Indices are crucial methods of benchmarking market performance. The providers of indices differentiate themselves with the coverage of their indices and the methodology for calculating their value. But the underlying technology and distribution infrastructure required to manage the variety of indices is becoming ever more difficult due to the increasing complexity, frequency and range of today's indices
The rapid growth over recent years of Exchange Traded Funds (ETFs), which offer purchasable shares in what is effectively an index, has highlighted the value of these instrument types and driven demand for index (and quasi-index) calculation systems. However, they have also added complexity because of the multitude of rules, systems and protocols used in providing index value and related data. As a result, the business of calculating and distributing index data requires heavy development work, pushing up costs and impeding flexibility for both the index provider and consumer.
It is clear that a standard is needed to simplify the exchange of index and ETF data. By implementing such a standard, many of the interfacing headaches could be relieved, leaving index providers, information providers and end users to focus on their core strengths.
A new proposed standard for the interchange of index-related information has emerged in the form of IndeXml, which, with full industry participation in its ongoing development, promises to address many of these issues.
What is IndeXml?
IndeXml is a new proposed standard for the interchange of index-related information within and outside of the financial marketplace. The standard provides a uniform tagging system for the index data, its composition, underlying instruments, weightings, investibility, corporate actions data and much more information required to build, maintain, generate and disseminate indices, ETFs and alternative portfolio products.
Why XML?
The eXtensible Markup Language (XML) protocol is rapidly gaining credibility within the financial industry for its ability to tag data according to a defined standard that can be sent and received regardless of the systems or platforms used at any of the participating firms.
It was estimated in March this year by ZapThink Research that the financial services sector spent over USD195bn in IT expenditure in 2001, with USD985m invested on XML technologies in 2002. They estimate that expenditure on XML technologies will grow to USD8.3bn by 2005.
Many standards have been created and implemented by market participants in several areas of the financial world, including research (RIXML), market data (MDDL), derivatives (FpML), transactions (ISO 15022 XML), funds (Funds XML), and news (NewsML). To date, the more niche business areas like indices and ETFs have not received any attention, but are set to benefit as greatly as other areas.
XML will enable all participants related to the index or ETF business areas to simplify their infrastructure by using a single accepted language for the data used in these activities.
What are the benefits?
Standardising the mechanism of information exchange promotes significant reductions in development, integration and systems costs to both the vendor and user community. Additionally, there are many benefits specific to the index and ETF businesses.
For users, the process of selecting index providers can be eased, as integration issues related to switching or adding providers will no longer be a barrier. Customers will also be able to do far more clever and predictive things with their index products and analytics. For instance, they will be in a much better position to predict which companies may join an index such as the FTSE100 and those that may fall out of it. They may also be able to arbitrage between the different index constituents based upon their different rules. These sorts of comparisons and predictions will provide trading opportunities.
Implementing a standard could also provide end users with the ability to send data back up the line to the exchange or index provider, offering the opportunity for revenue generation.
The benefit to exchanges and index providers comes in their ability to introduce new products with no additional software overheads or integration issues, but rather requiring only a permissioning change.
For index providers, the reduction in uptake time can reduce their marketing costs. It will also enable them to offer one-off trials or a 'try it for now' policy without significant cost or disruption. More significantly, there will be significant potential for the index provider to expand its user base as the control over its data distribution will enable it to target end users directly. While the main base of end-users can be served by redistribution of index data by information vendors, there are end users in niche markets, or end users who require index data only, that can be serviced directly by the index provider.
All these changes will spawn greater use of the indexes and richer products and analytics.
Are there any downsides?
There are many arguments for standardisation of information, both in format and content, but relatively few against. The arguments against are mainly based around the verbose nature of XML in data transfer terms and the potential for dominance by leading vendors of the data format.
The key to overcoming the latter argument is to structure the organisation managing the standard's development in such a manner as to ensure parity from all contributors and an equal contribution and voting structure on the voluntary committee that defines the standard.
The issue of data verbosity can be tackled in many ways. Firstly, the transmission of real-time critical data can be separated from the additional XML tagging information, which may not be required on a per-trade basis. This can be sent on another circuit or even an alternative transmission connection over the same physical connection giving priority to the real-time traffic.
Additionally, data can be packed, or as an interim solution data can be transmitted in binary format, and expanded into IndeXml at the receiving end. The nature of the tags used within a niche marketplace lends itself to the use of compression algorithms. As communications bandwidth becomes cheaper, the concern over verbosity will decline. The minimum bandwidth offered these days is commonly 64K, compared to the common line speed 10 years ago of 9.6K, which has risen over the years through 19.2K, 33K, 48K and then 56K.
The traditional cycle
In the traditional cycle, information vendors either provide constituent data values to the index provider, or provide index calculation facilities on behalf of the index provider who will have provided the corporate action information to the vendor. Following the calculation of the index value, the information vendor disseminates the index values and any other value-added information, such as highs and lows, to the end user.
The IndeXml cycle
In the IndeXml cycle we see more control given to the index/ETF provider and greater flexibility and opportunity provided to the end user. Power traders can get an insight in real time to the operations of an index with the opportunity to leverage a greater advantage. This mechanism does not, however, demote the role of the information vendor, but seeks to offer an alternative.
The end user now has, by means of a standard, the opportunity to purchase a more varied selection of data at a lower integration and maintenance overhead.
So how does It work?
The IndeXml initiative, as with all XML standards, is based around a DTD (document type definition) that describes in universal terms the relationship of data elements to each other.
IndeXml is a protocol that allows for incremental delivery and does not impose the requirement for all data structures to be fully populated. For example, a provider may wish to distribute an index value, whereas another provider may wish to disseminate the index value plus the daily, monthly and annual high and low.
It also allows one to dig for as little or as much information as is provided or required in a given application. For example, an index value is calculated at a certain time of day in a particular time zone and at a particular interval; however, it may be traded by a trader in a different marketplace in a different time zone, possibly on a different day (e.g. Tokyo market traded by London trader).
IndeXml defines a timestamp in terms of: GMT time, time offset, daylight savings time applicability, and of course the date. Alternative fields indicate market holidays and trading periods in order that a trader or trading system is presented with the whole picture. A basket European index will trade even though some of the constituent countries may be celebrating a national holiday.
In addition, IndeXml provides various XSLT style-sheet templates for the simple display of index-related data. These can be used within a web browser or even a document to display and present data for reports or monitoring. They also allow index providers to enforce display rules where their data is used in the media.
When combined with VoiceXML, an emerging TTS (text to speech) protocol, streamed audio information can be generated for telephony services, radio broadcast updates and any similar application. Again, the control is obtained by the provision and customisation of the XSLT files by the vendor or provider.
Who is behind IndeXml?
The IndeXml initiative is being driven by Kinetic Information System Services Ltd., a vendor-neutral party with a wealth of experience in designing, building and maintaining index calculation systems.
As a leading vendor of index calculation software covering the equity, ETF and bond market, Kinetic is constantly working with our customers, the leading index houses and also the major information vendors, in new areas of the financial marketplace.
As providers of not only the calculation software but also the handlers to connect to world exchanges and independent vendors, Kinetic has developed a recognised expertise in both the presentation of data and its underlying transport. Hence, we feel we have gained some insight into the issues surrounding the provision of an XML-based structure to index data alongside the inevitable delivery questions surrounding this bandwidth intensive but flexible form of data.
Kinetic is the world's single largest supplier of index calculation systems, counting leaders such as FTSE International, S&P, Reuters and Dow Jones amongst its customers. Kinetic's systems operate in real-time and 24x7 retrieving trade data from information providers, operational control from global locations of the index providers and disseminating via global networks.
The design, development and implementation of these systems requires a deep insight into how index markets work and the operational aspects of dissemination on a global basis. Kinetic's software is directly responsible for the servicing and dissemination to exchanges from the United Kingdom and Europe through Japan, Australia and North America.
This experience led us to introduce and sponsor the much-needed development of the IndeXml standard. Kinetic has implemented the IndeXml protocol over its own Kinetic Data Feed (KDF), offering both IndeXml in ASCII format and a compressed binary version. The data available in both formats is equivalent but the option of both formats allows our customers to select the most pragmatic solution for themselves at this time or any time in the future. Where clients use international circuits, bandwidth costs are at a premium and the availability of both formats is a benefit to them.
How will it be developed?
There is an open invitation to all information vendors, providers, exchanges and end user institutions to join in the further development and ratification of the IndeXml standard. Our intention is that the committee be composed from individuals involved in the publication and sale of index-related data and not from technical disciplines. Membership will be without cost. A forum is in the process of being convened and will meet at www.indexml.org as well as at least annually at locations around the world's principal markets.
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