How Low Can You Go?
A difficult economy is fueling big changes in the market-data space as end users want more cost effective, streamlined solutions and vendors are charting a new course to revitalize business.
Slipping under the bar again and again, market-data vendors are going lower and lower to meet the needs of their cash-strapped customers. As the limbo game continues for both vendors and end users trying to cut costs, the market-data landscape has evolved into one where partnerships have become the new frontier.
As cost becomes a major factor for any IT department, the market-data space has reached a new plateau. Over the last couple of years, financial-services firms have scaled back and re-evaluated their market-data needs. The difficult economy and IT cutbacks have created a new environment for many firms and with these changes come a new approach to market data from both the customer and the provider perspective.
Traditionally, market-data vendors have offered up their products and services, such as quote feeds and pricing information separately from other application providers offering portfolio management, trading systems, customer-relationship management and other workstation capabilities.
But with firms scaling back their feeds and reducing the number of redundancies, market-data providers are entering new territory. The tide is turning and market-data vendors are working to revitalize their business and work more closely with customers to fit their needs and tailor their products and services.
While it's overly cliche these days to admit, many firms and vendors are viewing their involvement more as partnerships, working together to develop a more comprehensive set of solutions around the data rather than simply offering the data itself.
"The larger market-data vendors really want to revitalize their market space by not just putting out quotes, but getting more in-depth and putting out the next level of workstations," says Larry Tabb, senior strategic adviser to the securities and investment practice at TowerGroup.
A perfect example of such partnering is the high-profile deal sealed in December between Thomson and Merrill Lynch to jointly develop and implement a wealth-management workstation for more than 25,000 users across the firm. The workstation will be based on Thomson's Thomson One platform and will bring together market data, news and information from Thomson, along with CRM tools, portfolio management, online collaboration tools and more. While details of the final contract were not made public, some speculate that the deal could be worth close to $1 billion over several years.
Lou Eccleston, president of sales and trading at Thomson Financial, explains that the Merrill arrangement is not your typical outsourcing deal for a market-data vendor turned solution provider.
"What Merrill has done is take a concept of outsourcing and a concept of best-of-breed and combined them together, so we're acting as a partner and a general contractor," he says. "We're going to work as partners, we'll have people at Merrill and Merrill will have people at Thomson. Wherever necessary we'll have teams on site and people at branches around the world on a regular basis."
John McKinley, executive vice president and chief technology officer at Merrill Lynch, agrees that this deal highlights the maturing of the market-data space over the last several years.
"From a market-data perspective, content alone is a fungible commodity," he explains. "For our partners to have a long-term relationship with us, they have to provide more value-added services."
Cost Cutting Drives Changes
Clearly, these changes all come back to cost as firms scale back and vendors figure out ways to respond. "Everyone has pressure on revenues and all customers are looking at a difficult 2003, which makes you look at cost," says Eccleston. "It's now a question of cost control with regard to the things that don't need to be running in-house to differentiate from competitors, while still controlling intellectual property, research and core business assets."
McKinley adds that as organizations have become more virtual by necessity, the idea that everything a firm does is a core competency is probably a "bit of a myopic view of the world."
Instead, he says the idea was to create a next-generation-operating model to focus on Merrill's core competencies, while partnering with best-in-class providers for other products and services.
"This should be very good for the marketplace, enabling users to get a better platform at a lower cost," notes TowerGroup's Tabb.
"It's all around leverage," says McKinley. "When you do something yourself, any enhancement or improvement, you're going to have to fund 100 cents on the dollar. But when you have more of a commercial partnership, you're able to share development costs. We're able to increase the amount of discretionary capital that we can apply toward things that truly differentiate us in the eyes of our clients."
These kinds of partnerships between customers and their technology partners are the next chapter in the evolution of the technology marketplace, says McKinley.
He adds that these types of deals represent a big marketplace in the United States and abroad for other participants. "I think Thomson recognized this and the portfolio acquisitions they've done over the last four or five years has given them an effective Swiss-Army knife to apply to the problem," says McKinley. Overall, he says that the Thomson deal represents significant savings for Merrill in addition to a dramatically improved retail platform for financial advisers over its previous proprietary platform.
Tabb adds that as the equity market declines, firms are doing two main things which are prompting these new approaches from market-data vendors. They are reducing costs and the number of traders, which means they need less market data.
One industry source cautions though that the market-data world is getting "a little insane" with such a heavy concentration on price as firms try to get vendors to meet stringent price points that sometimes aren't economically beneficial for the provider. "The concept is short-sighted because these are mission-critical systems for the firms," says this source. "And a lot of these firms will haggle over a couple of bucks a month per terminal."
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