I am both blessed and cursed by having worked in the market data industry for nearly 21 years: blessed, because as both an editor following the industry and a consultant advising companies within it, age and experience work in my favour; cursed, because I sometimes yearn for those relatively carefree days I spent selling Telerate green screens back in 1984. In those 'good old days' customers would phone a salesperson up to order batches of new terminals - not the other way around. I know I am looking through rose tinted glasses - even in those heady days we had to do some selling - but not like salespeople operating in today's markets who I freely admit have a much tougher job than we ever did. My point is that the market data industry keeps evolving and changing.
Is there a market data 'industry'?
So what are we faced with in 2005? Again looking back, but this time only a couple of years to 2003, I remember an Inside Market Data conference at the Grand Hyatt, New York where several people were questioning whether we should even be discussing market data in terms of it being an industry in its own right. Surely, they said, ' ...it is now just part of a much wider marketplace', a marketplace where back in early 2003 STP was still the really hot topic - remember T+1? Companies like Reuters were diversifying beyond being simple purveyors of market data - the phrase 'view and do' had been coined a year or so earlier and there was recognition that the transaction was the critical activity of the financial markets.
STP focussed on the series of complex processes that follow after a trade, and here issues to do with accuracy and error spawned another hot topic - reference data. That is data about instruments and counterparties, designed to ensure that everyone really knew who they were actually trading with, what they were actually trading and what the precise terms and conditions of those trades were. There was, and still is, a widespread recognition that an awful lot of money can be wasted on inefficient and error prone post-trade accounting and settlement processes. On many occasions I would listen to different people quote a seminal Tower Group report which discussed how much money was lost as a result of failed trades.
But what has this got to do with a discussion of market data? My answer is that it all comes back to what we define as market data. My belief is that broadly there are no incorrect definitions, it is just a case of making sure that when discussing market data with some one else you ensure you are both talking about the same thing. It occurs to me there is a nice analogy with reference data right there.
So what is 'market data'?
One way of looking at market data is to look at the data used for price discovery, that is, pre-trade. In practice there is a whole range of data that needs to be considered prior to executing, or equally not executing, a particular trade. Indicative and/or executable price quotes are the most obvious but what about news and commentary, risk assessments, historical data and associated analysis e.g. charting, fundamental data - company or macroeconomic and much else too arcane to go into in detail in this article? This is all data and it relates to the market so surely it must be market data?
If one wants to broaden the scope of what we include yet further, then at one level we have a myriad of asset classes to consider - equities, fixed income, forex, money and commodities, not to mention all the derivatives that are based on these cash markets. We also have interbank markets which are different from retail markets, and so on. There are esoteric markets out there such as the whole M&A space - M&A constitutes a market and data is used to arrive at decisions. Of course this is a very different market from trading stocks and shares on an exchange and the data it uses is therefore different. My point is that are lots of different 'markets' and they each have different data associated with them - some are considerably more different than others.
Taking the next logical step we move through the trade and into the post-trade world. Here we find a host of data about the trade that has been done: the price the trade was done at, the time the trade was executed, the size of the trade, the counterparties involved and so on. This data is of vital importance to institutions who want to accurately and efficiently settle and account for the business they have done.
However, the lines between pre- and post-trade can get blurred - post trade data can be seen as the 'history' element used in pre-trade decision making analysis. With the introduction of executable or 'clickable' prices, the pre-trade price quote becomes the last trade price at the moment of 'clicking'. The point that emerges from this is that where there have been a variety of distinct elements within the overall market data domain, many (but not all!) of the distinctions are getting blurred; we hear more and more about the concept of 'data management' which encompasses the fields of reference data and quotes data.
And what about the 'vendors'?
In my role as editor of Inside Market Data Reference I spend a lot of time watching the various players in the grand game that is market data: how are these players faring in the competitive jungle out there, and how are they adapting to the changes evolving around them? The market data industry comprises a very broad church in terms of companies supplying products and services. The 2004 edition of Inside Market Data Reference carried profiles on 32 different companies all providing some kind of market data - that was just real-time data, and not all companies approached provided a profile. For the purposes of this article I will focus on three of the largest players: Reuters, Bloomberg and Thomson Financial.
Reuters
Reuters has had a busy time over the last couple of years, much of that time getting its house in order so that it can move 'Fast Forward'. Part of the problem it faced was that it had grown phenomenally while the good times rolled and had expanded into a diverse range of markets with an equally diverse range of products - some developed organically, others brought on board through acquisitions. One interpretation of the result of this growth was that Reuters lost a certain amount of focus and became cumbersome and less than optimal in some of those markets. That diversity is clearly characterised when IMD Reference produces its annual market share analysis of the real-time market data 'industry'. Reuters quite correctly points out that in the figures I pulled together for year ended December 2003, only about 60% of Reuters' core revenues were derived from real-time market data. Reuters had developed a number of other businesses that were more to do with, for example, transactions or software applications, rather than subscription data services.
More recently under the new management team Reuters has taken the scalpel to many parts of their business and cut out whole swathes of staff (I confess to being one of them). Conversations I have had suggest that there are still significant job cuts to come. In parallel to these human cuts, Reuters has also robustly addressed the sheer quantity of different products it offers so as to reduce the costly complexity such a vast range generates. This makes good sense to a point. Where some of that good sense appears to wobble can be seen in both the staff and the product dimensions.
From the staffing perspective two things catch my eye. Firstly, I pick up a definite sense that in cutting back on people so heavily and so quickly Reuters may have cut into muscle and not just fat. I see this from two perspectives. In talking to clients I detect that there has been an impact on both day-to-day service levels, and also in overall product development quality and output. With respect to staff still within Reuters, there is clear evidence that those left behind are earnestly rushing around trying to cover the workload of their departed comrades. Secondly, I am also aware of a large amount of outsourcing on Reuters' behalf, whether in employing consultants to advise on a whole manner of subjects or in employing large and small companies to operate different aspects of their business. The outsourcing debate could fill 10 articles itself, so all I will say is that the jury is still out on this idea and only with the benefit of hindsight will we be able to truly tell if it was a good or bad idea.
This last point about staff work overload is closely linked with an observation I have on the product dimension. Reuters has made a lot of noise about rationalising their product range down to a more manageable size - tens or hundreds, rather than thousands of products. However, in practice while Reuters is divesting itself of some distinct chunks of business such as TIBCO, Radianz and potentially Instinet, its efforts to reduce the quantity of core products is hard to quantify, as many are regional or domestic information products which in reality only exist in terms of permissionable entity (PE) codes or Price Line Items (PLIs). The question remains as to which substantive product lines it has cut back on and thereby saved itself the resources needed to run them?
Reuters' diverse business is too large to discuss in its entirety in this article, but a couple of interesting and topical areas warrant comment.
Reuters' acquisition of Telerate is a sad day for the industry but I emphatically do not blame Reuters for this; it is simply taking advantage of a market situation which is both its duty and its right in a free market. If any blame exists it rests with the industry as a whole, and the main culprits are complacency and conservatism. The market has allowed another player to fall by the wayside and be absorbed and has therefore left itself open to the prospect of an ever greater concentration of business in an ever smaller group of suppliers. Whether this results in a monopoly, duopoly or oligopoly, less competition will probably mean less downward price pressure and less energetic and plentiful product development. From Reuters' perspective, I wonder if this is going to give it a serious case of indigestion as management wrestle with the issues of integrating Telerate's staff, infrastructure and products and services into their organisation.
To avoid sounding wholly critical of Reuters, there are three areas I have noted recently where Reuters is making solid progress in what I believe is the right direction:
- Reuters management are making it very clear that they see the transaction as a critical part of the business they are in - not as an isolated opportunity but one that is integral to their business as a whole i.e. linking pre-trade price quote discovery and associated analysis with the ability to execute the trade all within a common environment. Reuters has vast experience in the forex world and is quite sensibly looking to leverage that expertise and associated technology in other markets that are becoming more automated. They missed out on the Tradeweb acquisition but seem to have picked themselves up from that setback and moved on organically.
- They have also recognised that the way markets work, especially the exchange-based equities and derivatives markets, have changed and continue to change. This is manifested in a series of related themes - the continuing growth in update traffic, the search for ever lower latency and the enormous growth in programmatic trading. Reuters has always been cognisant of managing the onslaught of increasing data traffic with its IDN upgrade programmes. Very recently it has established a programme to manage the delivery of direct exchange feeds to its customers, to satisfy their need for low latency. Finally they are apparently modifying their price strategy to better take into account the different values that programmatic trading accrues from market data.
- The first part of this article discussed the broad scope of the market data domain; Reuters has woken up to this new reality and has focused a large amount of attention and effort on what it refers to as 'Enterprise Data', by which it recognises that clients are interested in more than just real-time price quotes and, more importantly, clients appear to value negotiating an enterprise-wide deal with data suppliers.
Bloomberg
When I discuss Bloomberg I am a little reminded of Winston Churchill's well known quote about Russia - 'a riddle, wrapped in a mystery, inside an enigma'. If I understand Churchill correctly he was trying to say that Russia was not only darned difficult to understand but that just when you thought you might be beginning to understand it you would find another barrier to comprehension. I sometimes feel like that when I try to get my head around Bloomberg.
At one level Bloomberg is simplicity incarnate; it offers one product at one price - no discounts, no negotiation and not much information about the product or the company. However, if one starts to dig into the product itself it represents a staggering array of data content and analytical functionality. Their business model is pretty straightforward - they approach the end user directly and because Bloomberg staff are traditionally highly trained in their own product and in the markets, they are able to demonstrate or even train their users in such a way that the users can see value that offsets the arguably high price. The vast majority of users probably only use a tiny percentage of the Bloomberg Professional's overall functionality, but the key is that different users all use a subtly different part of the service. Bloomberg could have gone down the segmented BMW 3, 5 and 7 series model that Reuters promotes, but instead it has taken a one size fits all approach which is simple to sell, implement, invoice and support.
Bloomberg's approach has enabled it to overtake Reuters in terms of dollar revenue in the real-time space; Bloomberg has grown its user base steadily over the last few years while Reuters has declined in the same period, a decline that may have finally bottomed out. Reuters still has significantly more 'bottoms on seats' or 'eyeballs' but this is because it has many more installations in lower tier segments such as Retail Equity Brokerage or off trading floor users - the BMW 3 and 5 series users - whereas Bloomberg only competes in the luxury executive saloon BMW 7 series class.
There are, however, potential flies in the ointment for Bloomberg.
In some quarters there is a belief that significant numbers of Bloombergs are inappropriately installed, either because they are only there because of the status symbol having a Bloomberg confers on a user, and/or because many users rely on it solely for Bloomberg messaging and only use Bloomberg messaging for non-mission critical conversations. A cottage industry of consultants is hard at work helping clients to identify such users.
Another trend I see continuing to bubble to the surface in some large institutions is the desire to reduce their dependency on one supplier, as they see a potential risk of being held hostage at a later date. This is almost a political or strategic dimension to purchasing.
On the product front Bloomberg has always been very responsive in adding new functionality to the Bloomberg Professional but it has also been hard at work over the last two years or so on a project humorously referred to as Phat Pipe (a play on the word phat which in hip hop slang means something of high quality, but also FAT in the context of a very large consolidated feed of data). This is a very real attempt by Bloomberg to move into one part of the market where Reuters has managed to remain dominant - datafeeds.
Reuters has had considerable success over the last 20+ years with its datafeed offerings, heavily supported by the success of it market data distribution systems - Triarch and TIB plus, now RMDS. These datafeeds have fed user display applications such as 3000Xtra with Kobra, but they are at their most sticky when feeding clients' central server applications. Until the development of Phat Pipe (and its cousin Thin Pipe) Bloomberg has struggled to attract certain elements of clients' market data budgets. This could all change very soon. Bloomberg is very cagey about discussing this area in the public domain, but there are clearly a number of robust beta sites installed and working. Much talk surrounding this area focuses on the potential commercial model Bloomberg might deploy, something that it has apparently struggled long and hard with. With Reuters strongly rumoured to be changing its pricing model in this space we could be in for some interesting times in the latter part of 2005.
Thomson Financial
Many in our industry believe that in the real-time segment Reuters and Bloomberg operate a kind of duopoly. In reality this, while not being wrong, is a vast simplification of a complex marketplace. The complexity comes with respect to the classification of markets, or in marketing speak - market segmentation. One can break up the wider market by a variety of segmentation models, for example by asset class (equities, fixed income FX etc), by institution type (sell v buy side or institutional v retail), by work type (sales and trading, investment management, investment banking etc), by geography, by size of institutions ... and probably a million and one other ways.
Within the narrow focus of sales and trading in the institutional sphere - which is where a significantly large amount of money is spent - then Reuters and Bloomberg dominate. Some two plus years ago Thomson made noises in the media indicating an intention to unsettle that duopoly. In practice that has not happened and Thomson remains, for the moment, a small player in institutional sales and trading. A more recent look at Thomson's strategy indicates a longer term game plan designed to build on Thomson's strength in other areas such as investment management, investment banking and retail wealth management.
Thomson has a wealth of diverse content at its disposal, much of it not in the classic real-time mould. It has acquired a serious player in the fixed income and transactional space in the form of Tradeweb and now time will tell how effectively it translates these assets into workable product solutions for a very demanding customer base.
Thomson's greatest asset is sometimes its toughest obstacle i.e. the diverse range of assets/companies it has acquired in recent years. Inevitably, integrating acquisitions is a tough job and no matter how practised and good a company is at doing it there has to be an element of disruption post-acquisition - disruption to both the acquirer and the acquired.
In Europe, Thomson has a significant installed base of Datastream. In the US it inherited and then developed and enhanced the ILX Retail Equity Brokerage business. In parallel and complementary to these historic attributes, Thomson has developed an organic strategy based on its own Thomson ONE framework. Thomson ONE is presented as a way for it to deliver solutions tailored to the different market segments discussed earlier, drawing from the diverse and in some cases unique content it has at its disposal. On paper this a great concept and sales figures from Thomson indicate it is having success with it.
Thomson is not without its problems - the legacy of multiple billing and exchange permissioning systems causes many clients to get frustrated. The biggest advantage Thomson has is its lack of legacy in the institutional sales and trading segment. Reuters and Bloomberg are hamstrung by their constant need to defend their ongoing revenue streams - Thomson, if it chooses, has the ability to unsettle the cosy duopoly by attacking with new products and, as importantly, a fresh approach to commercials.
Having identified the opportunity there is no question that taking market share in institutional sales and trading is a tough and expensive battle. The real-time infrastructure that is good enough to satisfy retail customers and off-trading floor investment bankers and investment managers is a very different beast from that required to keep up with the ferocious demands of an institutional trading floor. Thomson can make a very healthy and growing business by developing ever greater share in market segments where it is already strong. It will be interesting to watch when and if it fully engages in a battle for the trading floor - its Tradeweb acquisition suggests it has the appetite for a fight. We in the industry will have to watch and to wait and see when and how that fight unfolds.
Conclusion
In conclusion, I do believe that there is a vibrant and healthy market data industry in 2005. To steal from Mark Twain - rumours of its death are much exaggerated. The market data industry I entered as a callow youth in 1984 is much changed but what in this world is not? In those days the battle appeared to be between Reuters and Telerate, Bloomberg was but a distant speck on the horizon. I wonder what someone will be writing about in 2026? Perhaps they will be stealing quotations from that guru of the market data industry in the early 21st Century, now sadly missed - David Anderson '...whatever happened to him?'
This article is an extract of the industry overview that appears in the 2005 edition of Inside Market Data Reference, an Incisive Media publication.
