28 May 2018

Death by a thousand cuts

30 May 2003  |  2974 views  |  0 Williams (R.T. Williams)

The market data industry stands at a watershed, with technology, standards, market fragmentation and commoditisation combining to change the economics of the business for all participants. Tee Williams of R Shriver Associates explores the implications of these profound changes for vendors, for exchanges and content creators, and for users.

Historically it was very expensive to be a market data vendor. Vendors manufactured their own computers, and built and owned their own distribution networks. These costs were barriers to competition and protected vendor margins. As powerful low-cost computers have developed and standard operating systems and network protocols have evolved, these barriers have eroded.
Today, vendors are finding that the vertical integration that formed their defensible advantage — data collection, normalisation, storage, processing, distribution and display — has become a liability. In the future, the defensible advantage of a business will not be vertical integration. It will be a more discrete component of business data content or function.
Organisations that do not modify their business model to adapt to the new reality will, over time, find themselves the victims of the 'Death of a Thousand Cuts'. Continual losses in customer base and incremental increases in their cost structure will drive them to extinction.
What then will the future be like and how should it be planned for? In the future market data services are likely to be created from components that are assembled by users themselves or by integrators who price their services based on time. Some services now offered by vendors may be provided by consortia or as mutualised monopolies.
Pricing is likely to change. Product pricing will make sense only for independent components. Integration will be offered 'by the hour' by integrators. New schemes may be needed to pass revenues on to vendors that do not have direct contractual relationships with users.
An environment such as this raises serious questions for the market data industry.
For vendors: Do we believe that the environment has changed in such a way as to make traditional business models ineffective, and if so how should we react?
For exchanges and content creators: How do we balance legitimate complaints about our pricing policies against the need to maintain our revenue stream? How do we ensure that market data gets the strategic attention it deserves?
For users: How do we plan to source market information in a fragmented environment and how do we develop an architecture that integrates many disparate uses of information with minimum redundancy?
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