Alternative data: new models emerge

Market participants, including institutional investors, face cost pressures and a changing set of data requirements. They are looking to more affordable alternatives to the traditional providers of market and financial data subscriptions and searching for unique datasets that can add greater insights. As new requirements emerge, it is opening the door to smaller and more specialized firms. At the same time, incumbents are adapting and beginning to introduce more “à la carte” products and solutions.

The model is shifting

For decades, large “one stop shop” multi-service data vendors such as Bloomberg and Thomson Reuters have been the primary sources of breaking news, market price information, ratings, and research for financial institutions. Their services come with a heavy price tag, between USD 20,000 and USD 25,000 per year for Bloomberg terminals and up to USD 22,000 a year for the Thomson Reuters Eikon platform. In recent years, however, the business model has begun to shift and more specialized competitors have entered the marketplace. These disruptors are gaining traction and are challenging the incumbent providers due to changing market and industry dynamics. In 2016, for example, Bloomberg experienced a drop in its terminal subscriptions for the first time since the financial crisis in 2008. It was only the second time the number of subscriptions had been reduced since the company launched in 1981.¹

Cost pressures are weighing on clients

This shift in client preferences may be due in part to the high cost of the full-service data provider solutions. Similar to Bloomberg’s contraction in terminal subscriptions, Reuters also saw its market share dip. In 2017, both firms lost market share while smaller rivals grew their share of the market.²

Financial firms are facing a range of cost pressures with profits squeezed by lower interest rates and stronger capital requirements. As a result, they are becoming more selective in the products they purchase.^1,3

The opportunity to subscribe to services provided by smaller data vendors is an attractive proposition. For example, Capital IQ reportedly charges between USD 7,500 and USD 13,000 per year depending on the number of users.⁴

Changing regulatory requirements

Regulatory compliance is one area where demand for more specialized services has grown. Risk and compliance customers were the fastest-growing customer group in 2017.⁵

Financial firms are
facing a range of cost
pressures with profits
squeezed by lower interest
rates and stronger
capital requirements

Data vendors have used the implementation of the second Markets in Financial Instruments Directive (MiFID II), the European market regulation implemented in January 2018, as an opportunity to provide clients with tailored solutions to help them navigate and comply with the new rules. Both Bloomberg and Reuters have developed new services to help clients with their MiFID II compliance obligations.⁶

“A lot of the vendors [of financial information] are facing headwinds,” said Douglas B. Taylor, founder and managing director of the consultant Burton-Taylor, in a Financial Times article. “The combination of machines replacing traders where they can, and cutbacks overall in financial institutions in terms of budgets has made it difficult for all vendors frankly to maintain [terminal numbers].”⁷

The impact of electronic trading

Financial institutions are increasingly moving toward electronic trading and seeking out data providers that can support them through that transition. Global markets are accessible through electronic trading, yet divergent financial regulation has led to market fragmentation. Clients likely need more market data from numerous sources in order to form a consolidated view of multiple markets.⁸

Though the incumbent
data vendors saw their
market share weaken,
overall spending on
financial data hit record
highs during 2016 and 2017

“Just as the broader world of finance is changing, the market for financial information could be approaching an inflection point. Data providers are realizing they must adapt and innovate to maintain a competitive position. Clients are looking for access to flexible data solutions that are easy to use and integrate, rather than through tightly controlled closed platforms and strict contractual terms,” commented Jamie Stevenson, Global Product Head, Data and Analytics at RBC Investor & Treasury Services.

Smaller firms are disrupting the industry

Though the incumbent data vendors saw their market share weaken, overall spending on financial data hit record highs during 2016 and 2017.

According to DataCompliance LLC,⁹ the most successful data vendors are those that focus their core business on providing proprietary data, including evaluated pricing, benchmarks, credit markets, indices, and analytics. Firms that do this include the Intercontinental Exchange, or ICE, IHS Markit, Moody’s Analytics, MSCI Inc. and S&P Global Market Intelligence, according to the report. It said those vendors' combined revenues grew 95 percent between 2010 and 2017.

“In contrast, vendors with a product suite built upon an aggregated model such as Bloomberg, FactSet, Morningstar, and Thomson Reuters have seen significantly lower revenue growth,” the report said.

Startups are proliferating

In addition to firms such as S&P Global Market Intelligence and Moody’s Analytics disrupting traditional data provision services, there has also been a proliferation of newer entrants in this space.

For example, Symphony Communication which launched in 2015 was designed to compete with Bloomberg’s instant messenger. Estimize Inc., founded in 2011, provides earnings and other estimates based on crowd sourced data. Meanwhile, websites including Briefing.com and Money.net are seeking to disrupt the worlds of financial news, commentary, analysis, and charts.¹⁰

The Canadian Pension Plan Investment Board this month said it had formed a dedicated team to experiment with alternative forms of data to compliment its traditional methods of information-gathering.¹¹ For example, it recently used a public registry to help with analysis of the US real estate market.

Traditional market data providers are responding to the competition by disaggregating their services and providing a wider range of products beyond the traditional terminal licenses

“One of the things that we’ve been focused on for the last couple of years is being able to use not only the traditional financial data that we get from the traditional sources like Bloomberg in making our investment decisions, but also the increasing volume of alternative data that is available,” Deborah Orida, the global head of active equities, told the Financial Post.¹²

Vendors respond by disaggregating and diversifying

Traditional market data providers are responding to the competition by disaggregating their services and providing a wider range of products beyond the traditional terminal licenses. Thomson Reuters, for example, offers Eikon Messenger as a standalone application.

While Bloomberg still focuses largely on its terminal product, it recognizes that revenue growth is coming from non-terminal businesses. Those include Application Programming Interfaces and data feed services such as the open data website Bloomberg Enterprise Access Point, the flagship real-time market data feed, B-PIPE, and PolarLake, a data management service marketed to chief data officers.

Market participants are beginning to look towards less-costly alternative data vendors and are open to buying different services from individual niche providers. Large market data providers must adapt their business models in response to this emerging trend or risk being disrupted by more agile competitors as client needs change across the financial industry.