Earlier this month, Virtu Financial announced it was rolling out a data analytics service, it was one of several initiatives launched by the firm since the acquisition of ITG and is yet another example of how the non-bank market making segment is seeking to evolve and, as a result of that evolution, move closer to offering the type of service a bank would.
This is not that much of a surprise – after all, they compete in the market making arena so why shouldn’t they in data and analytics? The question I have, however, is what does this offer that is original and are people going to be willing to pay to access the data and analytics?
Firms like Virtu trade a tremendous amount on public venues and the data from these venues is available – at a cost. If the firm is going to undercut those data sources then all well and good, it’s a good data aggregation service, but when it comes to FX in particular, what can it offer that is not already available from banks for free? The banks have invested heavily in analytics and while I still find it strange that they pay to access what is largely their own data, the analytics are available gratis as long as one is actually a customer of the bank.
More to the point, bank data packages include something that several non-bank firms cannot boast – a huge internalisation programme that generates a lot of unique data – in FX especially, less than 20% of the flow hits the public platforms. On that note, incidentally, I read somewhere or was told (and I genuinely forget where from) that a firm was boasting a 97% internalisation rate during the recent upheaval. Far be it for me to cast aspersions upon that claim but either the firm has a very dumb client base; cherry picks flow to a ridiculous extent; is playing with the data; or I would hate to see the skew and signals it has been chucking out to the market. In short, I don’t believe the claim if we are talking genuine internalisation – what was I saying a few weeks ago about how much I lov…sorry detest…some marketing claims?
Anyway, back to the non-banks. I think there is no doubt that they need to monetise more than just their trading – the halcyon days of March are already well behind us and the new ‘normal’ is not quite as rosy, so diversification is smart. The trouble is, I don’t think going head-to-head with banks in this field is worth the trouble. If people want independent TCA or execution analytics there are several third-party firms that can do that who never execute in the market and as such are “cleaner”. I recall when XTX launched its X-Ray product, the firm acknowledged the challenge of being a market participant offering execution analytics, was willing to explore it being hosted independently, and was keen to stress that it was not a commercial product in the sense that users would not be charged.
The challenge for a trading firm stepping into the data analytics world is no different today – there will inevitably, rightly or wrongly, be questions asked over the independence of the data.
I like the fact that Virtu is being aggressive in extending its product offering, and I think it is inevitable that non-bank firms generally do this, but where they do it is the interesting part for me. I continue to hear murmurings of a non-bank firm taking a keen interest in an OEMS provider. This makes sense to me because the banks charge for their execution services, therefore the newcomer is not at an instant disadvantage.
For all the competition between non-banks and banks, when it comes to the top tier providers of the latter they have a distinct advantage in their client bases and internalisation programmes that feed of them. By all means look to diversify a business, it makes sense, but I still like the idea of picking one’s fights. Challenge where there is an opportunity to undercut – and if it’s free, walk away!