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Market Data Management, Global Cost containment, and what it takes to achieve it.


It does not take a genius to work out how much your organisation spent globally on the provision of Market Data information services to its traders last year. All you need to do is gather the vendor's invoices together and do the maths. What surprises most people when they first do this, is the magnitude of the amount spent, and how close to the top of the list of the organisations overall expenditure items it is.

"Global management reporting" and "cost containment" are the words on everyone's lips these days, but how can it be achieved? In this article I will explore some of the issues to be considered and outline some of the approaches to cost containment that do work.

As you would imagine most of this is common sense, along with a good understanding of what you've bought, and of course the help of an excellent Market Data Management system (like MDS2000) to assist with the analysis and modelling your data. Armed with these few tools you can reorganise your users, vendors, market data contracts and services agreements and end up with substantial savings.

Gathering the ingredients for success.
There are a few "must haves" to consider if you are to stand any real chance of success.

Must Have #1:
Someone with muscle in the organisation has to "Champion the cause". Not only must they be fully committed to the cost containment exercise, they also must have the power and authority to set the rules of engagement with the Market Data Vendors and produce and ratify practical internal procedures that others, throughout the whole of your global market data community, must obey; with the threat of some form of disciplinary action if they don't.

With the best will in the world, you are not going to succeed with cost containment if you cannot prevent wildcat purchasing.

Must Have #2:
A pro-active Market Data Management tool capable of being used globally and documenting and modelling the agreements and services in place.

Understanding Global service pricing (Don't buy anything until you really understand how much it costs.)
It is plainly irresponsible to buy market data services unless you at least understand what they cost, how they are billed, and how long you are committed to their use, and how to cancel them if you wish to. Remember, all of these facts will be clearly documented in a good market data management (MDM) system.

Once you have this knowledge you can make informed decisions rather than knee-jerk reactions. For example, if you know that the service is billed under a "site fee" arrangement, you will realise that cancelling 50 of your 200 permissions to that service is not actually going to have any effect on your bill.

This becomes clear when you appreciate that services are typically billed in one of three ways, as follows:

Per Access Fee
A price paid for each access to the service within a specified period. Normally a monthly amount is specified, although payment may be quarterly.

Site Fee
A periodic price paid to have the service delivered to your site. Regardless of the number of users accessing it

Tiered Charge
A charging mechanism based upon the number of access within a period where, for example, the first access may be at a higher price than the next "n" accesses. There can be any number of tiers, and there are at least three different calculation methods for each of the tiers.

To add to the complication, there are many services that employ a "hybrid" charging system that contains a combination of the basic methods above.

Regional peculiarities
You need also consider the various rules, regulations and charging options that apply across the regions of the world; and these include, but are not limited to, currency, tax rates and administration fees.

Who bills you for the market data and at what frequency, can also change dramatically depending on where you are. An exchange service in Europe, charged in a local currency, might be billed by the vendor who "carries" it to your site. In the USA that same service may be billed by the "source" vendor and in a different currency. In Japan (for mostly historical reasons now) the bill may have to come from a native Japanese company acting as a broker for the source vendor or the carrier.

In the USA some services may only attract state tax, where others may attract state and city tax etc.

Be aware of "Netting" rules
Netting rules change from country to country, and form vendor to vendor. Netting rules are valuable for cost containment. A netting rule applies when, due to a pre-arranged agreement, it is allowable to deduct the cost of certain access to services due to the presence of other or duplicate services that are also being provided.

Take a pro-active approach
Finding out that contracts have "rolled over" is not good management. Expect your MDM system to provide you with plenty of notice of pending events such as this. Give yourself enough time to analyse the use of the products and services delivered on the contracts before you automatically renew them.

Knowing that certain thresholds have been reached is also a must. For many services the price you pay changes dramatically when you exceed or fall below certain numbers of users. This affect can often creep up on you over time, so it is important for your MDM system to be able to watch out for this and advise you automatically. You may want to configure your MDM system to inform particular groups of managers, via e-mail for example, when these thresholds are broken.

Duplication of service delivery warnings should also be an automatic feature of your MDM system if you want to minimise costs. Unless you have negotiated netting rules (see above), your traders are liable to pay for each access the same service regardless of how it is delivered. Remember, your liability is based on entitlement NOT usage.

Use Trader Profiles
It is highly recommended to use "Trader profiling". This is where you can set up the profile of different types of traders within your MDM system. Each profile is based upon the "normal" set of services that would be used by a trader working in a particular market segment. e.g. FX traders, Equity Sales and so on. Your MDM system is then able to show you the typical cost of each profile, the cost of the next 'n' traders, and most importantly highlight any traders whose costs exceed the 'normal' profile level for their segment.

Centralise control but distribute the management.
If you do not document the constant changes that occur to your environment then control will soon be lost and cost management becomes a shot in the dark. You need to pass on the responsibility for upkeep of the documentation to those directly involved with the changes. The approach MDSL has taken with our MDS2000 management tool is to allow access to the central database or any number of people who are responsible for maintaining the documentation in their area. Bearing in mind the fact that they will probably be widely dispersed in a geographical sense.

Reporting needs to be easily accessible both locally and globally, allowing the costs of an individual, a department or the whole company to be produced in customisable formats. Ideally reporting should be made available to everyone who needs it via your intranet. This way there is no excuse for people not knowing how much they cost.

Procedures (internal and external)
Rule with an iron fist. Internal procedures must be established and enforced to control the entitlement to services. When a trader requires access to a new service, there should be a business case behind the requirement. Procedures that cover the way change is managed and documentation is maintained are also required.

External procedures, covering the rules of engagement with vendors, also need to be set up. Involve the vendor's sales force and then carefully police them. Make clear to the vendors that they must have received an official order reference from you, and that this reference can only be issued certain authorised people within your organisation (not the trader who wants the service), if they expect to be paid.

In Summary

You need:

To know what your commitments are today before you even begin to make savings. If you have not been controlling entitlement for a while, you may be in for a nasty shock. It may be cold comfort to know that you would not be the first to discover, once all the entitlements are counted, that you have been under-declaring for months, and actually your expenses should be higher not lower! But it is better that you discover it before the exchanges do.

n A good understanding of the peculiarities of the service costs.

n A method of profiling your users to highlight exceptions

n A pro-active MDM system (like MDS2000) to document it all and provide alarms and warnings where necessary.

n The power to enforce procedures both internally and externally.


Ben Mendoza
Managing Director
Market Data Services Limited




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