About the Authors
Alan L. Paris and Bruce O'Donnell, Directors,
Alan L. Paris is a director in the data management group of PwC's financial services advisory division. He has developed and managed product and service offerings in reference data management, risk management, electronic markets, messaging, business continuity and trading floor technology to global financial services companies.
Bruce O'Donnell is a director in PwC's financial services practice area. He has been responsible for multimillion-dollar global cost management efforts, product launches and business reengineering projects, and has managed or conducted market data cost analysis engagements at several global financial institutions.
As the global economy has expanded, the information requirements of the financial services industry and related markets have continued to grow. At the same time, industry cost management efforts have had a limited impact on core market data services (MDS) costs.
Market and reference data information costs typically are among the top five highest expenses in a financial services firm -- after personnel, real estate and IT. A large international bank pays more than $300 million, for example, while a major German bank spends more than $250 million on market data-related services. And one of the United States' largest brokerage firms pays more than $150 million for combined access and usage of market data services for real-time, end-of-day and reference data.
So just what is market and reference data? The life blood of the financial services industry, trading houses and related markets, market data generally is defined as:
- Real-time quote data from vendors.,
- Third-party commentary and analytics services.,
- Exchange data.,
- Reference and static data (e.g., customer, calendar, terms and conditions).,
- End-of-day pricing services (for valuing portfolios).,
The total industry spend in this area exceeds $11 billion per year, and -- despite the arrival of the Web, "information ubiquity" and commoditization -- that number continues to grow. Managing market data is a major issue, as it is rarely done effectively, causing considerable cost inefficiency.
Savings of 10 percent to 15 percent often can be achieved with little or no business impact and, dependent upon the level of change that a company is willing to enact, the savings level can be further increased to 33 percent. However, unless process and management tools are installed, savings achieved through a market data expense review are easily lost.
Organizations often struggle to properly manage costs in this area for a number of reasons:
- Market data is a key tool used by trading desks, a notoriously difficult area to manage.,
- The level of change in terms of personnel and business in this sector of the business is high.,
- Organizationally, market data management responsibility often is not clearly identified.,
- Market data contracts often are purposely difficult to manage (e.g., require very specific termination procedures and notice periods).
Effective Management of Market Data Services
Effective management of market data services requires a diverse set of skills working within a well-defined process in areas that include:
Management Systems. Management of market data requires not only management of the market data services from a contract and cost perspective, but also monitoring of their operation.
Process Reengineering. A critical measure of effective management of market data is providing the users with the controls and measures necessary to manage the resource themselves. Firms should develop or upgrade an automated administration process of request, approval, permissioning, installations, usage reporting and cost allocation, along with the requisite management reporting.
Operations. Support of the technologies and services is required to ensure the normal and abnormal operation of the market data services and its distribution across the enterprise.
Growth of requirements for information -- real-time, historic or reference -- has been met by a continuing stream of services, products and packaging from a variety of vendors, and market data has grown to represent a significant portion of the external expenses of the financial industry. Managing this resource has a number of challenges for firms to overcome. In order for a financial services company to successfully reduce its spending on market data and, more importantly, keep it under control going forward, the following steps are necessary:
- In order to begin a successful reduction of market and reference data spend, a company must first review all of its current market data expenses and compile a complete inventory of market-data-related products or services, including the contracts with each vendor.
Market Data Management
- When they review the different sources available for a particular aspect of market data, companies should ensure they look at qualitative factors such as data availability and usability, rather than simply cost. ,
- Companies also should ensure that they identify and cease to pay for all sources of data that they do not use, and that they appropriately leverage their spending with the particular vendors they are maintaining.,
- Further, companies need to ensure that they build in the appropriate processes and controls to sustain the cost reduction. Staff charged with delivering market data to the consumers typically are not concerned with, or rewarded for, controlling costs. However, these staff members typically are the only knowledgeable source of information regarding market data usage and consumption. Business managers see cost reports or spreadsheets that are heavily massaged and often contain network tariffs or other allocated costs.
- A company should establish a project management office to ensure that a market data management project is kept on track and is executed in accordance with program objectives.
The above steps help to ensure that companies meet the cost-reduction and data-quality goals, and that the cost reductions that are implemented as part of the project are sustainable for a reasonable period of time. Savings often are eroded in a 12- to 24-month time frame due to inadequate controls over the market data services procurement and entitlement processes, so the importance of building in the appropriate processes and controls so that the program is sustainable cannot be underestimated.