a change of scenery to the home office (or garage), help with networking contacts, and offer the chance to meet people who can offer skills you don’t have.

But, these spaces are mostly open plan, have an itinerant population that comes and goes, and the communal kitchens sometimes remind me of the worst shared houses I have lived in….. So, you have to enjoy that sort of vibe, and as we know, open plan offices are not always conducive to productivity or personal concentration.

There are some genuinely philanthropic values inherent in a number of these venues, but others are more commercial and seem only interested in getting investors through the door to nurture the “talent” they think they have uncovered.

If you are thinking of signing up to a co-working space, it pays to do your due diligence:

  • Commitment – not just the cost, but time and other contributions that may be expected of you
  • Values – it helps if your values generally align with those of the hosts and other members; if you’re not a creative type, or if 3-D gaming development is not your thing, maybe look elsewhere
  • Location – proximity to prospective clients and/or partners and collaborators may be more important than a cool hot-desking venue in a trendy part of town
  • Services – what’s included in the membership fees and/or rent? are there any hidden extras?
  • Insurance – make sure the premises are up to date with their building and other statutory insurances; do you still need to take out professional indemnity/public liability policies; are your personal belongings and equipment covered while they are on site?
  • Ownership – are you buying a membership or a “share” in a business? if the former, does this carry any voting rights at member meetings? if the latter, could you be taking on more legal risk or financial liability if the venue fails?

No doubt there are some vibrant co-working communities, that offer great support and service to the growing number of people who want to “do their own thing” rather than join a more corporate environment. Even some banks seem to be getting in on the act, as they recognise an opportunity to engage with their business customers via co-working spaces and startup facilities.

Next week: Who’s making money in financial data?

Online Pillar 3: #Education

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Students don’t need to attend formal classes anymore – they can YouTube a tutorial, sign up for a MOOC, watch a TED talk, Google the answer to a question, or research a Wiki entry. And that’s just the free stuff. Online seminars and workshops, especially in the area of software programming and code writing, are big business; and even vocational courses are looking to deliver more content via the web.

This week is the final part in my mini-series on the Three Pillars. (See Health and Finance.) Of the three, Education has probably done the most to embrace online – it’s certainly been at the forefront of the Internet and the web, both of which have their roots in academia. Yet of the three, it is the one vertical segment that is most vulnerable to disruptive technologies and changing business models.

Lifelong learning is going to become vital in keeping ourselves informed, skilled, up-to-date, relevant and employable (whether as hired labour or as self-employed freelances). Even in retirement, services like the University of the Third Age (U3A) can help in maintaining our mental wellbeing.

Few of us establish long-term relationships with schools or educational establishments we have attended – at best, we may join an alumni group, but in my experience, many such organisations are designed around fund-raising activities, “old boy” networks, quasi-masonic rituals and/or sadomasochistic memory recall at the annual reunion; and they don’t do so well when former students become increasingly mobile in the global workplace. On the other hand, the ability to attend so many different educational establishments and be exposed to different types of education services makes for a richer learning experience.

Online academic reference and research services have been around since the 1980s, and it’s now possible to source post-grad dissertations and PhD papers via vast online library databases. Part of this is driven by the academic need to “publish or perish”, part by changes in the publishing and information industry, part by the need to foster collaboration via better dissemination of primary research.

For myself, I participated in my first online seminar about 15 years ago, and webinars are commonplace for professional development, distance learning and collaborative projects. I have also enrolled in online tutorials for one-off courses on very specific topics – less about getting a qualification, more about enhancing my knowledge.

Students today, including those in primary and secondary education, are expected to participate online, even though they may still attend daily “in person” classes:

  • tablet devices are mandatory – for access to textbooks, and for managing assignments
  • students interact with their teachers and classmates via Learning Management Systems
  • undergraduates are expected to develop online CVs as well as use dedicated social media platforms run by their colleges
  • ebooks are capable of being personalised and customised – e.g., uploading your own notes, accessing peer comments, and interacting with teachers

Mass Open Online Courses (MOOC) are a logical extension of the webinar model – but of course, you don’t get the same certificate or diploma you would receive (assuming you get one at all) if you had enrolled for the class, completed the assignments and passed the exams. Some universities and colleges license their content (syllabus and curriculum) for local delivery by another institution – a bonus for students in remote locations, or unable to access more expensive colleges. Maintaining the integrity and quality of this “distributed” learning is still a challenge, and mutual recognition of qualifications (as well as certification and authentication) may yet be a barrier to student mobility.

Recognition of prior learning is a key feature of vocational education – but I can see a demand for more services that help me validate what I know and what I have learned (in the absence of a formal qualification) as well as helping prospective employers in candidate selection. There are also challenges in monitoring mandatory Continuing Professional Development (CPD), especially in areas such as health services, where even relatively junior nursing and ancillary staff in hospitals are required to maintain an online learning diary or journal as well as evidence of training completion and competence. (Question: who would be responsible if a nurse engaged by a hospital via a labour service provider failed to maintain currency in patient care, resulting in avoidable harm?)

Ultimately, the role of lifelong learning is in helping to plan, manage and develop our careers. Just as we might have a financial plan (to prepare for the future), and we would expect to manage our health (via regular check-ups and preventative measures), why wouldn’t also have a career plan, supported by a learning pathway? And if we are increasingly comfortable accessing content via mobile apps and the web, why wouldn’t we expect to pursue our learning needs online as well?

Next week: Another #co-working space opens in #Melbourne

Online Pillar 2: #Finance

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Along with the launch of the iPhone 6, Apple also announced a new mobile payments system. OK, so it’s not the first smart phone app that will help you manage (read: SPEND) your money, but it’s likely to be a market leader very quickly. After all, financial services mean big money in the interconnected online economy.

This week’s blog is #2 in my mini-series on the Three Pillars. Away from NFC solutions, digital wallets and virtual currencies, what else is helping to drive online innovation in financial services?

First, as with last week’s look at Health, it’s important to consider that despite being both a defined business vertical, and a highly regulated industry, the financial services sector is also vulnerable to market disintermediation, horizontal challengers and disruptive technologies.

Although most of us tend to stick with a single financial institution for the bulk of our banking products and services, we will likely use different providers across our credit cards, insurance policies, personal investments, retirement plans and foreign currency. The major banks don’t always do a good job of being a single provider of choice because they tend to manage their customers from a product perspective, and not always from the vantage point of a life-cycle of different needs.

Most retail banks have launched customer apps – mainly for account management and transaction purposes – and likewise, other platforms such as PayPal offer smart phone solutions. As with our other two pillars (Health and Education), Finance apps proliferate – e.g., calculators, account aggregators, budgeting tools and branded customer products from major financial institutions. But unlike Health apps, at least the Australian retail banks have to comply with consumer information requirements – although I suspect this is more a requirement of APRA than Apple. (Question: should apps offering stock market data, or enabling customers to plan investment strategies have to include product disclosure statements, or ensure customers have first completed a mandatory risk profile?)

Disruption in the banking and finance sector is coming from a variety of directions:

  • traditional retailers extending their existing credit card and insurance services into deposit accounts and investment products;
  • technology startups creating online payment systems;
  • trading platform Alibaba offering microfinance, trade finance services, deposit accounts and investment funds; and
  • online retailers and market places collecting a lot of useful behavioural data on customer creditworthiness and implied financial risk – for example, platforms like eBay and PayPal are using transactional data to assign customers a quasi-credit rating score or ranking.

Elsewhere, the financial services sector drives the use of data and technology to streamline stock trading and settlement – across algorithmic trading strategies, low-latency trading, straight-through securities processing, transaction and security data matching, market identifiers and real-time data analytics. The use of social media sentiment and stock #hashtags is also creating new trading strategies among savvier investors – one major Australian bank I spoke to recently boasted of having a Media Control Centre, where they can monitor client engagement, customer activity and brand profiles across the social web.

Crowdsourcing services, along with other platforms for raising capital and early-stage funding (plus new online listing and share trading platforms) threaten to disintermediate established stock exchanges, investment banks and stock brokers. Yet I see a huge opportunity for traditional bank and non-bank lenders to use these techniques for themselves. For example, banks love asset-backed and secured lending, as opposed to overdraft or cashflow lending. However, most startups don’t have physical assets such as plant or machinery, and young entrepreneurs are less likely to own property that can be put up as collateral.

So, what if banks see startup clients as a new channel to market? By investing part of their marketing costs or R&D budgets to underwrite new business ventures, they could help fund early stage ideas, and gather valuable information on customers and suppliers. Some banks are sort of moving in this startup direction – NAB and RBS, for example – but they have yet to demonstrate new business models or innovative product solutions that align with the lean startup and new entrepreneurial generation. I have observed many founders bemoan the lack of support from banks when it comes to offering merchant services that align with the needs of startups.

On another level, banks could do more to connect ideas with capital, customers with vendors, and buyers with suppliers – as the increasingly online and highly networked economy introduces new supply chains and innovative business models. (Hint to my bank manager: referrals and recommendations are often the most cost-effective way to acquire new customers – so, maybe we can help each other?)

Of course, where financial institutions really need to lift their game is in coming to grips with the shared economy. If consumers no longer see the need to buy or own assets outright (thereby reducing the reliance on mortgages, personal loans, hire purchase agreements and even credit cards….) what are the implications for financial services? Maybe banks need to take more interest in these “shared” asset eco-systems. For example, if I have taken out an investment loan to buy an apartment, which I plan to list on Airbnb, wouldn’t it be in the bank’s best interest to make sure I am getting as many bookings as possible – by helping to market my property to their other customers, or by making it really easy for people to book and pay for the accommodation via their smart phone banking app, or by enabling me to run online credit checks on prospective customers?

It’s nearly ten years since the term “distributed economy” was coined to encapsulate the new approaches to innovation, collaboration and sustainable resource allocation. Apart from microfinance and some developments in CSR and ethical investing, I’m not sure that financial institutions really grasped the opportunities presented by the distributed economy – sure, they were quick to outsource and offshore back office operations, but this was largely a cost-cutting exercise. Innovation in financial products mainly resulted in complex (and risky) derivative instruments – and ultimately, led to the GFC.

In the current low/slow/no growth economic climate, banks have to look at new ways of generating a return on their capital. They can’t just keep paying out higher shareholder dividends (not when banking regulations require them to increase their risk-weighted capital allocation); so they must engage with the new business models and the people behind them, and they must be willing to do so with a new mindset, not one built on staid financing models. Sure, they need to maintain prudent lending standards, and undertake relevant due diligence, but not at the risk of stifling innovation in the markets where their customers increasingly operate.

(For a related article on this topic, see here. Since I drafted this blog, PayPal has launched an SME loan platform, and it has just been announced that the ex-CEO of bond fund PIMCO has taken a key equity stake in an online Peer-to-Peer lending platform.)

Next week: Online Pillar 3: #Education