Revolutions are known to be noisy affairs. But 22 years ago, one man quietly founded a company that was to revolutionize the way financial markets do business. Michael Bloomberg set up his eponymous online network in 1981. Slowly but surely, the company expanded its service, covering virtually every region, every asset class, and every communication medium.
Where Bloomberg hit the jackpot was in combining data with analysis. “The value of Bloomberg is these two pieces joined together,” says Kevin Gould, chief operating officer of Mark-It Partners.
The analysis is provided by Bloomberg but the data is generated by large numbers of the company’s clients: the banks, brokers, dealers, and traders who use – and pay to use – the service also supply its raw material.
This process was initially welcomed by the banks and other data providers. Bloomberg offered to take their data, clean it up, make it presentable and then, effectively, sell it back to them. The theory was that market insiders were not expert at managing data themselves so a specialist was needed to do the job more efficiently.
Such an idea was not new. Reuters adopted the same argument with the foreign exchange markets; Cantor Fitzgerald did it with government bonds; and Icap did it with interest rate swaps. “In three major asset classes, banks have taken the risks, done the business, and then given away their data,” says Gould. “Bloomberg is doing the same as Reuters, Cantor, and Icap but it is doing it in spades. It is now worth more than some of the banks themselves.”
Bloomberg’s development has not been universally welcomed. It has fostered growing concerns about the power such a dominant force might have in the market. These fears have become sufficiently intense among some players that they have decided to act. Instead of simply giving away their data, they are participating in the creation of competitors to Bloomberg, new rivals who offer similar services in narrower fields.
“Traditionally, Reuters and Bloomberg aggregated data. Now organizations are forming that are dealer-owned,” says Stephen Miller, managing director of Standard & Poor’s leveraged commentary and data department.
Creditex was founded four years ago. The firm works in the credit derivatives market as a data provider but also offers financial institutions, companies, and investors the chance to carry out transactions on a real-time basis. The company is backed by leading players in the credit derivatives market, including Bank of America, Bank of Montreal, CIBC, CSFB, Deutsche Bank, Dresdner Kleinwort Wasserstein, JPMorgan, Morgan Stanley, Société Générale, UBS, and WestLB.
MarketAxess, the electronic bond trading platform, is also partially owned by its users, as well as management and venture capitalists. “We take information from the National Association of Securities Dealers and we add value. We put the data in a presentable form, add such information as the spread over Treasuries and then redistribute the data to around 5,000 users,” says Andy Nybo head of marketing at MarketAxess.
Some critics suggest that when owners are also suppliers and users, impartiality is compromised. Nybo turns this argument on its head. “We know the credit market so we provide what the credit market needs,” he says. In other words, MarketAxess actually benefits from being owned by market users: it can offer a better-quality service as a result of its inside knowledge.
Like Creditex, MarketAxess offers real-time trading online. LoanX, founded in 2000, also offers trading capacity but focuses increasingly on data provision. Backed by Bank of America, CSFB, Deutsche Bank, Goldman Sachs, and JPMorgan, the company competes directly with the Reuters-owned Loan Pricing Corporation and provides information on the price of thousands of loans every day.
“LoanX resulted in the development of clearly superior data services and a steep reduction in the cost of loan pricing data. We created the first web-enabled services to deliver global price transparency on over 3,000 loans a day, and we competed for business in a market that had been served by a single vendor. This new market competition led to a nearly 50% reduction in the cost of credit data services for investors,” says LoanX chief executive Mike Rushmore.
Like Nybo from MarketAxess, Rushmore hotly refutes accusations that data is not as “independent” when it is provided by the banks to a company in which they have an interest.
“The milk-toast argument that a multi-dealer platform is somehow not independent is advanced regularly by those individuals that have an interest in reducing competition. The truth is that the independent credit rating agencies that have an informed view on whether a data platform is independent have selected LoanX as a qualified independent provider of loan pricing services. Any arguments to the contrary are the desperate blather of those firms finding that they suddenly need to invest in their own data businesses, reduce the costs of their services and deliver more value to their clients because they are now operating in a competitive market,” he says.
LoanX is working increasingly closely with Mark-It Partners, a company set up two years ago to provide data for risk management and credit pricing. Mark-It is first and foremost a data company, backed by Toronto Dominion and a string of other banks, including several that have supported Creditex and LoanX. “Both LoanX and Mark-It work in the credit space. It makes more sense for us to offer the full array of products in this space and we can do this by working together. Our combined platform is stronger,” says Mark-It’s chief executive Lance Uggla.
However, despite these data providers mutual ownership that doesn’t mean they are not in the business of making profits. As Uggla points out the growth of Mark-It Partners can be as good for the users as it is for the Mark-It itself. Uggla is unapologetic about the desire of management and its backers to gain financially from the enterprise. “Mark-It Partners is positioning itself to monetize data and offer the banks the opportunity to have a role and an ownership in that. So we create an ownership structure that encourages the top banks to provide data. But also you persuade the banks that by combining their data it will benefit the whole market. You have to persuade them that the bigger the market, the bigger their profits will be,” he says.
According to Gould, the creation of Mark-It Partners was linked directly to banks’ growing uneasiness about what they were giving away to Bloomberg. “The sell side increasingly realized that their data had a value. They were giving up something that was valuable and Bloomberg was monetizing their data,” he says.
Mark-It approached a variety of financial institutions both for funding and the provision of raw materials. “We say give us your data every day and we will clean it up on a nightly basis, analyze it, remove bad or stale data, and come up with statistical analysis,” says Gould. “What we provide now is the chance for market players to look at where their trades are, compared with everyone else’s. This is very useful for them.”
Even though some of Mark-It’s data suppliers also own equity stakes in the business, Gould stresses that this has no bearing on what the company provides. “We are independent. The whole process is completely removed from any of our stakeholders,” he says.
Adds Uggla: “When I was in the market, my biggest concern was who was behind Bloomberg’s generics. What’s good about Mark-It is that all the big players are owners so our composite data is particularly valuable.”
Gould and Uggla’s opinion is borne out by their stakeholders and those who use Mark-It’s service. “The data is better from Mark-It because it is coming from a broad variety of contributors. Their philosophy works because they are only as good as their data and if you own a share in them, you are going to make sure you give them the right material,” says one client.
“We want to support competitors of Bloomberg. It is a great way of getting leverage over the company,” says another.
In other words, Bloomberg’s position of dominance is a concern to many. None of the investment banks would want to say so publicly but senior people at most of the top firms are concerned.
“Bloomberg is dangerously strong. It disintermediates investment banks from their clients. For instance, I put prices on Bloomberg, they put my prices with others and develop a marketplace for my clients in which I have no involvement,” explains one top banker.
“Ten years ago, people treated Bloomberg terminals as harmless and extremely useful. They are still extremely useful but they are no longer considered harmless. Without competitors, what is to stop them putting up prices whenever they feel like it?” says another.
Bloomberg is unruffled by such remarks. “We feel that the value of Bloomberg is its analysis. We have a different product. It has never been our philosophy to look at what other people are doing; all along it has been our philosophy to look at what our customers need. We have a product that people find valuable and we continue to add value to it,” says Chris Taylor, Bloomberg’s head of corporate communications.
Taylor points out that banks have tried their hands at the data business before, but never with much success. “We are a service provider. Banking is a different business,” says Taylor.
Now it appears that banks and other finance houses recognize this fact. These days, institutions are taking stakes in smaller data companies but they are not running the companies themselves: they are providing the raw numbers but allowing these niche specialists to aggregate and analyze them.
Bloomberg and other service providers would almost certainly like to think that competitors such as Mark-It Partners are flashes in the pan, companies that will flourish briefly before falling into obscurity as the giants in the industry grow bigger and more powerful.
Investment bankers have other dreams however. They hope and believe that Mark-It is just the beginning and that other pure data companies will be founded to create true competition in the industry. “We would anticipate more of these companies springing up,” says one senior financier.
Stephen Miller at Standard & Poor’s finds it interesting to see data companies being backed by financial institutions but he believes it is too early to know whether the current trend is a temporary phenomenon or the beginning of a sea change in the market. “We are testing out whether this is permanent or not. How all these new guys end up doing will provide an indication of how and where this is going,” he says.
Permanent or not, competition is almost universally considered to be beneficial to the market. On the sell side, institutions benefit from knowing that they are part owners of companies that deliver a product that is crucial to them and for which they have provided the raw ingredients. They are also comforted by the fact that any rivals to Bloomberg dent the group’s perceived omnipotence.
Those who put their data into the market and those who use what comes out benefit too from the downward pressure on prices that competition invariably creates.
New providers of a service are always vulnerable at the beginning but, as one banker says: “When Michael Bloomberg started out, he was just one guy with a good idea. Who knows what these new kids on the block will make of themselves?”
Clearly it is in the banks’ interest that these initiatives work. Data provision used to be considered a boring by-product of the interesting parts of banking – deal-making, trading and winning business. Not any more.
Dealers support their investing clients, period. When those investing clients demand better credit market transparency, dealers respond. That focus on investors is driving the development of multi-dealer data platforms.
Building the world’s best data platforms requires a combination of financial and intellectual capital that only the dealer community can contribute. When the required financial capital is bundled with real time data feeds and guidance from an engaged advisory board, good things happen.
This is a permanent change that reflects the desire of banks to create and finance superior data services for their investing clients.
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