Written by Kaylen Harris
This article was first published on marketdata.guru.
William Shatner must have had Inter Dealer Brokers (IDB) in mind when he said that, aiming high above the ground, not below the ground. Because spinning off their data business would have the same effect, with potentially devastating consequences. It’s not difficult to figure out why.
Why is this a big deal?
Of the four major IDBs, only TP Icap’s Parameta data and analytics business is in the public domain as a spin-off from its parent company, but BGC’s Fenics also appears to be preparing for a similar deal. , it would be in line with their plans. Achievements. Tradition’s business isn’t big enough and Marex’s data business is an afterthought.
So why the fuss?
Fundamentally, IDB’s market valuation is very tough, especially when compared to competitors in exchanges and fully electronic venues such as MarketAxess and Tradeweb. With a price/sales ratio of 1:1, despite increasing earnings, shareholders are bound to seek asset monetization, i.e. a spin-off of Crown Jewels, with an inevitability of activism, especially US-based hedging. We’re looking at Phase 2 of the fund, and at the top of the list are parameters. .
back to basics
Although all of IDB’s market data businesses underperform other exchange businesses in terms of the percentage of revenue derived from information and analysis (see graph below), these businesses, with the exception of Marex, Since 2016, it has comfortably outperformed the underlying venue business in terms of both revenue growth. and profit margin.
These are good indicators of the folly of making data businesses independent now. Because not only is the data business far from reaching its potential, but it’s like separating your head from your body.
It’s all about the fundamental role that brokers play in financial markets. It creates liquidity by connecting counterparties across multiple markets, asset classes, and products by enabling price discovery and setting market levels that facilitate trading.
How does this work? We provide you with a price over the phone or through your data business.
Broking and data are inherently linked, so separating the two harms both. No broking = no data, no data = no liquidity, no liquidity = no broking.
How does intermediation impact your data business?
The interaction between brokerages and their data businesses is no stronger than the supply of data. Data businesses are responsible for commercializing, distributing, managing, and developing their own businesses. Still, there are significant implications.
Intermediary relationships with customers drive data relationships. This is an important link. If a new desk or new trading product comes online, connectivity is required. As voice intermediaries are replaced by electronic trading, price flows dry up in more liquid markets. This has a double effect, as reduced price flows reduce broker activity, further reducing price flows. If a desk pulls a traded product, no further price exists and no notification is necessarily given.
How will the data business impact the brokerage industry?
In a significant and unobtrusive way. Data businesses distribute the prices that front desks need to get in front of customers, provide publishing tools to capture data, and provide connectivity to the marketplace. Therefore, data flow interruptions and inaccurate pricing distribution will directly impact brokerage operations, resulting in higher operating margins.
negative impact
The immediate conflict of interest works against the newly independent data business, which needs to have fairly stringent safeguards in place to avoid the fate of Air Canada’s Aeroplan frequent flyer program. Most of them are.
You need continuous access to your data from your desk. What happens when brokers open and close their desks? Data consumers will be much less understanding when prices are lowered from a third party than when they are lowered directly.
Similarly, what happens if there is a problem with in-store prices? Who is responsible at what point? Who invests in the trading technology and price extraction applications needed to access price data?
But above all, spin-off entities are most at risk because they have a single source of revenue, and that revenue is driven by a single source of data. This is where the Air Canada/Aeroplan experience comes into play. In 2005, Aeroplan, whose sole customer base was Air Canada passengers, was spun off at a valuation of C$1.9 billion. In 2017, Air Canada announced plans to launch a new loyalty program to replace Aeroplan, and its value plummeted, prompting Air Canada and its partners to buy Aeroplan from Aimia for C$450 million in cash. It was possible to buy it back.
This means spin-offs will need to diversify from a single source to avoid Aeroplan’s “crash and burn,” meaning less focus on the core business and less on brokers and data. Corporate relationships weaken. This inevitably leads brokers to realize that it was a bad idea to separate their data business in the first place, as the important direct relationship between the data consumer (i.e. the broker’s client) and the broker is lost. It will be.
winners and losers
Parameta is optimistically valued at £1.6bn, which is roughly the same as TP Icap’s market capitalization, so despite all the downsides we’ve discussed, it looks like a big deal on paper. Looks like a victory. This applies equally to data and analytics business spin-offs. Even at other companies.
So, yes, there will be winners – TP Icap shareholders who will abandon ship the moment they receive their payday. The impact on losers will be particularly painful for brokers in the short term, as it will impact their ability to facilitate trades, including lost commissions and lost revenue from data businesses. Putting more pressure on stock prices.
In the medium term, data businesses will struggle to diversify and pay the price of being forced into spin-offs, before being bought back cheaply by the inevitable divorces with intermediaries. We have some great people in the IDB data business, and we could lose them too.
Inbound investors will also feel the pain unless spin-off entities get lucky.
Other exchanges such as ICE, LSEG, and Nasdaq take a strategic view of data and analytics as part of their overall trading workflow. IDBs need to understand how data translates transactions back into the business.
Unlocking the potential of IDB’s data business will be much more beneficial to shareholders and IDB itself by maintaining a symbiotic relationship between the broker desk and data business by leveraging the intrinsic value they bring to each other. Masu.
In other words, it’s a bad idea for brokers to separate their data business.
knharris@marketdata.guru
