The Future Of Market Data
The Status Quo
Great change is coming to the world of financial data.
The dominant data providers – such as Bloomberg, Thomson Reuters and Markit – have built multi-billion dollar businesses by mining and presenting data. Their business model relies upon how efficiently they can monetise that data, which is sold and live streamed to banks and financial institutions.
However, for too long, data providers have been weak at technology and ambivalent towards partnering with smaller companies below their pay grade. Companies like ours, Origin, all too often struggle to negotiate with these giants.
Now technology is revolutionising this industry in ways we’ve never seen before. Small, agile businesses are reconfiguring the foundations of the data industry. The large providers need to adapt and they can only do this by adopting the latest fintech.
I believe that incumbent financial data providers have noticed this threat and they are responding by changing how they do business. These changes are significant and they are creating huge opportunities for the rest of the industry. Two key shifts will change the world of financial data as we know it.
Firstly, the entire industry is changing, with new data providers emerging, offering cutting-edge technology and more efficient data distribution.
Secondly, banks and financial institutions are changing how they perceive, acquire and use data, based upon smart contracts. This is creating new monetisation opportunities.
The Arrival of New Vendors
For too long, banks have been forced to rely upon incumbent data vendors who provide a vast, varied amount of data, but in an often muddled way, for big money and little oversight. In short, data provision is plentiful but inefficient. This inefficiency was created as a result of how vendors sold their data.
Currently, vendors sell data as a package, whereby banks purchase a certain frequency, volume, usage and distribution mechanism for the data in one transaction, usually via a contract that spans a number of years. Banks typically have technology that fast grows outdated, so integrating data with in-house banking systems is slow and highly inefficient.
To a new generation of smaller, more agile and technologically savvy data providers, inefficiency means opportunity. The challenge of integrating data is one such opportunity, with a number of ambitious companies hoping to streamline integration by offering reliable wrapper technology that can be easily and cheaply plugged in by banks & financial institutions. Railsbank are doing this in retail banking. TransFICC are offering a similar service in the fixed income space.
The often bandied figure is that banks pay roughly 8x for each piece of data they consume without even realising. This is largely due to the fact that there’s no centralized attribution service to monitor the vendors as their feeds are custom built and, in many cases, need updating. As is the case across the entire financial services industry, systems and practises that were the norm are being replaced by new technologies. Cutting edge fintech firms are causing the landscape to shift beneath our feet.
This reminds me of my days as a trader. We’d have the desk assistant check quarterly if we really needed all the data feeds we used. Xignite are now offering this service via their Market Cloud Data Platform, giving financial institutions the ability to monitor and control their data needs. This could dramatically reduce what banks spend on data, and threaten the profits, market share and profitability of Bloomberg, Thomson Reuters and Markit, as technology continues to drives efficiencies and cost savings.
Smart Contracts Are The Future
The second transformational shift for financial data will be linked to the rise of smart contracts on the blockchain. If correctly implemented, the widespread adoption of smart contracts could open up new monetisation streams for banks.
A smart contract is a digital agreement which is tamper-proof because it is run on a decentralized network. This digital agreement once triggered irreversibly executes an arbitrary number of steps. As a working example, imagine how a smart contract could replace a structured note, whereby on a specific date each month the payoff can be calculated automatically following a few market data inputs (e.g. the FTSE 100 price) and the payout can take place instantly.
Diagram: A simple equity swap smart contract
One stumbling block with smart contracts is that they are unable to directly communicate with offchain (off the blockchain) resources, such as data feeds and APIs. As we can see in the diagram above this smart contract would require market data inputs and to enable it to be truly useful you’d want the payments to party A and B to be settled offchain such as via the SWIFT network.
Diagram: The smart contract connectivity problem
To overcome this obstacle, smart contracts use oracles. Oracles connect smart contracts to APIs and data feeds by broadcasting the specific data. The smart contract uses that data input as part of its execution. The use of smart contracts and oracles would remove an enormous number of manual inputs that are currently required when pricing and settling a huge number of contracts and securities. The efficiencies and cost savings this would introduce could be enormous.
As smart contracts and oracles grow in popularity over the coming years, they will still rely on one crucial element: a consistent inflow of trusted data. And that data – despite being used in a different, more modern way – will still have to be supplied by giants like Bloomberg, Thomson Reuters and Markit.
I believe the arrival of smart contracts will enable financial data providers to open up entirely new business lines. Encouragingly, these giants are responding and adapting to embrace this paradigm-shifting technology.
For example, vendors are working to monetize all data. Reuters have launched B1IQ, a ‘smart oracle’, created to power smart contracts with trusted financial data. With projects like B1IQ becoming a reality, I’d expect all data providers to look how they can monetise smart contracts. The prize for whoever can do it most effectively will be great.
What Does The Future Of Market Data Look Like?
The pace of change in financial technology is breathtaking, and it’s no different in the world of financial data. The future is impossible to predict, but with new, agile companies arriving on the scene and the incumbent giants realising they need to adapt and change, the only certainty is that things won’t remain the same for much longer.
For companies lining themselves alongside the likes of Bloomberg, Thomson Reuters and Markit, the opportunities being opened up by blockchain technology and smart contracts are exciting and almost endless, which is good news for all involved in fintech.
In the coming weeks here on the blog, I’ll be taking a more in-depth look at smart contracts and their application to financial markets.