Market Data Wisdom 


THE POWER OF PERFORMANCE DATA

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Pete Esler

PVE Consulting LLC, is a financial market data strategy and advisory firm. 

With over 25 years of experience managing market data in the largest financial firms, we have demonstrated a track record of managing data Market Data operations, system engineering, financial management, audit defense, and strategic procurement.
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By Peter Esler July 9, 2020
By Peter Esler Founder, PVE Consulting LLC https://www.marketdataconsultants.com/ In the previous blog we reviewed the requirement for Active Market Data Management. Market data is the Critical Asset behind every investment firm. This is very analogous to a race car owned by Formula 1 team. If you owned a Formula 1 car, you would hire the best team of people you can find, to coordinate their activities and deliver “the Car” to be a top performer to consistently win! Market data at your firm requires the same attention as a Formula 1 race car. This valuable asset requires a team of highly skilled market data professionals to run a successful program. As more Portfolio Managers (PMs) realize that Data is the asset, they seek out highly talented Quants, Data Manipulators, and Toolsets. But they oftentimes overlook (and under fund) a critical job – that of the Commercial Manager. The Commercial Manager (CM) maintains a team of Market Data Negotiators. The purpose of the CM team is to work directly with the PMs, Quants, and Data Manipulators to deliver on a Strategic Data Portfolio. A Strategy for mapping your existing data, (what do we have), evaluating data quality, (is it any good), and renewing and/or acquiring new data (does this augment or replace existing data). Score Cards are utilized to assess data quality and support both in-house and the Vendor. So, what is the result of not hiring a quality CM team? PMs and Quants are aggressively seeking greater amounts of structured and alternative data. Without the overview of a CM Team exercising a Strategic Data Portfolio mindset, the requested data may have been previously licensed but sit in an orphaned database. Here, we often find multiple data sets in tangential repositories that are not actively managed. So, the data is out of sequence, or not adjusted for corporate actions, so pretty much useless. There are many reasons why data gets moth balled, but by not actively managing this data, or the contracts behind them, it can lead to enormous costs and expose the firm to audits, and broken algorithms.  Here comes the Hybrid Exchange The marketplace has been observing the Exchange Groups growing their profits by diversifying their product offerings. Market Data has become a dependable consistent revenue producer which the Exchanges have enjoyed through “Display fees”, “Non-display fees” and the “Creation of Original Works fees”. So, what will happen when they acquire large data sets from Aggregation Vendors? Those in the industry I have spoken with, have stated a concern that these new Hybrid Exchanges may raise their aggregated data costs. They have pointed out that the Exchanges have done it in the past. When a German exchange created a new pair of product licenses, “Non-display” and “Creation of Original Works”, the rest of the Exchanges were quick to replicate. We have seen over the years, a steady increase in fees on exchange licensing. The financial community should brace for a potential ramp-up in Vendor fees as these Exchanges justify their acquisitions to their shareholders. The Financial Community should anticipate: 1. Bundling of services – if you subscribe to this, you must take that. 2. Price Increases due to bundling or failure to bundle. 3. Increased barriers of entry for existing and new data competitors. 4. And, a reduction of demand elasticity, as certain products and markets “get locked in” by a single vendor solution. PVE Consulting LLC is a leading consultancy specializing in Market Data. We believe in Strategic Market Data Portfolio solutions. PVE helps firms’ master the complexity of market data by optimizing their environment through data mapping, usage reviews, contract negation/re-negotiation, eliminating redundancy, and moving our clients towards an overall Data Management Strategy. Let us help you! peter.esler@pveconsulting.net
By Peter Esler November 25, 2019
Managing Market Data – Why is it important? Market data is the second largest expense within a financial institution. The data is critical to every investment decision so users are aggressively seeking greater access to structured and alternative data to provide a unique perspective, or edge in the market. This leads to the aggregation of many sources of data with complex terms & conditions for “use provisions” and an ever increasing “licensing controls”. Increased regulatory requirements are demanding greater accuracy and transparency around instrument and portfolio pricing, valuation, and credit. This in turn is driving the need for wider and redundant sources of data. In addition, the maintenance of the data has become an extremely costly exercise. Acquiring the data through a scheduler is in itself an art, but there is indexing to a meta data model, cleansing, interpreting, normalizing, extracting in many file types, and distributing to many end points. This complexity of obtaining, massaging, and distributing the data creates contractual compliance gaps. As time goes by these gaps widen driving the vendor to seek an audit to true up the contract terms and pricing. Market Data is a Strategic Asset Market Data as well as “Big Data” is now being viewed as the most important assets within a firm. It is truly a gold mine. Additional sources of Unstructured Data are being mined through various industry points or even within the firm itself. This has created an explosion of data volume. Add in artificial intelligence, the key factor driving the adoption of data-intensive computing, and in itself is creating new derived data sets. So the question begs to be asked, how does a firm know what it has, where is it, how is it controlled, and whose data is it? The Market Data Team As one can realize the custody of this valuable asset requires a team of highly skilled market data professionals to run a successful program. As more investment managers realize that market data is a strategic asset, one would assume they will seek the industry professionals who can help them oversee a market data program that can prove strategically important to the success of their firms. And for the most part this assumption is true at most large banks but is not so at mid-tier banks, and even less so at asset management and hedge funds. Subject Matter Expert Market Data teams are comprised of various Subject Matter Experts. These include Engineers, Business Analysts, Data Procurement, Business Administrators, and Operations/Desktop Support. Market data professionals regardless of their work duty are required to be knowledgeable about the business units they service. To do so they must be knowledgeable of asset classes, trading venues, vendors and exchange offerings. They must be knowledgeable in all facets of their business so they can service their requests in an efficient manner at an optimal cost. So If its’ important, why is Managing Market Data so Complicated? As the cost of market data increases, the scrutiny on these costs get the attention of the Chief Financial Officer and Business Unit Managers. This in turns gets the attention of the big accounting and consulting firms. The accounting firms establish benchmarks to try to compare within the industry or between industry’s the cost of market data at the firm, region, department, business unit and user level. However, this is not very easy to do. There are complex accounting and allocation models that make these comparisons very difficult and can lead to inaccurate conclusions. This in turn can lead to management frustration and concerns about the efficacy of the Market Data Team. Here comes the Audit The FISD in their 2009 Best Practice Audit Document, has defined the audit purpose as being “to verify compliance with contract obligations and policies. In particular, the examination of the correct remuneration for the Information entitled and the identification of potential sources of error as well as the cure of potential errors. This involves verification and assessment of controls over Information at client sites”. Compliance & Resources All financial institutions try to be compliant with their contracts with data suppliers. It is not their intent get “get one over” on their vendor. But as mentioned the management and control, and distribution into applications of market data inevitably slides out of complete control. Application developers are paid to write code, not to read contracts to observe licensing T&Cs. Unfortunately, the market data teams which are tasked with the responsibility to administer compliance and reporting of these applications are under-resourced and often ignored by the application development teams. Due to this situation there is limited time and effort to conduct a proper internal assessment of potential contract liabilities. The auditors know this. It is there job to find where the leakage is occurring and failure to comply with new licensing policy. The “Finding” is the result of the audit. The size of the “Finding” can be a surprise to the firms who have taken a casual view towards market data compliance. Unfortunately, the nature of audits can lead to an adversarial relationship between the client and the vendor/exchange. Due to this situation, the audit is typically concluded with a negotiated settlement. But can still be painful for the financial institution, and if large enough, can lead to audit information leakage, which in turn, an increase in audits. All audit settlements should be concluded with the correct confidential language prior to payment. Why use an Outside Expert? Many firms do not have the resource capacity nor the expertise to conduct a complex audit that can span across their institution globally and take upward of two years. The audits are resource intensive. They require a great deal of documentation about applications, users, data controls and numerous reports. The Market Data Consulting firm will do this work as well as partner with the business, legal and compliance. It should be the ultimate objective to not just weather the audit, but to move the firm towards a more compliant state. A Market Data Consulting firm has the knowledge, capacity and experience defending against these audits. Clearly every financial institution should do its own homework to assess the various consulting firms. For more information feel free to contact peter.esler@pveconsulting.net
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