Thomas Richter, chief executive of Germany’s BVI, says the financial industry must unite to resist the pricing power of “data oligopolies”.
The fund industry is dependent on a drip feed from data providers. Whether it is research, trading, clearing, settlement, compliance, or risk management, from sales to reporting, nothing can work without stock exchange, index, rating and more recently ESG data. The data market, however, is controlled by oligopolies of global companies – such as index providers and rating agencies – who use their market power to determine the conditions. After all, their clients cannot operate without data or they will endanger their own businesses or be in breach of laws.
As a result, prices for financial and corporate data have risen for years – according to Esma in some cases by several hundred percent, and even retroactively. The consulting firm Burton-Taylor expects that by 2025, data providers will have a turnover of more than US$5 billion from ESG data alone, $3 billion of which will be borne by asset management. In addition, asset managers must enter into small-scale licensing agreements that break down their value chain into tiny parts – each at a cost. These costs are charged to funds and affect end investors.
The BVI has criticised these developments for years. In an ongoing dialogue with Esma, IOSCO and the FCA, we are working to try to stop the upward costs spiral. This is more necessary today than ever. Margins are falling as costs, such as regulatory costs and investments in digital change, rise. However, data costs are becoming a competitive factor not just for fund companies.
In real terms, the entire financial sector is affected, too.
“…data costs are becoming a competitive factor not just for fund companies.”
It is therefore surprising that buy-side initiatives to counter the data oligopolies have so far been the exception rather than the rule. There are plenty of good reasons and opportunities for closer cooperation. For example, in 2021 the BVI joined forces with international broker associations to lobby IOSCO for stronger regulation of index costs. When purchasing ESG, index data and ratings, costs could also be saved through cross-sector purchasing cooperatives or group contracts.
More independence from data providers, with significant potential for savings, could also be created by the introduction of a ‘Consolidated Tape’ (CT) for equities, ETFs, bonds, and derivatives. Fund companies already have access to aggregated trading data, but only for those exchanges covered by a data licensing agreement. An overview to compare all EU trading venues within a single contract and at a single price has so far been lacking. Therefore, we support the EU Commission’s proposal to introduce a real-time CT but would go even further. The provider of the new CT should also offer a low-cost ‘all shares’ EU stock index family including all companies. This would create a new benchmark administrator that would be independent of the large commercial providers. Together with the EU database for free financial reports and sustainability data of listed companies (planned for 2025), this would help to counter further increases in financial market data costs.
A cap on prices based on production costs (MiFID) would provide an effective tool – as would comprehensive legal regulation of data providers operating in the EU (‘Data Vendor Act’). In some cases, however, the only option is legal action.
As can be seen, there are effective means available to limit the pricing power of data oligopolies. However, the buy-side needs to unite and use them more consistently.
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