By Kuhan Tharmananthar, Etrading Software
You would think, after centuries of standards – from the Chinese measurement of distance ‘li’ to the metric system itself, we would happily develop and embrace them across the global economy. After all, a standard makes everything easier for everyone… but in a free market where competitive advantage is sought and leveraged by every lawful measure, ‘easier for everyone’ is not necessarily what everyone wants. The British Standards Institute define a standard as ‘an agreed way of doing something’. The challenges become obvious when there is money or advantage to be gained by not agreeing.
There are a few examples where standardisation was required early in the development of a market. Physical electronics is quite a good one; interfaces and connections are often turned into a standard before being manufactured, although there remain some who are able to adhere to proprietary approaches just through providing a useful solution at the right time in a market’s development. This creates a market presence that generates a standard almost by default. The RED code for the credit swap market is a good example of this kind of standard in finance. The code came into existence through necessity as a proprietary data point developed by a group of key participants and then formed into a separate venture to serve the whole market. The venture is now valued at more than $5bn. Whilst standards of this type facilitate the growth of a market, they can also generate different challenges for participants, especially in an environment undergoing constant change from regulations and economic conditions.
This is where an open standard can deliver additional benefits to the whole market. A transparent funding model alongside a standard that is governed by the industry can ensure that cost reductions created by technological innovation are applied across the market. In addition, it provides a forum for relevant regulations to be addressed, where possible, with a mutualized approach. It is increasingly clear that it is only through this open model that cost reduction can be maximized. Industry governance also provides a more stable platform for the standard – giving the whole industry transparency on any upcoming changes and, indeed, influence on the direction it might be taking. This foundation enables the investment and development of value-added services.
Putting aside the open or proprietary nature of a standard, it is interesting to note the other circumstances that cause an open standard to be developed in the financial industry: One – a problem that is common across participants; two – part of the problem involves the capture of value away from those participants who generate the underlying data; three – environmental factors, such as regulations, highlight the impact of the problem and finally four – technological development reaches a point where it is largely commoditized and low-cost. Neptune is an example of an industry utility, using standards, that meets these four criteria and is one of the reasons the network continues to grow in an ever increasingly populated market.
A good example of an opportunity for an open standard is market data. Market data is expensive for all participants – sell-side, buy-side and CSDs amongst them. In addition, despite there being a few composite prices in the corporate bond market, the derivation of them is unclear to many market participants. Upcoming regulations in Europe and the US around transparency and best execution are only going to increase the importance and value of this market data. Finally, using open standard FIX best practices and utilising the gateways and technologies that are already familiar to market participants, it is possible to implement a low-cost network that allows providers to retain ownership and control and receivers to reduce their cost base. In addition, a composite that is defined and governed by the industry can be delivered alongside the individual data.
There are other opportunities that fit this model for an implementation of an open standard. Of course, at the moment, much of the financial market is occupied with meeting regulatory requirements as quickly and efficiently as possible. However, sometimes a group with a clear and shared vision can meet those requirements and address long-standing issues at the same time without incurring huge costs.
In the final article of these three pieces, we will look at what are the key ingredients for a standard’s success in capital markets and where current standards are being brought together, combined to help the industry in an increasingly challenging environment.
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Setting The Standard
