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The Market Data Dichotomy: Innovation by Necessity

By Mark Schaedel, CEO, DataBP

Mark Schaedel, DataBP

Capital markets have evolved into a complex, data-driven ecosystem. While data has always been critical to the proper functioning of markets, the provision of data is now a primary function and source of value for many market participants. Yet the business of market data remains terribly inefficient for data providers in terms of their ability to both provide value to consumers, and realize value from their commercial relationships. As demand for data and use cases grow, data providers are finding it more difficult to generate revenue and value from new products and policies. Many exchanges estimate that they are able to earn only a fraction of the revenue they should collect from their data licensing relationships. These commercial headwinds have become an accepted form of overhead amongst the market data community despite the broader capital markets community being preoccupied by the growing cost of data. 

Vendor dependency and disintermediation

While technology has driven rapid advances in how data is consumed and managed, the supporting administrative framework has remained largely unchanged since the days of the vendor terminal. Over the years, this framework has devolved into more of a patchwork, consisting of incremental exchange policies and disparate administrative processes which have overwhelmed consumers and redistributors. Exchanges continue to rely on vendors for product development, billing and relationship management, which creates disintermediation risks. 

This disintermediation has been perpetuated by a lack of resources and the scale necessary to manage data consumer relationships directly. Exchanges remain dependent on vendors to account for the number of users consuming data and to enforce data usage policies even where they no longer control access to data and are forced to rely on declarations made by users to vendors subject to each exchange’s usage policies. Consumers complain about the inherent lack of policy standards, ambiguity and a lack of supporting business processes which often undermine the viability of these policies making compliance impossible or too expensive to justify.  Exchanges also rely on vendors to account for “non-display” use of data – a term that tells you everything you need to know about the retrofit approach to the administrative challenge.

New players on the block

These challenges are exacerbated by the increasing diversity of new fintech players and platforms that often lack the data governance culture, disciplines or even the administrative resources to support the responsibilities imposed on them as redistributors of data. While the risks are proportionally smaller with many of these new players, the aggregate risk of the long tail is becoming significant as the community continues to grow. Exchanges compete for wallet share with redistributors, resulting in reduced cooperation and commercial conflicts preventing the exchanges’ ability to create new products or value. Further, existential threats remain as consolidation between some redistributors with competing exchanges is providing competitors with critical customer information. Use of data by competing platforms and for internalization is also cause for concern. 

Opportunities in innovation

But, there is hope. Data providers are beginning to observe the lessons of the media industry who have overcome many of these challenges, while significantly enhancing the consumer experience. With so much growth and innovation around how data is consumed and managed, data providers are now extended to the back office to automate and streamline business processes. A number of key innovation initiatives are underway, setting the stage for meaningful change, including: 

  • Digitized workflows – replacing emails and files exchanges with messaging-based processes for communication of customer data, licensing agreements, e-signatures, declarations and verification processes
  • Data licensing ledgers – establishing a common, immutable source of truth for licensing terms 
  • Defined business rules – clear, unambiguous business rules shared between licensing parties to drive accountability and reduce interpretation efforts/bias and risks
  • Digital rights management – a machine-readable, digital representation of licensing rules to drive data governance and control frameworks
  • Cloud distribution/Automated entitlements – API-driven automation of data access controls at the enforcement level allowing cloud platforms to extend the reach of exchange distribution and reliably offer pay-for-use policies
  • Vendor management APIs – APIs for automating requests and approvals, inventory management, usage and entitlements system reporting
  • Compliance AI – intelligence formed from data exceptions and patterns which identify potential issues and drive resolution to contain issues and avoid escalation.

Realizing the potential

Providers of data must embrace automation in order to achieve the scale required to overcome disintermediation threats and grow revenue by expanding the addressable market. Self-servicing tools are a critical part of automation and besides improving the user experience, they provide users with guidance and decision support, as well as a means of collaboration where multiple parties or actors need to be part of a workflow process. 

The use of APIs provides the means to link data providers, redistributors and consumers for exchanging information and communicating efficiently. Cloud distribution provides an important outlet and complement to distribution channels and will increasingly become required as more applications move to the cloud.

In short, these technologies can provide data-driven insights that help ensure compliance through the ability to surface issues sooner, avoid audit escalations, reduce resourcing efforts and drive accountability.