A relative newcomer to the reference data business, Exchange Data International, is challenging the incumbents for what it terms anti-competitive practices. Specifically, EDI contends that the termination clauses in reference data contracts, which typically require users to return or delete their reference data, make it difficult for users to change providers because they would have to re-create their reference data libraries, which can be prohibitively expensive.
Burton-Taylor International Consulting, the leading authority on the market data business, estimates the global market for reference data is $2 billion to $3 billion.
EDI says that most data users are unaware that they are in effect only renting their data from major data vendors.
“It always comes as a shock to financial data consumers when they find out that they have only been ‘renting’ their data, and are effectively locked into their contracts. This has significant implications for all users of historical data, including quant analysts who rely on it for their algo strategies, and compliance teams which are required by legislation to maintain accurate data history. EDI’s strategy is to sell rather than rent data, and to offer hard-to-match cost-savings.”
EDI has obtained a mildly supportive legal opinion from a leading London law firm which said “Our assessment is that the Termination Practice could pique European antitrust authorities’ interest. There are cases which suggest that there are plausible arguments to be made that the Termination Practice infringes EU competition law.”
The termination practice could qualify as abuse of dominance, the firm said, noting that the concept of abuse of dominance is evolving.
Andy Nybo, a director at Burton-Taylor, said there are a variety of unique licensing agreements for reference data, and termination clauses can be justified.
“On the surface it makes sense because the aggregation, cleansing and normalizing all come at a cost,” he said. “Reference data is not static. There is constant cleaning and refreshing of historical reference data because new information or corrections are made, names change. All those thing impact the quality of the data.”
If the users don’t own a perpetual license for the data, they’re leasing it and when they change vendors they lose access to the data, he added.
EDI is the only sizable data vendor which believes that clients should own what they pay for, the company says.
“The onerous termination clauses are an effective barrier to entry for new potential data providers and may even be anti-competitive under EU law and local/national laws,” said Jonathan Bloch, founder and CEO of EDI. “This is damaging to data users, who are locked into an expensive and inflexible relationship with the ‘big four’ data vendors; it also makes it difficult for would-be entrants to the industry.”
While some financial firms only focus on the last ten years of data, most quant traders will be working with a twenty-year data set and the loss of even several years’ data could force them to remain in an expensive and inflexible relationship, he added.
“Based on our legal advice we believe that a financial data consumer based in Europe and challenging this termination clause has a fair chance of getting it held to be in violation of European anti-competition law and therefore unenforceable,” Bloch said. “But this route is not available to U.S. users.”
EDI, which was established in 1994, is headquartered in London with offices in New York, India and Morocco. It was named Best Corporate Actions Initiative of the Year in the IMD/IRD Awards 2018.