Data everywhere, all at once: data management challenges for sell-side firms
In the ever-evolving global financial marketplace, effective market and reference data management is an ongoing challenge. More venues transacting more and more instruments, more regulatory obligations to manage and data to report, and more demanding customers, make the challenge especially difficult for sell side firms in their roles as consumers, generators and distributors of financial markets data.
Operating in an ever-changing environment
Data management challenges and costs are further exacerbated by a new, post-pandemic home working model that has created a whole new set of data destinations and consumers, with attendant timeliness, security and compliance obligations.
At the same time, sell side banks and institutions are operating in a highly competitive environment and subject to more rigorous capital adequacy requirements, increasingly volatile markets, rising interest rates, high inflation and overall, a very much higher cost of doing business. The scale and reach of sell side firms (compared to the majority of buy side customers) means that they are particularly hard hit by a mounting operational burden, and perhaps under much greater pressure to seek and implement operational efficiencies.
Cost savings through efficient data management
One of the areas that many firms are looking at to identify service efficiencies and make cost savings is data management, both from an internal, enterprise-wide perspective and in terms of optimising the packaging and delivery of data to buy side communities and customers – the asset managers, hedge funds and other institutional investors that rely on data pre-trade to inform investment decisions, and post-trade for accurate and timely customer and regulatory reporting.
MiFID, EMIR and equivalent markets regulation mean that multiple regulatory bodies including FCA, SEC, MAS and FINRA have imposed much more stringent requirements on regulated firms to implement rigorous and robust transaction monitoring in foreign exchange (FX), fixed income, equities, commodity and associated derivatives markets.
Increasing financial markets regulation and compliance
Driven by technology innovations and a growing focus on financial markets regulation, traditional trading activity has migrated permanently from opaque voice-based markets to a much more technology-led model built on the principles of transparency and effective risk mitigation, and in which market participants are required increasingly to clear and report trades (e.g. through CCPs).
While this shift from relationship-based to technology-driven trading has resulted in many structural efficiencies, and has opened up access to what was a traditional ‘interbank’ market to a broader and deeper group of financial markets participants, the associated complexity and cost of compliance has grown exponentially - with sell-side banks bearing the brunt of the costs and the compliance burden.
So, what are the key sell side challenges that impact effective market data management?
Data everywhere, all at once
Sell-side banks play a critical role in managing reference and market data, using a variety of strategies to source (gather), aggregate, normalise and distribute it to clients and regulators. Gathering data from multiple sources and consolidating it within unified datasets (for example, asset class or instrument) is challenging in and of itself, not least because of the myriad and growing number of data sources – exchanges, CCPs, banks, fintech data aggregators et al.
Having ingested data from multiple sources, sell side firms have the challenge of distributing it effectively and efficiently to customers, regulators and other parties in the transaction value chain, in a variety of different formats, through a plethora of (ever-changing) communications channels including proprietary platforms, third-party vendor platforms and APIs. Even within a sell side firm there are an increasing number of internal clients and ‘destinations’ for data, each with differing requirements in terms of format and frequency.
Quality in quantity
One of the biggest challenges facing the sell side in reference and market data management is ensuring and assuring the quality of data derived from multiple market sources. The volume of data is also increasing at an unprecedented rate due to the proliferation of new financial instruments and venues.
Not only is data accuracy and timeliness important in the investment decision-making (and reporting) process, it is an absolute imperative when it comes to regulatory reporting – and specifically in avoiding censure (and potential reputational harm) from ‘bad’ reporting.
Valuable and sensitive data must also be protected from unauthorised access, theft and manipulation requiring the implementation of robust security measures like encryption, firewalls, and other security protocols to protect it from unauthorised access and cyber threats.
Sell side firms in particular must adhere to seemingly ever-changing and ever-more demanding regulatory obligations with respect to data management, including mandated requirements governing data accuracy, retention and security. They must also satisfy regulatory reporting obligations which often vary across reporting jurisdictions and asset types, or face significant penalties and potential reputational damage.
Sell-side organisations face several challenges when it comes to efficient data management, including but not limited to quality, security, volume, integration and regulatory compliance considerations and obligations. Handling growing volumes of data from increasing numbers of sources, in a secure and compliant manner while reducing the risk of processing errors and assuring consistent data quality, requires continuing and significant investment in technology and infrastructure, as well as process and workflow automations. . ‘Data as a Service’ is an increasingly popular trend, replacing long term, high cost, fixed contract models with more nimble and flexible subscription services that enable ‘users’ to access the data they need as they want it, paying on a data consumption (and type of use) basis.
An essential part of the investment decision-making process for data management teams today is how - and to what degree -third party providers (data and technology specialists) can help to improve data management processes and deliver cost efficiencies.