Market Data Q&A: Phil Lynch of Asset Control

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Advanced Trading: How are hedge funds obtaining and managing their market data?

Phil Lynch, Asset Control: The buy-side is generally consuming market data in an outmoded way, based on historic business models. Firms source information to multiple systems via many different means -- anything from feeds from their terminals to Excel spreadsheets. The buy side's market data is still a relic of the old fashioned "people and terminal" business and it is not really in line with the electronically driven and high-speed front office whereby fewer people do more through leveraging technology.

When it comes to consuming, managing and validating market data, the buy-side is essentially operating on a highly inefficient and duplicative process. As an example, it's difficult for firms to obtain a centralized and reliable view of their positions and risks in order to provide any level of consistency and depth in their reporting. It's also highly inefficient from a cost perspective as well. This is something that has to change because the buy-side no longer has the luxury of the margins it once had. With increased pressure to lower costs, provide far more transparency, and the need to have a much closer eye on risks in performance on a much more regular basis, manual and disaggregated processes just can't do the job.

Advanced Trading: What are the challenges for buy-side firms when dealing with market data? Do they have their MD management tools to properly do this job?

Lynch: The biggest challenge for buy-side firms when dealing with market data is actually cultural. The provision of financial data has typically been a back seat function and is seen as "IT's problem." Whatever business you're in today, including capital markets, data and information is the foundation of your business; it is not separate from the business. To truly leverage the value of information, firms need to have a shared interest in data across both the business and IT. It's essential to take a cohesive and consistent approach to market data so each business unit has visibility into what the others are doing to ensure a consolidated strategy across the organization. Everyone has to be on the same page using trusted information, front to back, top to bottom.

When addressing the management of market data buy-side firms tend to manage it one of two ways: The first way is via a siloed approach This is common because firms tend to have different groups with different strategies and mandates which traditionally operate independently of each other. On the opposite end of the spectrum, firms that attempt to address every financial data issue they have simultaneously -- big bang -- which has consistently proven not to be the most effective approach either. Firms need to look to the middle of these extremes -- being both practical and collaborative and the truth is, very few firms are doing this. Nor do they have the necessary tools to tackle this job properly.

Advanced Trading: Are hedge funds firms getting their market data and MD tools from the sell side or from their prime brokers?

Lynch: The buy-side is definitely not consuming market data just from the sell side; rather, they are increasingly relying on third-party firms.

The buy side has traditionally relied on two firms to supply the vast majority of their information, and they haven't taken advantage of the other players in the space. We're starting to see all kinds of specialized data providers crop up (index providers, real-time fixed income prices, mortgages or swaps etc.) and as more of these complex instruments become exchanged-traded, there will be more options for bringing data into the firm.

One of the benefits of investing in a data management infrastructure is that it provides customers with ability to integrate data from wherever they want from whoever they want. As the Internet continues to provide us with an explosion of information sources, the capital markets space continues to default to two pipes. Firms need to have an infrastructure in place to source and harness the global sources of information available and be able to leverage it consistently.

Advanced Trading: Are Buy Side firms open to using cloud solutions for their storage requirements? If not, why not? Security issues?

Lynch: The buy side is extremely conservative. The first question that needs to be addressed here is "what exactly is the cloud?" There is no question that cloud solutions will play a very strong role in the future of buy-side technology and operations. However, there are serious issues to be considered when moving to the cloud, such as data security and privacy, which are vital.

While those issues can be addressed, the question then becomes, "what types of information am I comfortable putting in the cloud and which type of cloud?" Some firms might be comfortable with storing market data in the cloud, but not positions and holdings. Even before you get to this point, firms need to first put in place a robust and secure data infrastructure and standardize their processes. Only then can firms start thinking about delivery options.

Issues with scalability are going to push firms closer to the cloud in the foreseeable future. Since companies are geographically dispersed, having consistency and flexibility as well as cost and computing power are going to be very attractive. The standardization and efficiencies that come with this is vital if firms are going to be able to preserve their margins and remain competitive.

Advanced Trading: Please give us a real world example with a Hedge Fund or Prop Shop client and how you helped them with their market data needs.

Lynch: The buy side is made up of different firms of varying sizes and investment strategies, so this isn't a one size fits all type of answer. One example is this: Asset Control ultimately saved a top-tier American asset manager over $5 million per year by centralizing and sourcing it more efficiently. This firm had no way to process all of its information so it was unable to take advantage of new investment opportunities -- simply because it took too long to set them up. The firm was able to save massive amounts of money by rationalizing the way it consumed information. Asset Control also worked with a large American asset manager who had traditionally operated their funds around specific asset classes (equities, fixed income) completely separately, almost as if they were different organizations. They were not sharing any information or infrastructure at all. This firm decided it was strategically important to run their business on a consistent and shared view of information and the markets. Because of this decision, these once disparate entities now have greater visibility across the funds.

And lastly, a macro hedge fund was looking to manage its risks on a daily basis. This was something that used to be done on a less frequent basis. Given the volatility of markets, this hedge fund needed to have a much better assessment of its positions every day. In order to do this, it needed data infrastructure in place that allowed analytics systems to calculate and process this information all day, every day.

This is essentially what a data management infrastructure allows you to do -- it allows you to quickly process very large amounts of data, thus enabling more frequent reporting. Through this, firm essentially have their finger on the pulse of their business, market risks and positions at all times. Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio