Max Bowie: Location, Location, Diversification—Which Is More Important in 2015?

As we enter a new year, it’s clear that today’s market data industry isn’t the same as it was 25 years ago, or even a dozen years ago when I started writing about it. One of the key differences is the pace of modern markets, shifting to low-latency trading strategies where location—i.e. proximity of trading servers to an exchange or trading venue—becomes as important as the trading strategy itself. Another is the attrition and consolidation that has taken place since, reducing once-titans to mere business lines within larger organizations. And yet another is how the remaining players have diversified to take advantage of new revenue streams, and in some cases, to survive.

Over the same period, exchanges have moved from relying on vendors to providing data directly to clients, and are constantly building added-value datasets and analytics, now placing more emphasis on ways of increasing market data revenues as a means of diversifying their revenues in the face of lower volatility and trading volumes, which are driving them to seek out new sources of income to make up for lower revenues elsewhere, according to a report released late last year by Burton-Taylor International Consulting and Porter Walford Consulting.

For example, around the same time, Deutsche Börse unveiled a new options liquidity indicator for its Eurex derivatives exchange, while Austria’s Wiener Börse struck a deal to license and distribute market data from Croatia’s Zagreb Stock Exchange—another step in Wiener Börse’s diversification strategy of becoming a hub for market data from Central and Eastern European markets.

Being a hub for lesser-known data is also a strategy adopted by financial search engine Quandl, which has amassed 10 million time-series economic and financial datasets since launching in 2013, and is now adding premium, fee-liable content, with recent additions including Zacks Investment Research, Orats, and start-up fundamental data provider Sharadar.

To cite a few other recent examples of diversification in action from the pages of Inside Market Data, BT is diversifying the use of its trader turrets to provide greater levels of data integration, rather than just being a telephone for traders, while Perseus Telecom is diversifying its High Precision Time clock synchronization service to provide a lower tier of service that can be used by a broader base of clients within and outside financial services.

Just as companies now use elastic cloud resources to perform on-demand intensive data calculation tasks, they can also engage flexible staffing resources to help diversify their sales activities into new business areas.

While still targeting bulge-bracket firms with its main service, the vendor is aiming the new offering at small to medium-sized broker-dealers that are less latency-sensitive than top-tier banks and proprietary trading firms—as well as at developers in other industries—to support minimal (but not nanosecond-level) clock drift and ensure compliance with new time synchronization regulations that mandate an accurate time source across all trade messages for trade reporting and audit trail initiatives.

Flexible Resources
Of course, diversifying a business is a big step that requires new resources, planning and people—usually ahead of any cash injection from the revenue streams that diversification is expected to generate. So how does a company pursue that strategy without over-burdening itself with people and infrastructure costs? Just as companies now use elastic cloud computing resources to perform on-demand processing and intensive data calculation tasks, they can also engage flexible staffing resources to help diversify their sales activities into new business areas. For example, microwave-based low-latency datafeed provider Quincy Data engaged USAM Group—the outsourced sales agency set up by former NYSE Technologies exec Feargal O’Sullivan aimed at start-up data and financial technology vendors—to expand its sales function to respond to new business opportunities using experienced industry professionals without having to recruit the right people in-house.

For sure, diversification isn’t without challenges, and isn’t an end unto itself. Diversifying a business is only half the battle. In fact, at that point, you’ve really only diversified your costs: The other half is capitalizing on that greater breadth to truly diversify revenues.