Market data consumers buy the same products at massively different price points

Hope springs eternal in the human breast; grief springs eternal in the market data professional.

Market data consumers have long complained about the necessary evil that is market data. Stemming from non-existent or poorly followed rate cards, rising renewal rates, complicated licensing structures, and a lack of alternative providers, market data managers are often greeted with new or increased fees year over year.

In 2021, spending on market data increased 7.4% to $35.6 billion, according to a study conducted by Burton-Taylor International Consulting. And a new study by Substantive Research has found that market data consumers on the buy side grapple with sometimes wide pricing inconsistencies for the same products and services.

According to Substantive’s study, price disparities between asset managers buying comparable products and services from the same providers can reach as high as 2,632% (26 times) in the ratings, ESG data, and index markets. The highest disparities were found in the index market while being much smaller in the ratings and ESG markets (562%, or 5.5 times, and 600%, or six times, respectively).

“We saw that there was a need for consumers in the market data world to try and get some sort of understanding of how they should feel about the agreements and relationships they have in place,” Mike Carrodus, founder and CEO of Substantive Research, tells WatersTechnology.

The study included a combination of 60 long-only shops and hedge funds located in Europe and North America, representing $7 trillion in assets under management (AUM). Peer groups were grouped by the factors that were most important depending on the product or license, Carrodus says. For some areas, AUM mattered the most and therefore they were grouped tightly by that factor, but in other instances, other pricing drivers mattered more, making the AUM range broader. In other words, when Substantive identified the driver of a product to be uniquely AUM, they narrowed down the dataset to only include firms that were more aligned in AUM. However, Carrodus adds, the level of inconsistency was “very similar” across all peer group sizes.

Initially, Carrodus says he was reluctant to conduct the study at all, the first iteration of which was released last October with a smaller group of participants (40 firms) that found pricing disparities of about half the rate of the second study (1,300%, or 13 times). After all, there are plenty of valid reasons why pricing consistently in market data is a challenge for providers.

The use-cases can get “fantastically complex,” he says, and both the consuming side and the selling side have undergone M&A activity. Recent mergers and acquisitions in the data space include major deals such as S&P Global and IHS Markit, the London Stock Exchange Group and Refinitiv, and Cusip Global Services and FactSet, along with a flurry of smaller deals.

I’ve yet to run into a firm that feels like they didn’t want to fall out of their chair when they got their renewal quote

Bernardo Santiago, S4 Market Data

Compounding matters is the fact that no consumer profile is the same as another’s. Differences in clients’ office locations, user or seat numbers, display formats, and necessary reporting licenses all factor into the provider’s service bill at the end of the day.

“If you were a provider, you would struggle to price consistently, I think, because you’d have to put a lot of time and effort into it,” Carrodus says. “However, I would also say that I don’t think providers are incentivized to ensure that they are providing consistently.”

When it comes to pricing data, there are two strategies providers adhere to: cost-based pricing and value-based pricing. The first practice determines the cost of a product or service based on the provider’s production costs, while the second prices services based on the value perceived by the consumer.

An executive at a US-based data vendor says their company follows the latter model.

“I sell my data for $1 a seat, $10 a seat, $100 a seat, $1,000 a seat, or $10,000 a seat depending on who you are, how you’re going to use it, how you display the data, how fast you get it, and what format you get it in,” they say. “Technically, one could say it’s the same data … but the use-cases are different.”

The data that gets delivered to Robinhood on a delay for casual investors, for example, is the same data that gets delivered to a market-maker on the Chicago Board Options Exchange in milliseconds. Is it more valuable in one place than the other?

FCA taking notice, too

Earlier this month, the Financial Conduct Authority (FCA) in the UK launched its wholesale market data study, the results of which will decide whether the FCA makes a market investigation reference to the Competition and Markets Authority about any or all of the credit ratings, benchmark, and market data markets. The study, which will be published by March 2024, will explore six themes including barriers to entry and expansion, network effects, vertical integration, suppliers’ commercial practices, the behavior of data users, and incentives for innovation.

In the last five years, scrutiny of market data vendors reached a fever pitch. The FCA began researching the supply and use of data in wholesale markets in 2020. And in 2018, Copenhagen Economics, a major economics consultancy and research firm, conducted a study in which it proposed implementing a price cap on market data based on a Long Run Incremental Cost (LRIC+) benchmark to reduce rising market data fees and combat erroneous pricing policies.

“I’ve yet to run into a firm that feels like they didn’t want to fall out of their chair when they got their renewal quote,” says Bernardo Santiago, CEO and co-founder of S4 Market Data, a consultancy to financial institutions on market data administration.

Santiago, who also spoke with Substantive’s Carrodus, was impressed by the new study and its thoroughness. While pricing discrepancies undoubtedly exist, and sometimes for good reason, he notes a conflict of interest between the providers and consumers. The biggest spenders on market data are often shareholders of the biggest market data providers; the more they pay, the more money they make, but that sets the tone all the way down to the smallest shops.

Whether or not they’re being fairly priced across the board, and knowing what firms with similar objectives are being charged for similar products is a good conversation for the industry to have. “A C-level person sees this, and they’re probably pulling their market data person out by the hair and asking, ‘Is this us? Are we the ones paying more? Which one are we?’” he says.

Given the complexity of market data production and consumption, and the vast array of use-cases that correspond to it, Carrodus doesn’t believe that this is a market where comprehensive rate cards and exhaustive price lists can ever solve the issue of price disparity.

“But,” he adds, “I don’t think we’re even 1% of the way there.”