At a time when the financial services industry is facing the daunting task of market data management, the outsourcing option can provide succour

Chennai: The financial services industry is facing another daunting task today - market data management. As of now, the task of managing market data has become a costly and challenging affair. Being considered the lifeblood of the financial services industry, market data, including real-time historical and reference data, are necessary for completion of the trade and settlement process.

A study by Outsell Inc, a US-based research and advisory company, estimates that global investment banks are spending an average of $32.6 million annually on market data services. Effective capture and smooth flow of data is imperative for successful business ventures. However, the pace at which businesses are expanding today, managing and accessing the various types of data has not only become complicated but critical.

This article will take you through the world of market data management in three episodes. The first episode describes the current scenario of managing data in the financial services industry, while the second highlights why the task of managing data is turning out to be a nightmare. The third episode throws light on how market data management has become a key issue and why financial companies are considering outsourcing as the most viable option for relief from the mind-boggling business of managing data across the enterprise.

The problem
Financial services organisations deal with numerous financial instruments, ranging from stocks, funds and derivatives, to meet the requirements of the ever-increasing demands of the global securities marketplace. As such they need to tackle a huge amount of data to trade and keep track of these instruments.

Now, financial companies hold this data in multiple and disparate systems to support the different software application or operational areas of an organisation. Each of these reservoirs of data has its own unique feeds, cleansing integration processes and data definitions. As such, communication between these disparate systems becomes a nightmare as another integration and cleansing process called reconciliation is required for a uniform format and quality of the data across the organisation.

The data that needs to be tackled is huge. Market data is the price information and is known as tick data in real time or time-series data in historical sequence, whereas reference data, the foundation stone of securities trading and settlement, is the descriptive information about a security. Counter-party data is defined as the data that identifies and describes trading partners.

"Reference data is just like the Mafia. Just when you think you are out they pull you back in," says Tim Lind, senior analyst, Tower Group, in a recent report. Companies are struggling to integrate the huge flow of information into their trading and compliance systems on a continuous basis. Managing them on a day-to-day basis, ensuring the quality and scaling their systems for future requirements, is creating havoc.

Says Srinivasan Rajasekaran, offshore head, capital market excellence centre, Pinnacle Systems Inc: "Market data is very critical and fundamental for pricing; risk management and any erroneous or improperly managed data will result in trading losses and poor risk estimates."

Big companies have already deputed in-house market data services departments to acquire, manage and deploy this data for their end-users on trading desks and elsewhere. However, such departments are turning expensive in terms of budgets and experienced professionals in the specific area are difficult to find.

But, moving shoulder-to-shoulder with the fluctuating market data scenario has become essential for Wall Street companies because inconsistency in market data could make or break trades, and those with the cleanest, most reliable data enjoy competitive advantage in their operations.

The root cause
Why is the management of market data on a day-to-day basis proving to be a challenging task for financial organisations? Some of the reasons are:
1. The entire process of trading and settlement in an organisation depends on the data that lies on a multiple number of disparate systems. Each of the systems is further connected to different instruments, settlements, routing, trade, counter-parties and other data, thus holding data in a variety of formats.
2. Data always originates from varied sources, including both internal and external.
3. Organisations differ with respect to their applications, policies, procedures, asset mix and relationships and data originating from them is never static in terms of quality and format.
4. Data filtering, cleansing and filling are critical for robust pricing. Data from the vendors may be erroneous at times.
5. Many companies still keep various data in spreadsheets.

The outsourcing option
An industry-wide survey by Celent Communications this year, in conjunction with Iverson Financial Systems, a market data service provider, and Inside Market Data, a Risk Waters publication, revealed that in order to provide high-quality data in a cost-effective manner, an increasing number of companies are exploring ways to outsource a part or all of their data management operations.

"Our survey indicates that there are growing demands on internal market data management groups in terms of improving data quality, usability, service and timeliness. Unfortunately, this is happening when continued dismal market conditions have put additional pressure for cost-cutting measures," says Celent analyst Sang Lee in a recent report.

But the survey was able to identify intriguing trends and perceptions that appear to signal a shift in industry-wide attitudes towards outsourcing market data management. Another important finding is that close to quarter of all financial institutions are actively considering outsourcing options for their market data management.

Source: Celent Communications

"As sophisticated messaging is very important in today's market data management, capital market companies will be increasingly looking to outsource market data management to technology companies that are better equipped in providing advanced and cost-effective technology solutions," says Rajasekaran.

Surprisingly, the survey said that financial institutions with small market data teams are less likely to consider outsourcing than companies with larger internal data teams. It said that companies with larger data teams that currently handle multiple asset classes in multiple locations will certainly add complexity to the overall outsourcing transaction. Also, companies with larger data management teams could potentially achieve the greatest cost-reductions through outsourcing and, thereby, relieve their pain points.

Rajasekaran says technology companies with capital market focus will make the difference in this scenario, whereas the outsourcing option will provide competitive advantage for the capital markets companies.

Error rectification and exception management are some of the functions that companies are looking at outsourcing. Exception management is the identification and rectification of incorrect data by data analysts. Outsourcing this kind of function serves a twin purpose - quality service at a cheaper rate. The 24x7 offshore delivery model predominantly helps to deliver cleansed and authenticated data before the start of each trading day.

However, financial companies are reluctant to divulge how much they are spending or saving in data management projects, which range from consolidating databases to outsourcing the data management process.

Celent Communications, the Boston-based research firm, reports that outsourcing revenues in the financial services sector will climb to $30 billion by 2006, with companies in North America and Europe leading the way. The leading categories for outsourcing are trade automation, data management, and development of client extranets, reconciliation and corporate actions.

In general, the survey results profile an industry trying to balance the mounting problems of dismal market conditions that impose heavy cost-cutting requirements on financial services companies, the demands on internal market data groups for ensuring quality and usability of data and the need for technical support and timely delivery of data.

Not surprisingly, outsourcing some or all of the data management operations is seen as an increasingly attractive way to relieve these pressures and companies with large internal data teams that understand the growing importance of data integrity are leading the way in looking for assistance in achieving it.

The finale
Market data management has become an increasing challenge for capital market companies. Complex structures and burgeoning varieties of financial instruments require more than one set of market data for pricing and risk management as new measures on risk reporting has augmented focus on market data management.

Efficient data storage, advanced messaging technology, sound business rules and robust handler are critical which will take companies to the next level in their market data management. Thus, the industry is doing its homework to effectively manage market data to supply enough oxygen for the lifeblood of the financial services industry.