Profit & Loss talks to Kevin Taylor, managing director, Icap Information Services about why is market data increasingly seen as a big money business at a time when market participants appear able to access more data from different sources than ever.
Profit & Loss: Given that Icap has a mature and well-established data business, how does the company plan to continue growing its market share going forward?
Kevin Taylor: If you look at Icap’s business and you look at the way we generate revenue as a group, we’re transaction based – we have commission-based revenue generating businesses – but one of the areas that is increasingly interesting for firms is our subscription-based business. I would also point out the high retention rates of market data businesses. Once business has been secured and data is actually being consumed, the way that data is consumed by the end user customer makes the product very sticky.
When I started, the business was screen-based, and it was view-only, but today, in extremely complex ways, a lot of the consumption goes through the entire workflow of an organisation, not only front, but also middle and back office. This makes the products extremely sticky. When you add that subscription-based market data revenue model to the mix, I think you have a relatively stable workflow.
P&L: How do some of the recent acquisitions we’ve seen affect the market data provision industry? What is driving the interest?
KT: Technology has enabled people to consume market data in creative ways and in much greater volumes, so the ability for people to consume market data continues to increase as technology continues to advance, and I think that makes those companies providing market data services and market data businesses better able to deliver new products out to additional end users in a more efficient manner.
As people’s ability to consume and use that information is increasing, these sorts of firms are therefore becoming increasingly attractive.
Once you have a market data service or product that becomes desired, or there’s a certain level of consumers in the industry actually consuming those services, I think that distribution enables you to actually generate cross-selling opportunities. When you look at the IHS and Markit deal, there’s a non-overlapping client base, and both firms have tremendous distribution.
P&L: What is the key to successful distribution?
KT: Successful market data firms have tremendous distribution, and being able to generate cross-selling opportunities through that distribution is another key factor in why these companies are becoming so prized, particularly now – technology, cross-selling opportunities and distribution, high retention rate, and a steady subscription-based service are the primary drivers.
P&L: Is the way that financial professionals want to access and consume data changing? If so, how?
KT: The story of big data is complex. The processing power of technology is lightyears ahead of what it was – it’s now about consuming via automated processes prior to getting the human eye viewing the digested information.
Using analytics to identify where opportunities lie is key. Whilst I wouldn’t necessarily say that people have an issue or a problem that’s been posed in relation to the vast amounts of information that’s available, I think where the opportunities lie is around automation and using analytics to identify where those opportunities are before they get to the human. I think that’s the challenge.
P&L: How does Icap’s market data business relate to the firm as a whole?
KT: Our business has certainly evolved over the last decade. When it started, it was about traders looking at screens, and today our business, whilst we still have that as one of the fundamental pillars of our operations, much of the new business is about utilising information in applications, and those applications can be many and varied, and could mean pumping data into a risk management system, or moving that data into a separate pricing engine to generate a curve or generate correlated data, or utilise the information in a credit application, or put the data into portfolio management systems.
Historically, an end-user client firm may have relied on different data sources in the front, middle and back office, but technology has allowed and enabled the same data service and source of data to go through the entire workflow of the organisation into middle office applications, into back office applications and into front office trading screens, so I think that evolution of utilising data into increasingly complex middle and back office applications is the trend that we’ve seen over the last three, four or five years and it continues to be so.
P&L: How do you see that trend continuing?
KT: It really goes to differentiation. There’s a vast array of services out there, and on the surface they’re primarily offering the same thing, but look underneath and I think a lot of the trends will be about ‘what is the source of that data and how can I trust that data?’
We see a great deal of our clients extremely interested in the fact that we trace all of the data components back to an execution business, and that the FX price we provide from EBS is actually executed on an electronic platform that’s independent.
From our perspective, we don’t care if the price is 1.1 or 1.2, it doesn’t matter to us, because we don’t have a vested interest. So that independence is key; I think the source of the data is key; and I think that liquidity and transparency of that source is going to be a key trend going forward.
Now, saying that, there are many asset classes that aren’t necessarily liquid enough to provide consistent pricing, and it’s certainly not a business that we’re involved in, but I think that businesses such as those in the corporate bond space are providing extremely valuable services, because they’re able to calculate with their vast array of analysts pricing in illiquid services.
Additionally, we’ve focused on our strategy over the last three to four years of creating value-added services off those raw data components, which is why you see index businesses are highly sought after and why we opened up our index business three to four years ago.
P&L: So it’s about creating value from those raw data components. Does the same go for data analytics?
KT: Being able to generate meaningful analysis off raw data components is going to be a trend moving forward. Differentiation is key, so the source of data and having an execution platform that can trace the source of the data back to the electronic transactions, is where we see the value.
P&L: How do you see consolidation of market data firms impacting IIS?
KT: I actually don’t think it affects us at all, because we have distribution agnostic policies – we deliver data directly to end user clients, as well as through distribution partners [DPs]. Markit is a DP of ours, Interactive Data is a DP of ours, Bloomberg is and Thomson Reuters is, and dozens of other service providers around the world are also distribution partners.
For us it’s client choice. If customers want to receive our data they can receive it directly from us, or they can receive it through one of these distribution channels. I think that these particular areas of consolidation are somewhat unique in that it’s not necessarily one competitor purchasing another one.
If you look at these particular acquisitions, they seem to be more about the management of both firms believing that they can service more segments or service more clients or develop cross-selling opportunities rather than saying I’m going to take out a competitor so I can control that particular space. It seems to be more about how I’m going to be able to expand my offering, expand my footprint, expand my services, develop cross-selling opportunities.
So for me, these are unique deals, I don’t see them as competitive, I don’t see them as disruptive at all.
P&L: What are your views on pay-as-you-go (PAYG) models?
KT: We currently offer these in a very limited way, mainly around intra-day or end-of-day snapshots and historical data, but the majority of our clients do not want pay as you go and I think it’s increasingly difficult in a high frequency, real-time environment to have many iterations of products that you deliver out to end user clients.
One of the things that we’ve learnt over the years, certainly in the real-time business, is that you keep it simple and you make it fast.
P&L: There’s a lot of buzz surrounding FinTech right now, and some up and coming firms are targeting the market data business by providing on-demand data via cloud solutions. Do you think that these outfits have the potential to disrupt the market data business and further alter the competitive landscape?
KT: With market data, you’ve got to deliver it with the lowest level of latency that you possibly can. Whilst cloud-based PAYG models are certainly not concerning for us and I wouldn’t necessarily see them as a fad, we just haven’t seen the client demand for them in the real-time space.