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