Introduction

The subject of market data contract compliance plays an increasingly important role. The originators of market data (exchanges, vendors and third party data providers) formulate ever more complex Terms & Conditions around usage and ownership of their data, and are using on-site audits to verify and enforce compliance with their T&C’s.

During the last few years we have seen an increase in the number of audits and new rules being introduced. Exchanges have added and amended their policies for “non-display usage”, “delayed data usage”, and “unit of count”, while third party providers who previously gave their information for free are now applying complex commercial models.

These changes, often in an existing situation, don’t make it easier for user firms to comply. To add to that, the terminology that is used in the various contracts is not standardized and contracts are often unclear trying to govern purposes that were not envisioned even only a few years ago.

On the other hand user firms are increasingly using the proprietary information that vendors and exchanges produce in margin-maximizing activities by developing new products and by using technology shortcuts.

To illustrate this with an example:

The pricing structure of data across exchanges varies along several dimensions. One of these dimensions is the type of end-user: a professional investor VS a private investor. The latter pays a much lower fee than a professional investor. But it’s not always clear in the contracts what constitutes a private investor. Are small companies or foundations that conduct very few trades considered private or professional investors?

Not all auditing parties have the same agenda. Data vendors, such as Thomson Reuters or Bloomberg have a different approach compared to exchanges and third party providers, such as ICAP, FITCH or FTSE.

Exchanges and third party providers often have a monopolist position where the availability of their information is critical for the daily business of a financial institution, strengthening their position. On the other hand market data vendors are much closer to the end user and need to maintain a good relationship with the client. After all competition between data vendors is tough these days.

As it is nearly impossible to keep fully track of all the data distributed within a user firm, the process of an audit resembles much a “cat and mouse game”. Certainly those auditors who are not often at the client site, find it a difficult task to “ask the right questions” to find out what their data is being used for or how it is being distributed.

Data vendors who are regularly at the client site for sales, training and support purposes, often know when and where data usage is not compliant with the terms and conditions in the contracts. Up to a certain level they tolerate this excessive usage to protect their business relationship. If the data vendor feels the excessive usage is extreme or the user firm is holding back usage information deliberately they will decide to conduct an audit.

Free case study & whitepaper

To learn why audits are being conducted, and the current situation around market data compliance and how it affects user firms, please download our free whitepaper Audits are a Tricky and Contentious Topic
This whitepaper elaborates on:

  • A typical audit procedure from a Stock Exchange (visualized)
  • Why audits are often time consuming, lengthy and stressful
  • The problem of control
  • Suggestions & conclusions

Please do not hesitate to contact us, if you require any additional information!