Apologies readers for being away, it has been a busy few weeks. Over the past month, we've seen exchanges begin the consolidation dance - again - and several of the largest financial services firms begin to re-think their technology and data collection infrastructure. The current supply chain of data is on the verge of severe disruption, and will likely change the structure of the industry.
For today's post, we'll focus on the customer side of the equation, (the demand-side if you will), and we will focus at the top of the food chain- the top 25 of so firms.
On the one-hand, we are seeing these customers more than ever recognizing that they have over-invested in data and data management solutions and are looking to lower that investment. Cost control has always been a driver but what's different is that these firms have technology - cloud technology - as enabler of change to the way they acquire, store, manage and deliver that data out to their user population. In the past, customers relied on their Market Data Distribution Systems (MDDSs) to transport data around the enterprise to applications and users. The primary use was for their trading applications and businesses and as latency became more critical to success, they invested in direct feeds to exchanges and used vendor feeds primarily as back-up/secondary service and used the these vendor feeds to power off-trade floor applications - or in many cases simply used the vendor applications and supplemented with niche ISV solutions. Many firms built multiple infrastructures centred geographically to support their local business units - many since leveraging internal/private networks to feed data from say New York to a user based in Sydney was not efficient and carried with is high costs. In essence it was cheaper (and less risky) to build redundant systems and service users locally than centralize the effort and distribute out to the edge.
Today, cloud technology, lower bandwidth costs, increased network efficiencies and security improvements has altered this model. In addition, users are increasingly mobile, pushing their access point from inside to outside the firewall. As a result, the old distribution and network architecture is out-dated and being replaced by one which is centralized, cloud-based and mobile. Thus firms like State Street who have invested in a massive architecture redesign to embrace the cloud expect to realize over $600 million in savings annually AND increase efficiency and user satisfaction.
And State Street is not alone. Deutsche Bank, UBS, Northern Trust and others have publicly or privately announced programs to drive more and more of the collection, storage and distribution of data assets to the cloud. In a webinar yesterday hosted by Waters Magazine on the cloud, Elliot Noma, Founder and MD of Garrett Asset Management stated flatly that without the cloud his firm would not exist. This is not uncommon as more and more hedge funds and asset management firms leverage the utility cost model of the cloud to build their business (more on these firms another time).
However, what is not talked about much, is the net impact on REVENUES for data and technology vendors as a result of these programs and the new way firms are started and operate. Assume for a minute each of these top 25 financial firms realize a savings of $100 million - one-sixth of State Street's target - that's a contraction of technology AND data spend of $2.5 billion. The pie for the thousands of data and application providers just shrank by nearly 10%. Expand that over the tens of thousands of customers across all market segments and the market for data and technology could shrink 20 to 30%.
And folks thought the 2008-09 recession was hard on data and solution providers.
But some might question - will customers realize these savings? Short answer - yes. It should be fairly straightforward actually. Staff reductions will factor as well into the cost savings (State Street expects nearly 5% staff reduction) but the bulk will be through data and infrastructure savings. By eliminating redundant data acquisition fees, (two groups in two different geographies buying two fundamentals feeds for example), buy eliminating MDDS infrastructure that served non-trading applications, and ripping out desktops and replacing them with mobile-based platforms, each firm will realize tens if not hundreds of millions in savings.
Another source of savings will be the applications these firms will use. With lower costs to build, test, deploy and support application built in the cloud (regardless of there being public or private cloud infrastructures), firms can build many of the sophisticated applications they once relied on vendors/ISVs for at a cost that is significantly lower than before. Some firms expect to have as much as 50% of new technology spend to be on cloud-based services. Given that the data used by these applications will be in a cloud architecture, it is a natural fit for these applications to be cloud-based.
The final cost savings - and likely most deadly for the data aggregators - is the push to connect directly to data sources. As firms have realized, their investment in direct exchange connections has paid off. Although there is a higher initial investment in building and supporting the exchange connections, firms have learned they gain greater control of the interface with the source, they get better performance, and they get better support. Firms are starting to realize that this 'model' can be expanded to non-latencey sensitive data as well. Many times as pointed out in prior posts, firms increasingly see less value in the 'normalization' myth and want raw data from their sources. This means some of the services introduced by vendors, (such as entity management) will need to be done by customers but again cloud-based technologies and ISVs specializing in data management solutions (such as Asset Control), make this process easier to run by customer's themselves.
Firms will increasingly look to leverage their direct connections to power their data warehouses as well as seek new connections to pull raw, 'un-managed' data into their centralized repositories. This too will lead to further cost savings on data spend and shrink the market data pie. Spurred on by their customer's demand, exchanges are increasingly seeking to monitize their historical and reference data assets more and more.
All in all, customers are getting smarter in their data and infrastructure strategies and are seeking to leverage cloud technology and other best practices (such as direct-to-source connections) to build the next generation market data stack. The result is substantial, real economic pressures that force data aggregators and application providers to truly show value and differentiation.
Next time, we'll look at the supply-side of the industry - the data owners themselves and the pressure they are placing on the aggregators.