By Angela Centeno, CPA
Market data is the foundation of every investment decision. Investment managers can never get enough of it, and can never get it fast enough. Along with the recent growth in new investment products and regulatory requirements for increased transparency, comes the demand for additional, often unique types of market data. Market data providers are scrambling to respond with new products to meet these needs, but like any commodity in high demand, market data is expensive. With all these new developments, investment management professionals are getting anxious, and they’re pitching tough questions at their market data managers.
With so many providers, which one should we choose?
A new regulation requires additional market data for reporting. What do we do?
With so many market data agreements now, how do we know if we’re properly licensed?
Sometimes it seems like acquiring, cleansing, interpreting, normalizing, distributing, and overseeing all that data requires skills not typically found in an individual human being. Sometimes it seems like we need a team of Super Heroes.
Market data is just information used in investment making and monitoring processes. So why is managing it such a challenge for mere mortals?
Buried in Data
The biggest challenge in managing data today is volume. Investment managers rely on thousands of data elements for daily operations from many internal and third parties in many formats. To effectively manage data, investment managers must know each person requiring access to each data element. They must know exactly which parties are sending data, and exactly when they send it. Data received must be cleansed or normalized before it can be stored or distributed. Storing huge quantities of data is an issue in its own right. Which types do you need to store? How much can you store? How long do you need to store it? How often do you need to back it up?
Regulations, Regulations, Regulations
As new regulatory requirements appear on the horizon at an alarming rate, they are dramatically increasing the challenges of managing market data. As each new regulation is released, investment managers need to understand it, comply with it, and provide proof of compliance. This means having the right data available to comply with reporting requirements, primarily around transparency. In addition some of the new banking and financial directives require firms to apply oversight and risk management processes to their third party relationships. This challenge is not as much about having the right data, as it is about managing the providers of that data.
Each new law enacted is a new opportunity for data providers to sell products and services. The agreements governing these products are new, complex, and expensive. As investment managers are struggling to control their market data expenditures, vendors are stepping up their usage monitoring. Investment management firms must thoroughly understand their licensing structure, and carefully oversee employee compliance for licensed material.
By nature, the task of managing market data is complicated because different investment managers holding different assets for different client types need different data elements. A firm investing solely in equities won’t need bond ratings. Asset types now extend well beyond equities and fixed income, and these alternative investments require unique methods of valuation. Firms investing in these alternatives may have unusual SLA requirements and may require unique reporting.
To run a successful data management program, a Market Data Manager must capably manage many data types, providers, and relationships. That challenge requires skills so broad and deep that only a team of highly skilled specialists can provide them. The first step to gaining control is recognizing that market data is not a commodity but a strategic asset, requiring high quality resources.
Subject Matter Expert
Market data professionals purchase market data at the request of internal partners. But they can’t just react to requests; they must be knowledgeable in all facets of their market data category. They must work closely with IT and data stewards to understand the data architecture in terms of how data is brought in, stored, and sent out, and to ensure that it is appropriately normalized, cleansed, and licensed.
Market data specialists must also understand the business needs and processes of their internal clients. Complex asset classes make these tasks especially difficult. For example, valuing derivative securities is much different from valuing equity or fixed income securities. Derivative valuation comes with its own vocabulary (think tariff levels and cleared pricing) and requires a subject matter expert to compare the offerings of the various vendors and to properly engage suppliers regarding their products and services. It is essential for market data teams to be able to compare and contrast vendors during selection and renewal of services.
Finally, market data professionals must stay abreast of industry issues (think Solvency II) and trends to advise their internal business partners.
Market Data Managers are also beginning to join in the financial planning process to help firms balance their market data budgets. They are being asked to provide budget projections based on a particular vendor, business unit, or subcategory (such as pricing or reference data). Being able to slice and dice the numbers yields insight into the ways investment managers can trim market data expenses.
Not surprisingly, market data costs remain a key driver in how market data professionals craft their program management. These costs encompass not only the contractual expenditure to the vendors themselves, but also the internal administrative costs. As we pointed out in the June 2014 Cutter AdvantEdge, The True Cost of Market Data: Operational Impacts, investment managers have a handle on the cost of licensing market data, but the cost of “managing” market data is more elusive. Market Data Managers must understand both the licensing and operational costs of market data, and work with finance and business managers to ensure these expenses are accurately tracked and projected.
More regulations mean more risk management, and that means tighter scrutiny attached to market data contracts. Market data specialists work with legal and compliance teams to stay abreast of changes in industry regulations. They also ensure that master terms and conditions and attached schedules contain the necessary wording to comply with existing laws and mitigate risk. For example, the treatment of Personal Identifiable Information (PII) continues to be of concern for investment managers. Ensuring that PII is safeguarded requires confirmation of appropriate contractual language for each service. More and more often, the oversight of contractual language is falling to market data teams.
Market data professionals negotiate contracts to drive price and rate card alignment. They also ensure the business is contracted appropriately for the use case, answering questions such as, “Is this an enterprise license, or a per user license?” and “What else do we need?” This work by data professionals enables vendor managers to keep their focus on product use and service.
What are our options for derivatives valuation vendors?
Which vendors are merging or acquiring other vendors?
Where is data management technology headed?
Which regulations are having the biggest impact on the market data landscape?
Are we in compliance with our data vendor contracts?
Why are we paying so much for market data?
One investment manager may have multiple relationships with a single market data provider. A business unit manager’s vendor relationship may be centered on an SLA, while a senior executive may be working on a strategic initiative with a counterpart at the same vendor. Market data professionals have become central points of contact between firms and their vendors. If a business unit manager needs to escalate an SLA issue, he or she contacts the market data team for help. If the vendor has a new product to shop around, they call the market data contact at the investment manager. If an executive level meeting is being held with the vendor about data architecture, you can bet that the market data manager is invited. When one-off situations arise between data vendors and client firms, market data specialists take the role of facilitator to drive resolution to both side’s satisfaction.
For investment managers, the number of market data subscriptions can be staggering. Furthermore, many services are licensed on a per user basis. The processes of providing employee access, monitoring usage, reporting appropriately back to vendors, and terminating services are challenging, but market data specialists are filling the need.
To help their data specialists, firms are investing in market data administration systems. Among other things, these tools can track market data spend as well as users assigned to products. Market data professionals use these systems to help their business partners manage licensing costs and user information.
Data, and particularly market data, is one of the most active topics of discussion in the industry today, as it is analyzed, discussed, negotiated, regulated, and processed. Managing market data well provides rich rewards, but requires a team of highly skilled market data professionals to run a successful program. As more investment managers realize that market data is a strategic asset, they will seek the industry professionals who can help them oversee a market data program that can prove strategically important to the success of their firms.
About the Author
Angela Centeno, CPA, joined Cutter Associates in 2015, bringing more than 22 years of experience in financial services. Before joining Cutter Associates, Angela worked for The Northern Trust Company in multiple roles managing enterprise market data, investment outsourcing, vendor relationships, and custodian relationships. Previously, Angela spent 11 years at Driehaus Capital Management, where she held senior positions in operations management, project management, data management, and solutions implementation. Angela earned B.S. degrees in Accounting and in Business Administration from the University of Kansas, as well as an M.B.A. in Finance from DePaul University.
CutterResearch content is the proprietary property of Cutter Associates and our members who have entered into confidentiality agreements. It contains information that is proprietary and confidential to Cutter as well as to the vendors discussed within the reports (the "Vendors"). Disclosure of the information contained in the reports could cause irreparable harm to Cutter and/or the Vendors.
By selecting "I Agree" below, you agree to safeguard this information with the same care as your firm affords its own confidential information. You will not provide access to this information to anyone who is not an employee of your firm and will not distribute this information outside your firm. Furthermore, you will not provide access to this information to any employee of any subsidiary, unit, department or division of your firm that is engaged in any aspect of the software business involving third parties, including, without limitation, selling or otherwise providing software to third parties, assisting third parties in the selection or implementation of software, or providing investment related software information to third parties (collectively, the "Prohibited Recipients").