If you’re a subscriber to the Australian Securities Exchange’s ASX and ASX 24 datafeeds, you’ve probably recently signed a new contract with the exchange.

In October 2020, the ASX announced it was expanding the use of its Data Reporting Module (DRM) to firms currently reporting so-called non-display use of equities and derivatives datafeeds indirectly via their data vendors.

“What those [direct agreements] do for us is that they get us close to the end-customer. So, we know who they are, we can directly communicate with them, and we can ensure that they understand our policies and are reporting effectively,” says Jamie Crank, general manager of information and connectivity services at the ASX.

Until now, the exchange has largely relied on data providers with vendor-of-record status, such as Refinitiv, Bloomberg, Activ Financial and Iress, to account for customers’ data consumption, so it could accurately invoice them according to their use. But, Crank says, in preparing its DRM expansion, the ASX asked these vendors to inform customers that, from now on, they would have to license their data directly from the exchange.

The ASX’s disintermediation of the billing relationships with clients could signal a broader move among exchanges that are seeking to better understand their users’ needs, and to take back control over the consumption of their data. By effectively outsourcing some of the hard work and risk to data vendors, exchanges have realized that they have let money slip through their fingers.

Exchanges have to connect with almost everyone who’s consuming a datafeed, which, for some of them, could be hundreds of clients.

Sally Huxtable, Exchange Audits

According to research done by Keiren Harris, Hong Kong-based market data strategy consultant and founder of DataCompliance, exchanges globally may lose an average of 22% in data revenue per year due to inaccurate reporting or billing errors.

Despite that loss of revenue, some exchanges are still reluctant to initiate these relationships, he says. “That [figure] is really, really high. And it comes down to the lack of contractual relationships. However, some exchanges are willing to let that revenue go because of the investment in time and money they’d need to put in to set it up properly.”

Sally Huxtable, founder and director of Exchange Audits, a market data auditing and consultancy firm, agrees that some exchanges are seeking more direct relationships with their customers. These are more efficient, and give the exchange a more accurate idea of how the customer is using the data.

“Exchanges have to connect with almost everyone who’s consuming a datafeed, which, for some of them, could be hundreds of clients. So, previously, they’d always thought it’s easier to just get the reports from Bloomberg and Reuters,” she says.

But the changing landscapes of non-display data and derived data mean that banks are using information differently, and exchanges are realizing that they aren’t getting the full picture, Huxtable says.

Keeping tabs

Exchanges have for years preferred to let intermediary vendors keep tabs on their customers. Indeed, it was Thomson Reuters (now Refinitiv) that first offered to track market data usage 20 or 30 years ago, says Aaron Garforth, chief content officer at TRG Screen, which monitors enterprise subscription and usage spend.

“They were the first ones to say, ‘Tell us how many users you’ve got, how many max counts you got,’ and start charging in that way. And that seemed an easy way for the exchanges to piggyback off them and get their revenue that way,” he says.

Under this model, end-users disclose data in an access statement to the data vendor, which then collects the money from that user firm, adds on a fee, and reports to the exchange.

These vendors have also built their own systems to help clients with entitlements across their own enterprises. Refinitiv, for example, has a product suite called Dacs for market data administration, allowing users to manage data entitlements, usage, and reporting. Bloomberg’s Entitlements Management and Reporting System is aimed at helping firms control which users or apps interact with what data. (Representatives from Bloomberg and Refinitiv declined to comment for this story.)

“Like Dacs, everything is now about entitling a user who has a login, but that user could be human or an app. But if you were someone in the market data team, unless you dug into it, all you would know is that that login has access to certain markets. Then you have to try to find out what is that login doing,” Garforth says.

In recent years, non-display uses for data became more common as technology transformed markets. Once upon a time, market data went mostly to terminals, for use by human traders. Now, while terminals still exist, it’s far more likely that a bank will consume market data via a datafeed, ingesting it into a myriad of applications and systems for everything from tasks like constant analysis, back-testing, risk management, and calculating profit and loss, to algorithmic trading and smart-order-routing.

By its very nature, non-display requires a direct relationship between exchange and end-user, as applications such as algorithmic trading require the fastest possible connections to the datafeed. Why pay an intermediary an extra fee for a slower feed? As exchanges tried to understand the new uses to which clients were using their data, they started to realize that they had lost touch with them, Garforth says.

“There is definitely a move towards more direct relationships, and I think that is a recognition by the exchanges that they were disintermediated. That is probably why they got caught out by the increase in non-display usage—because they were not talking to end-customers. And certainly, when we talk to the less mature exchanges, they still tend to think of Refinitiv and Bloomberg as their biggest customers, while the more mature ones think of them as a route to their actual customer downstream,” he says.

There is definitely a move towards more direct relationships, and I think that is a recognition by the exchanges that they were disintermediated. That is probably why they got caught out by the increase in non-display usage—because they were not talking to end-customers.

Aaron Garforth, TRG Screen

Exchanges are particularly keen to understand how the buy side, a key source of liquidity, is using market data. The exchanges know and understand sell-side firms better because they are exchange members, but the buy side, with its increasingly sophisticated uses of technology and algorithmic trading, remains more mysterious.

Another effect of these new uses, and with end-users increasingly deriving their own products from data, is exchanges’ increasingly complex usage policies as they tried to capture these novel practices. Firms often complain that these policies are too complex, and not only lack any consistent standards across exchanges, but also make it harder for the data vendors to track data usage and report it to the exchanges as accurately as the latter would like.

“We’re now in a realm where users are licensed based on how the data is used. All we had to know before was: ‘That person has access, that one doesn’t have access, and that is one report.’ Brilliant, easy. Now, it’s: ‘That application has got usage rights—what’s it doing with it?’ That adds an extra layer of complication,” Garforth says.

Some exchanges introduced policies where, if users went directly to them, they could net costs across vendors, a practice known as netting.

“Many [exchanges] are grappling with the scalability and tools required to manage a lot of those direct relationships,” says Mark Schaedel, strategy advisor at DataBP, a licensing, sales and e-commerce platform.

“What’s driving a lot of that is the enhanced programs around netting, around non-display policies—it requires a differentiation of how the data is being used, which requires that direct relationship. Being disintermediated in the distribution channel makes it very difficult to recognize each of those different types of use cases and treat them appropriately.”

Data vendors are often more focused on running their own businesses, and that sometimes results in lackadaisical and inaccurate reporting, DataCompliance’s Harris says. Plus, different data vendors have different ways of organizing that data to send back to exchanges.

“The vendors are not going to enforce the exchanges’ policies and reporting and all that on their clients—it’s not for them to do. It will cost them too much, and get them into the middle of arguments. Their role really is to say: ‘Hey, the exchange has got policies, you’ve got to get in touch with the exchange.’ And often that bit of the communication tends to disappear, or it’s not had,” Harris says.

These reports are often in multi-tab Excel spreadsheets, he says, with a long list of firm names next to products, the number of terminals, and fees.

“I’ve seen the reports that the vendors send back to the exchanges, and they’re very badly structured. They’re hard to follow because they detail the vendors’ products and services, and the exchanges don’t really understand what they’re looking at. They’re given a whole load of data, which they’ve got to pull to pieces, and then recreate it in a way which is actually readable and meaningful,” says Harris.

I’ve seen the reports that the vendors send back to the exchanges, and they’re very badly structured … The exchanges don’t really understand what they’re looking at.

Keiren Harris, DataCompliance

Vendors do the best they can, but there will always be delays in the process and data exceptions, Schaedel adds. “They have to accommodate such a wide range of reporting types across exchange groups that they’re just not going to get it perfectly right.”

Additionally, vendors must rely on what the end-users tell them, and they themselves might not be familiar with every use of the exchange’s data within a client firm, Exchange Audit’s Huxtable says.

“So they report: ‘Oh, we’ve got 10 users. And then we have two more IDs: this ID is a non-display, revenue-generating application, and this one is non-display, but a back-office application.’ And then that goes back to the exchange. But if any vendor is giving an open datafeed to a client, the client has to explain to the vendor, based on an honesty statement, what they’re doing with the data,” Huxtable says.

Also, the person reporting to the vendor is not always the one who best understands how the bank uses market data across the enterprise, in what could be hundreds of applications. And some of those could be applications in test mode. Some exchanges allow users to use delayed or end-of-day data to test their applications for free.

“A bank could start that application, forget that it’s always been in test mode and hasn’t been turned off. There’s lots that goes on, as well, for testing your applications,” Huxtable says. “It is complicated if you’ve just got a datafeed, and then on the datafeed, you’ve commissioned an ID to a server and that server is doing non-display applications—unless the person who’s doing the reporting knows exactly what that server has been set up to do, and understands the application.”

The difficulty of tracking customer usage is why exchanges still carry out audits, even though they are a deeply unpopular part of the exchange-client relationship, being time-consuming, burdensome, sometimes costly for the client, and often combative.

Jack Ko, former market data head at Société Générale, based in Hong Kong, says audits can be a heavy exercise, depending on the maturity of a bank’s internal systems.

I wouldn’t say it’s full-time work, but duration-wise, it can take us six to nine months per audit. If it’s a small exchange, maybe it’ll take four to six months, but otherwise, six to nine months is quite normal.

Jack Ko, EQ Labs

“We have to demonstrate to the auditors that we have a good system in place in terms of entitlement subscription, and we know the ins and outs of display data and non-display data and how we use them,” he says.

Ko, who has since left the bank and co-founded EQ Labs, a mental fitness start-up where he serves as chief data officer, says that, each year, banks are subject to at least five to six audits from exchanges worldwide.

“I wouldn’t say it’s full-time work, but duration-wise, it can take us six to nine months per audit. If it’s a small exchange, maybe it’ll take four to six months, but otherwise, six to nine months is quite normal,” he says.

Investing in billing platforms

So, exchanges have realized that direct relationships are increasingly critical in driving their businesses. However, establishing these requires investment in understanding customers. Despite the benefits of such initiatives, exchanges still balk at the costs.

Part of the investment that some exchanges have made in simplifying the billing process is investing in new reporting platforms. The ASX, for instance, introduced its DRM to customers in 2019, and the module is facilitating the more direct billing relationships it wants to have with clients. Behind the module is DataBP.

DataBP provides organizations such as exchanges, mid-sized data businesses, and data start-ups with solutions for setting up customer portals, product catalogs, management of licensing workflows, and data contracts.

For reporting, for example, DataBP can set up the platform for over 800 different configurations of the reporting module, depending on what the client needs.

Via a set of initial questions in the ASX module’s interface, customers disclose how they are using the data—whether it is cash or derivatives markets, and whether the activity is revenue-generating or not. Customers must name their applications, where those applications are, and how many there are. The DRM then creates an automated license agreement that the customer can look through and sign using DocuSign, or if they prefer, print it out, sign it, and send it back to the ASX.

Crank says the extension of the DRM will affect over 100 customers. While it currently only impacts non-display customers, the ASX could extend use of the platform to customers using data in display applications at a later stage.

Crank says the module is designed to be as simple and user-friendly as possible. “Has it been perfect? No. We’ve had to change it a few times to facilitate the way our customers are using the portal. But having that electronic interface has really helped us do that,” he says.

Toronto-based exchange group TMX has had direct billing and contractual relationships with end-users for longer than Michelle Tran has been at the exchange, and she’s been there almost 19 years. But in the past two or three years, the group revamped its reporting and audit processes, to make the audit process less painful for customers, and to better track data usage.

Tran, who is vice-president and global head of sales for TMX Datalinx, the group’s information services division, says the billing portal was the result of frustration from clients saying they couldn’t access their invoices.

“Our clients are becoming more sophisticated in terms of how they use technology, and market data is rapidly changing. You have to pivot and make sure that you build a model around something that is scalable,” she says.

As WatersTechnology reported in 2019, TMX set up a service called Datalinx Xpress, under which firms can submit to one initial audit, and agree to fix any compliance problems that it uncovers without penalty. After that, they never have to go through another audit again, but instead meet with the exchange twice-yearly to certify any changes. It also, with DataBP’s help, built the Datalinx client portal, which allows users to look up the information on their billing accounts and invoices, and pay their accounts.

Impact on vendors

The ASX’s Crank says that the data aggregators were open to the exchange’s move to the direct arrangement, as it reduces their risks when providing datafeeds and alleviates the burden of their reporting obligations.

“They saw it as helping them with their business, because essentially they’re always on the hook for whatever reported usage is required by the end-customer. If they’re providing them with an unfettered datafeed, as in ‘it’s a fire-and-forget, here’s the datafeed, we permission it to you’, we can’t see what you’re doing with that datafeed. So they were still actually on the hook, or semi on the hook for reporting whatever you see your end-client was undertaking,” he says.

Some vendors will help clients navigate the complexity of market data policies as a value-add. For these companies, disintermediation may represent a lost opportunity for differentiation.

James Hardcastle, business development director for capital markets in the Asia-Pacific region at Colt Technology Services, a network provider and licensed market data provider, says that reporting back to the exchange on how end-clients are using the data is something Colt does to take care of its customers.

“All they need to do is tell us how they’re using it, and we can report that usage back to the exchange,” he says.

The client would still have to understand all the varying policies of the different exchanges. Colt can leverage its experience with these policies, explaining them to the customer and walking them through the various complexities.

We partner with [exchanges] to sell their data, and we help them get their data [out] internationally, but now they’re coming up against us and saying: ‘You know what, we want to take control of this, we want to bring it back.’

James Hardcastle, Colt Technology Services

“We are now in competition with the exchanges in some ways. We partner with them to sell their data, and we help them get their data [out] internationally, but now they’re coming up against us and saying: ‘You know what, we want to take control of this, we want to bring it back.’ So that’s a frustration for us,” says Hardcastle.

To take the case of the ASX specifically, any client that wants to take the native or raw format of the exchange’s data must contract directly with the ASX. They can still buy it from vendors such as Colt, but they must also contract directly with the ASX.

That arrangement reduces the incentive for clients to get that data from a third party, Hardcastle says. “If you’ve got a contract with the exchange anyway, then why should you get a third party involved as well and do the extra step? Before, it was coming to us—we can sort that out for you and this is our value-add. We can give you the connection and the data. You don’t have to worry about working with the ASX, we’ll handle all that for you.”

Hardcastle says the trend of exchanges seeking more direct billing and reporting models is particularly pronounced in Europe and the US, but Asia is following.

“There’s less of an area that you can add value or be different, or add a USP [unique selling point] to your service. All the data vendors become more generic because there’s less of a service that we can provide,” he says.

For end-users themselves, the question of whether or not to have a closer relationship with the exchange may be a matter of indifference.

Ko says that, during his time at SocGen, he didn’t have a preference for either model, as long as the reporting was automated.

“Once it’s automated, once it’s system-to-system, then it’s all good,” he says. “The thing is, because we are in a mix of manual and automation among all the stakeholders in the industry, nobody actually has the complete picture [of the reporting-billing status], and that’s why we all struggle.”