Market Data with Asian Characteristics
The reasons for this fragmentation are well known, open and closed barriers to entry, cultural issues, and the underlying cost of operating across a very large percentage of the Earth’s surface.
The Asian market data industry naturally reflects both these trends, and arguably, the future could well see greater levels of fragmentation as new entrants seek a slice of a growing pie. However, especially in Asia, to be successful they need to differentiate their offerings to leverage unique product strengths rather than taking on the two Tier 1 universal aggregators, Bloomberg and Thomson Reuters. To a degree the Tier 2s, such as IDC, Morningstar, and SIX Telekurs, and specialist vendors have followed global clients into Asian markets as penetrating local institutions unwilling to invest in market data is often unprofitable.
This fragmentation is increasing on two levels geographically where there are 5 key market areas, China, Japan, Korea, Hong Kong/Singapore, and the parochial domestic markets of the rest, though Indonesia is developing rapidly.
The result is that global vendors can offer pan-regional services with near universal content coverage with an entrenched institutional client base. Unfortunately for Tier 2 vendors their weaker OTC and contributed data coverage has until now limited their Asian aspirations. In contrast domestic vendors focus primarily on their local equity markets offering low cost, low margin, market depth coverage for a domestic and retail audience.
Sadly, there is limited and unreliable information on market data revenues in Asia. However, reliable estimates indicate growth for 16 leading vendors from US$2.241 Billion in 2007 to US$3.742 Billion in 2011. This excludes the many privately held vendors, exchanges and brokers, as well as other sources.
As terminal based services and applications revenue in Asia has apparently remained static, where does the market growth come from? Naturally we must look to developments in the financial markets themselves. Since 2007 increased electronic trading in liquid and open markets where global institutions have access has driven the data boom.
Increasingly liquidity not only drives data demand in the front office it fuels enterprise wide requirements from trade to post trade. The expansion of Asian electronic trading and Direct Market Access (DMA) generates an increased need for feeds, with the corollary requirement for reference data and evaluated pricing services. One feeding the other, so the same data can be put to multiple uses, and often charged multiple times as well.
Like in other global financial centres data usage has expanded from the Front Office throughout the business, and with increased use comes higher costs meaning for many institutions Market Data is now the third largest cost line item. This has meant institutions view Market Data as a cost to be managed, not a resource to be leveraged to benefit the business, as many institutions generate their own data, rarely seeking to exploit it, nor appreciating what is happening to their own data internally or externally.
Bloomberg and Thomson Reuters overwhelmingly have dominated increasing their market share from 66.3% to 73.3%. The reason for this success? Comprehensive data coverage globally especially for OTC markets, via B-Pipe and Datascope products able to meet existing institutional client demand for expanding electronic trading and enterprise data usage. Arguably this is the fastest and strongest growing regional market segment, where competition, especially from Tier 2 global vendors has been weak, and exacerbated by poorer Asian OTC coverage.
Fortunately for Tier 2 vendors, they have prospered where Bloomberg and Thomson Reuters are traditionally weak, especially for reference data and evaluated pricing. This is aided by institutions wary of the overwhelming dominance of the Big Two as well as an increasing amount of customer dissatisfaction with these vendors. This is generated by a perception of arrogance and high costs for Bloomberg, and the eternal internal collision of the Thomson/Reuters merger combined with a bewilderingly poorly supported product line up.
While Bloomberg’s and Thomson Reuters’ terminal services are not likely to be seriously challenged in the medium term, despite the efforts of the likes of Sungard’s ‘MarketMap’, their overall dominance is not sustainable as the market reaches saturation point.
Tier 2 vendors are increasing content coverage, while leveraging lower cost bases with more flexible market approaches to transition from the reference data space into offering competitive data feeds, where institutions require a second feed to back up Bloomberg and/or Thomson Reuters. The latter has left itself in a weaker position. Bloomberg’s move to open source instrument codes while Thomson Reuters labours in a somewhat dinosaur attempt to keep its RICS proprietary means the likes of IDC, already mapping to Bloomberg codes, can make displacing Thomson Reuters a less painful process than removing Bloomberg in the key datafeed market.
Across Asia, there are many small privately held local vendors focusing on domestic equity markets with a retail oriented client bases, offering low cost, low margin, yet relatively sophisticated terminal based applications with market depth not distributed by global vendors. However, with few exceptions they are blighted by business blindness, unwilling to invest in new content or datafeeds with limited development strategies. Unattractive to potential buyers, and owner egos discouraging consolidation make it difficult to predict these vendors’ long term potential.
As usual Japan is an exception, despite stagnant domestic markets, it supports an almost universal vendor, Nikkei owned Quick Corporation with its loyal Japanese client base. Past failed attempts at overseas expansion has limited Quick to Japan placing a cap on growth, but not aggressive competition from global vendors attracted by the high fee environment.
In contrast many Chinese market data vendors are listed and well capitalised while seeking global conquest. Domestically their low cost, low margin services have the advantage of a substantial local market, and unlike elsewhere in Asia vendors such as Shanghai Great Wisdom and Wind Information dominate, not the Big Two. Attempts at overseas expansion, have, until now, proven unsuccessful. Like their western brethren seeking to enter the Chinese markets, they have little understanding of the mechanics of overseas markets combined with a determination to do it on the cheap. Resultant failure has led Chinese vendors to focus on offering unique China datasets at least to the Chinese vendors.
Serious Challenges Ahead
The Asian market data industry faces a number of challenges in the medium term, two of which are Regulatory and Who Owns Data, a global phenomenon, another, Data Piracy is again global but has a unique Asian, especially Chinese, characteristics, and a neglected fourth challenge, a regional lack of skill sets and knowledge.
Each of these has a fundamental impact on the financial markets themselves, after all there would be no capital markets without market data.
The impact of new regulations covering data will naturally vary from jurisdiction to jurisdiction, however, international banks are increasingly setting the policy of implementing gold standard regulations across their global businesses no matter the location. Thus, a Hong Kong located bank will implement London based rules if that is the bar. This will increase the Asian cost base for data requiring institutions to ensure the data they require for regulatory and client reporting standards are met.
The question of ‘Who Owns Data’ is not only controversial, but misunderstood, especially in Asia. Data is transient, intangible, a concept, and who owns it generates questions. Theoretically, it should be straightforward but it is not, the reasoning too deep for this article, but the impacts are widespread and directly relevant to who pays how much and for what. Data sources are developing new ways to leverage data and create revenue streams, backed by tighter contracts to protect Intellectual Property Rights. They place increased reliance upon compliance and auditing, with greater emphasis on data governance. Institutions in Asia must adapt or else face unnecessary liabilities.
Data Piracy is a major issue in China, and despite government attempts, the old saying ‘The Mountains are high, and the Emperor is far away’ is inevitably true. There is no immediate answer, and everyone loses. It becomes harder for data sources, and smaller vendors to enter the market, and achieve a profitable critical mass. In turn this means the market is not getting all the data it needs accurately, timely, or consistently, nor at a reasonable price. This sets back the development of China’s financial markets.
Increasing market sophistication should require market data people to have a wider knowledge of financial markets. In Asia, this is absent to the detriment of all businesses. Again, with few exceptions, market data managers answerable to Head Offices in London and New York fixate on contracts and costs management with administrators unable to talk markets with the data users. Many local institutions do not understand the concept of market data management is dead and buried, and has been replaced with the business of market data management now viewed as an asset. This encourages inefficiency and higher costs. Equally knowledge tends to be limited to local markets, i.e. someone who knows Hong Kong is unlikely to have an equivalent level of experience in say, Korea. There are very few people with true Pan Asia market expertise or experience.
I envisage growth in market data spend as new regulations come into play, and as new financial instruments are developed across Asia. This is likely to benefit data source owners, especially inter-dealer brokers with strong regional presence covering a broad range of asset classes, notably BGC, ICAP, and Tullett Prebon. Exchanges looking to clear OTC instruments will be able to add new content, especially the more innovative like Hong Kong Exchanges and Singapore Exchange, who increasingly are becoming service providers in competition and co-operation with traditional vendors.
The few progressive financial institutions will seek to utilise market data as a resource, whether it be outbound, internal, or, inbound. By understanding how to effectively leverage market data they will benefit their P&L creating a competitive advantage in the marketplace.
In the Tier 1 ‘Jack of all Trades’ vendors, their relative position in revenue terms in the medium term is not in doubt. However, their absolute position is threatened by more creative flexible Tier 2 ‘Masters of Some Trades’ vendors adding new content, and able, willing to work closely with their clients.
Keiren Harris advises exchanges, financial institutions and corporations on their Market Data Business Strategies since 1990.
Hong Kong based, Keiren’s project experience focuses on leveraging information as a business resource to benefit the bottom line.
Clients include Jardine Fleming, JP Morgan, Dresdner Bank, Queensland Government/Treasury Corporation, Tullett Prebon, Dow Jones, Reuters, Calyon, Deutsche Bank, and leading Exchanges.
Keiren also speaks and moderators at major industry events arranged by Incisive Media, Worldwide Business Research and Sungard, as well as conducting specialist business workshops for organisations including the Federation of European and Asian Stock Exchanges, FEAS.