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Market data faces a regulatory reckoning

The cost of market data being supplied by benchmarks and indices to asset managers – together with the complexity of the contracts binding investment firms to these providers – is an issue that IIMI (Independent Investment Management Initiative) has repeatedly raised with regulators  – most notably the UK’s Financial Conduct Authority (FCA). In a missive released in January, the FCA confirmed that it will launch two studies investigating how easily market participants can access wholesale data. 

According to the FCA, this comes amid mounting concerns that there is limited competition in the markets for benchmarks and indices, credit ratings and trading data, which in turn is leading to higher costs for fund managers and their end investors. The FCA said the first study – which will start in the Summer – will review concerns that contracts for benchmarks and indices are excessively complex – in what is precluding investment firms from switching to cheaper, better alternatives. At the end of the year, the FCA continued it would launch a follow-up study examining whether high charges for access to credit rating data is creating added costs for investors and hindering new market entrants.

The FCA said it will be gathering input about competition in the market for wholesale trading data, namely information about what financial instruments are being traded; how much people are prepared to pay for them, and the prices at which transactions are executed. A lot of this information is supplied by trading venues – principally stock exchanges – where the transactions take place. Nonetheless, there is disquiet about the absence of proper competition in this corner of the market, in what some say is resulting in asset managers facing higher costs. Others point out these costs might even have an impact on the nature and type of assets that investment managers buy and sell.

One IIMI manager adds that the lack of clarity over display and non-display data contracts with wholesale data providers and exchanges is still a live issue. This is because many managers are being challenged on how they use security/index data in their trading activities. Some firms have been informed by providers that these activities are not covered by their existing contracts or are being forced to sign new contracts to cover data use for something they did not need to pay for previously.

Experts say this FCA review could pit stock exchanges  – where proceeds from data distribution and sales are becoming an increasingly important component of their revenues – against asset managers, who are frustrated about the rising data charges – especially at a time when margin pressures elsewhere continue to grow. A number of investment firms are spending more than ever on operations – including data –  despite facing fee compression and heightened regulations. In response, many managers are looking to net meaningful cost savings, something which could be facilitated through greater competition in the benchmarking world.

As the UK increasingly strives to attract more foreign investment into the country post-Brexit, greater competition in terms of how market data is supplied could be one of the ways in which this is achieved.