January 11, 2012

Advanced Trading: How are Buy Side firms obtaining and managing their market data? Are they getting it from the sell side or from prime brokers?

Joel York, Xignite: For the most part, buy-side firms get their market data from data vendors and the exchanges or trading venues where they trade. Exchanges are taking an increasingly large portion of the market data pie due to the rise of low-latency and algorithmic trading which often require direct exchange connection and co-location.

Advanced Trading: Have market data firms finally figured out a way to charge for market data? Is it by the seat or per trade? Is this still an issue?

York: How to charge for market data is a huge issue, because out-dated exchange policies and vendor technologies are lagging behind the new market data consumption patterns of buy side firms and are stifling innovation. It used to be that the vast majority of market data was consumed by human beings sitting at desktop terminals provided by a limited number of vendors, with Bloomberg being the clear market leader. In this environment, charging per user made a lot of sense. Unfortunately, this pricing model also locks the data inside the terminal. Which is great for terminal vendors, but it's bad for customers. Demand for data is shifting to black box algorithms and mobile apps over terminals, and current pricing and policies make it difficult for buy side firms to adapt and innovate.

Advanced Trading: How do buy-side firms handle multiple market data feeds?

York: Most buy side firms are in a Catch-22 when it comes to managing multiple data sources. On the one hand they want to reduce costs through consolidation, but on the other hand they are constantly trying to develop competitive advantage through better market access and new trading strategies, both of which imply the need for new and unique data sources. The key is to know the difference between commodity market data and unique market data. Commodity data can be consolidated and even pushed to the cloud to lower costs and save precious IT cycles, whereas unique, proprietary data must be constantly sourced and protected.

Advanced Trading: How do hedge funds store their market data? Are they content to hand this chore over to the sell side or push it onto the cloud?

York: Again, there is no one answer for all kinds of market data. Firms must be very clear internally on what market data delivers competitive advantage versus what market data is simply a commodity. The right strategy is to push commodity data to the cloud to gain economies of scale, lower costs, and increase agility. For example, establishing a new hedge fund takes lots of market data. Trying to source it all and manage it all in-house will increase the amount of time it takes to get up and running and wastes investment dollars on low value assets. Sourcing the baseline market and reference data from the cloud can shorten time to market and leverage the firms market data investment by focusing money and resources on creating unique investment strategies.

Advanced Trading: What are the challenges for Buy Side firms when dealing with market data? Do they have their market data management tools in place to properly do this job?

York: The three biggest challenges of buy side firms when dealing with market data are ...

1. The cost and complexity of managing increasing amounts of market data as the amount of data has grown exponentially due to electronic trading, venue fragmentation and instrument complexity.

2. Getting that data into apps and algorithms instead of terminals.

3. Adhering to and reporting on complex and varied exchange licensing requirements.

By and large they do not have the tools to do these jobs, because the policy and technology changes required to solve these problems present leading vendors with the innovators dilemma, i.e., they must deliver new products that cannibalize the old.

Advanced Trading: Are Buy Side firms open to using cloud solutions for their market data requirements and tasks? If not, why not? Security issues? Client confidentiality?

York: As a cloud provider, we don't run into many concerns around security or confidentiality, because market data is by and large public information. The owners want to sell it, not hoard it or hide it. It isn't the same as investor account information, which is highly sensitive.

The primary cloud concern is scalability. With all of the cloud buzz, many vendors are repackaging old products in a new cloud marketing wrapper. But when you look under the hood, it isn't cloud at all. When done correctly, market data cloud delivery leverages every aspect of the Internet to create massive scalability and elasticity. Technologies such as infrastructure-as-a-service, distributed caching, Web service standards, and so forth lead to a dramatically different architecture from traditional feed products.

Advanced Trading: Please give us a real world example of how your firm helped a Buy Side client with their MD needs.

York: One buy side investment management firm with more than 20 billion under management was able to replace over 50 traditional terminals by building and creating more focused apps that were tailored to the needs of their analysts. Most of their analysts were only using a fraction of the functionality and data offered by the traditional terminals, so they were paying for the data 50 times over. The data required by these 50+ analysts was easily sourced from the cloud. They still use terminals for their higher end analysts that need the full capabilities.

Stay tuned for the February 2012 Advanced Trading cover story on market data's impact inside hedge funds.

ABOUT THE AUTHOR
Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining ...