The case for diversifying market data sources

Banks face a seemingly endless list of complex risks to address, making prioritization a challenge. According to a 2022 survey  of North American bank chief risk officers, an overwhelming majority cite funding and liquidity risk due to increased competition for deposits as a top concern, with climate and ESG risk high on the list as well.

An emerging risk that many financial institutions, particularly among regional and community banks, may not have yet considered is the overreliance of one market data source for key back-office functions, such as daily price exception reporting, new security setup and security master maintenance, and income processing within trust departments.

Market data was once thought of as highly commoditized and generally reliable regardless of the provider. However, when it comes to certain financial instruments, getting an accurate data point can sometimes be a moving target. Banks leave themselves open to getting burned when a provider stumbles.

We saw an example of this earlier in 2023, when a prominent data provider was fined $5 million by the Securities and Exchange Commission for failing to provide accurate information about their valuations process for certain fixed-income securities. A few years earlier, the SEC fined a different market data provider $8 million for “compliance deficiencies” relating to its delivery of pricing data of certain securities.

With something as important as pricing, the reputational and regulatory risks, and associated costs, cannot be overstated. Bigger institutions that typically draw from multiple market data sources are less vulnerable to such events because they can uncover discrepancies and validate a contested price with a higher degree of confidence.

Regional and community banks today have a lot of priorities to contend with, particularly on the front end where digital transformation takes top billing on most IT roadmaps. Overhauling back-office functions tends to be complex, so the prospect of adding a new market data source is commonly viewed as long, costly and full of headaches.

In actuality, the market data space, like other critical technologies, is moving toward cloud-based delivery models that enable an institution to quickly be up and running with a secondary market data source without disrupting existing platforms and data feeds.

As an aside, the demand for remote access to data for back-office employees cannot be ignored in a post-pandemic world. Recent data from PwC indicates that 69% of financial services companies expect to have much of their workforce working from home at least once a week for the foreseeable future. For middle and back-office staff, this WFH frequency will likely be higher.

When starting to create an action plan around addressing market data consolidation risk,

the best place to start may be to work within their existing roster of vendors. Most banks use market data provided by their core banking provider and/or trust accounting vendor. Often, this is an afterthought and positioned as a default option. In reality, vendors typically have integration partnerships with alternative market data providers.

The concentration risk for banks today when it comes to their usage of market data in the back office are very real, particularly for regional and community banks. Banks concerned about these risks should consider having a conversation with their back-office technology platform providers to learn about alternatives that might make the most sense for them.

Justin Van Til is a senior vice president of product and strategy at QUODD