Opening Cross: Come On Down, the Price Is Right … Isn’t It?

Max Bowie, editor, Inside Market Data

Price data—and the price that data sources charge for it—is constantly under scrutiny. And so it should be in any healthy market, as competition between vendors keeps data quality high and costs, well, reasonable. At present, the scrutiny is being driven by cost pressures at financial firms to obtain more and better data while reducing their overall spend.

A key area is over-the-counter prices, where no reference exchange price exists, and firms traditionally depended on trade prices from brokers, evaluated prices derived from various inputs on a daily or intra-day basis (but not real time), or services that provide prices based on contributions from dealers or buy-side firms.

Of course, the latter only works effectively if no one tries to get away with bringing water to the wine party. The UK’s Financial Services Authority and US Commodity Futures Trading Commission’s investigation into Barclays’ misconduct over LIBOR rate pricing—which last week culminated in the resignations of the bank’s chief executive and chief operating officer—shows that benchmarks can be manipulated if participants put their own best interests ahead of the benchmark itself and the overall market.

Derivatives valuation and risk management software vendor Fincad spotted a divergence between LIBOR-based swap pricing and overnight index swap-based pricing that began around the start of the financial crisis and continued to result in LIBOR swaps being priced too low and not accounting for embedded risk, officials say, prompting the vendor to incorporate an OIS-based pricing curve into its Insight Solutions derivatives valuation and hedge accounting platform.

A report from SNL Financial last week suggested that while the fallout from the LIBOR scandal may widen—indeed, the regulators’ reports noted that Barclays enlisted other banks to fix rates, meaning that the price formation process of excluding outliers could be flawed if several contributors collude—but that LIBOR is expected to retain its benchmark status. After all, benchmark pricing curves are an important tool in OTC markets—such as the benchmark oil curves launched last week by Tullett Prebon Information to provide more transparency into the oil and related commodities derivatives markets—and will become increasingly so as participants in those asset classes that regulators cannot shoehorn onto exchange-like venues demand similar levels of transparency. In fact, once the authorities have pored over LIBOR, it should emerge more transparent and stronger than others that have not been subject to the same scrutiny.

Meanwhile, users may resent paying for data that is being called into question. Of course, consumers usually resent data fees—and in a time when budgets aren’t increasing in line with the costs of data services, that frustration is understandable, though the old argument that “market data fees are like charging to look at the price list,” no longer reflects the extent to which content has broadened, especially in the OTC markets. But there are signs that data sources are softening their stance. One thing that especially irks users are constraints on how data can be used, such as non-display fees or derived data fees—both of which are addressed in a new Global Data License Agreement covering data from all of NYSE Euronext’s marketplaces, which will be rolled out next year, and which is designed to simplify policies and reduce costs for end-users.

Separately, sources say Bloomberg is relaxing its stance on its New Commercial Model pricing after clients have spent a year haggling over fee increases introduced as a result of unbundling individual datasets from Data License. Now, sources say, Bloomberg is proposing less drastic increases, spread over longer timeframes, to make the increases less painful.

With less cost pressure, end users can turn their attention to growth—and to purchasing more data to support new business, ultimately increasing revenues for exchanges and vendors—rather than focusing on cuts. And ultimately, that will be good for all industry participants.

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