For the past six years, reference data initiatives have been primarily driven by cost. Even as the global capital markets industry enjoys one of the most robust bull markets ever, industry participants remain highly focused on cost reduction. This is a carry over from the last bear market (2000 – 2003). During that time, as the industry aggressively searched for efficiencies, the cost of obtaining and managing reference data was recognized as a large target of opportunity. That view has not changed.

Today, most organisations are well down the road with procurement-based cost reduction initiatives. The most common involve detailed reviews of existing contracts and invoices within functional silos, and in some cases, on an enterprise-wide basis.

Several organisations have reported substantial savings accomplished through a line-by-line review of vendor invoices – stunned at the amount of data being charged versus the amount being used. The sheer size of the invoices -- hundreds of pages -- had discouraged these types of exercises in the past. They are now performed on a regular basis, either monthly or quarterly, and some organisations have hired additional staff based on the cost savings.

Capital markets executives are also concerned about the impact of “comfort levels” resulting from long-time employees facing off against long-time vendors. By making changes in personnel and incentive plans, executives have been able to further reduce costs.

Additionally, as contracts come up for renewal, participants have been demanding that data providers unbundle their services. This allows participants to pay only for the data they need and creates the opportunity to subscribe to multiple providers without duplicating the cost.

One industry organisation addressed its concern about cost and dependency on a single reference data vendor by approaching a second lower cost vendor and convincing it to provide free services for a period of several months after explaining that it wanted to demonstrate to front-office personnel that the difference between the two vendors was not significant. After a few months, some front-office users agreed that the differences were not noteworthy and migrated away from the initial vendor. This was viewed as a positive incremental step in reducing single-vendor dependency and costs.

A recurring trend is the attempt to lower costs associated with mature securities. Most organisations believe they have successfully driven down middle- and back-office expenses, including the reference data used to support those organizations.

Today many participants believe middle- and back-office processes, and the reference data supporting them, no longer need to be managed inhouse. For example, broker dealers who use service providers and investment managers who use functionality provided by their custodians as part of a broader middle-office services package, often view the processes and supporting data as a commodity that provides little or no competitive advantage. In fact, they are moving these functions out of their organisations.

One of the cost economies this move generates is lower reference-data provider expenses, as service providers manage those contracts and incorporate the expenses in their fees. While some reference-data providers are slow to embrace these developing relationships, others view them as the next logical step in the evolution of the industry.

From the back office to the front office, everyone is impacted by cost pressures on mature products and the implications they have for reference data.

Dramatic changes are happening to front office operations that are involved with mature products. These include:

• downsizing of broker dealer trading floors due to algorithmic or black-box-to-black-box trading;
• growing demand for Direct Market Access (DMA) and the resulting disintermediating of traders and salespeople;
• eliminating or reducing the size of exchange trading floors; and
• increasing popularity of alternative execution services for both equity and fixed income products.

It’s only a matter of time before significant changes occur with respect to the manner in which front offices acquire reference data.

The most interesting insight I’ve heard was an emerging view that vendors providing trading and execution services technology will also include the reference data supporting those functions. Just as the ability to provide pre- and post-trade compliance capabilities emerged as a key competitive driver for such applications in recent years, so will the ability to provide reference data supporting transactional activity.

In fact, some industry participants believe that the reference data providers who don’t have this capability today will form partnerships or make acquisitions with trading and execution services vendors sooner than later to gain this capability. This will be the first step in front offices eliminating some direct relationships with reference data providers.

No industry participant is immune from the unrelenting pressure to drive costs down on mature products. For reference data expenses, procurement exercises alone will not achieve the desired savings. As such, there is a growing trend of industry participants moving from direct to indirect relationships with reference data providers.

Leading the way are some organisations moving their back and middle office operations to a service provider. Front offices may take longer, but the same changes are in store for them. It is reasonable to assume that at some point in the future the majority of the industry will not be directly managing the reference data associated with those products.