FCA Commences Review Into Use and Value of Data and Advanced Analytics in Wholesale Financial Markets

On 9 March, 2020, the UK’s Financial Conduct Authority (FCA) published a Call for Input (CFI) looking into the access, use and value of data and advanced analytics in the wholesale financial markets, both now and in the future. As access to data has quickly become central to identifying investment opportunities, making investment decisions, trade and even meeting regulatory obligations, so too has demand for data increased and led to the potential for exploitation of the market by data generators and providers. In particular, the CFI focuses on (1) trading data, (2) benchmarks and (3) market data vendors. The CFI’s second area of focus is on the access and use of data and advanced analytics and, specifically, the opportunities and risks created by the changing use and value of data. We highlight below the key aspects of the CFI in these four areas.

The purpose of the CFI is to determine whether the FCA ought to implement further measures to address potential harms, all the while ensuring the current regulations do not inhibit innovation. The CFI is of particular interest to suppliers, buyers and users of data, although the implications of the CFI may have repercussions for any stakeholder that interacts with wholesale market participants. The FCA is focused on all data made available from, or accessed in, the UK, irrespective of where such data has been generated or sourced and reflects the FCA’s commitment to better understand the rapidly increasing innovation in data use in wholesale markets.

1. Trading Data

Trading data includes information on prices, bid/ask quotes and volumes of financial instruments available for trading. The CFI recognises that trading data has recently become a key growth driver and significant source of revenue for a number of trading venues, but that the current dynamics in the market may drive potential harm to users. In particular, the FCA will consider issues regarding pricing (including, the incentive and ability of trading venues to raise prices, “unnecessarily complex” pricing and the potential limitation of access to trading data due to high costs), the quality of data provided and scope for innovation, together with the potential for discriminatory pricing (e.g., charging competitors more than other users).

2. Benchmarks

Defined as indices used to determine the amount payable under a financial instrument/contract, the value of it or the measure of investment performance, the FCA acknowledges that the importance of certain benchmarks to investors has been increasingly growing. Specifically, the FCA noted a growth in passive investing with investors choosing passive index-tracked instruments, investment funds and exchange-traded funds. The CFI reflects the FCA’s intention to explore: (i) the impact of concentrated markets (including the availability of suitable alternatives and costs of switching between benchmarks); (ii) pricing, quality and innovation (not least as high switching costs weaken incentives for providers to innovate and improve product quality); (iii) transparency and complexity of contract terms (potentially also disguising switching costs); and, (iv) vertical integration (which, although can improve efficiency and reduce costs for the end user, may lead to harm where there is competition across the value chain).

3. Market Data Vendors

Market data vendors have a central role in distributing trading and other sources of market data, typically through desktop or web-based products with various sets of content. The CFI indicates that the FCA will explore issues regarding the impact data vendors have on the value for money obtained by participants, the level of competition (especially given the small number of firms offering market data) and market dynamics more generally. Moreover, the FCA is eager to better understand how data vendor products and services are sold (with bundling of content potentially reducing the ability of buyers to negotiate effectively), and the impact of vertical integration, including whether such integration may be causing competitive distortions.

4. Use of Data and Advanced Analytics

The FCA has expressed its interest in understanding how wholesale market participants use and envisage usage of alternative sources of data, notably including satellite imagery, client data, trading data, social media, account-level data and location data. The CFI observes that the range and depth of data sets operating in wholesale markets is vast and rapidly increasing and there is a focus on understanding how market participants access and use advanced data analytics to generate meaningful insights from otherwise unstructured data sets. Furthermore, the FCA observes that in considering the access to and use of data and advanced analytics, it will consider the use of new or expanded data sets (also referred to as ‘big data’), the adoption of new technologies to generate, collect and store the new forms of data, the use of advanced data processing technologies and sophisticated analytical techniques, and the use of data in business decision-making and activities.

In particular, the CFI denotes the FCA’s intention to explore a broad range of considerations in the field of advantaged data analytics, including:

• the access to data and advanced analytics, including potential information advantages where firms have exclusive access to data or technology and the related potential barriers to competition and harm to market integrity;
• the impact of concentrated markets, particularly on pricing and the increasing reliance on third-party providers;
• the changing and emerging business models, in particular, deriving a competitive advantage from new kinds of data and changing market dynamics in monetising data already owned;
• information sharing, collusion and biases, specifically bias towards incumbents where machine learning is based on historic data (in turn, excluding new entrants) and increased usage of algorithms resulting in investment recommendations with minimal human input that may give rise to new types of market abuse or collusive behaviours;
• data governance, controls and ethics issues, especially in respect of personal data, access of data through third-party sources and compliance with the General Data Protection Regulation; and
• the risk that increasing use of algorithms may, without sufficient controls or oversight in place, threaten market stability where decisions are made with excessive or unintended risks.

Next Steps

Although the FCA acknowledges the opportunities and efficiencies that the use of data and advanced analytics in wholesale markets may provoke, it also acknowledges that regulation has a critical role in ensuring the markets function adequately and competition is promoted in the interest of consumers. In this regard, the FCA reiterates its desire to ensure that regulation does not have a dampening effect on competition and innovation. The FCA expressly requests insight into areas of the current regulatory regime that may unduly affect the approach firm’s take to data and advanced analytics.

It is clear that the changing use, access and value of data and advanced analytical techniques is altering how businesses, and the markets more generally, function. Whilst appreciating the significant benefits of innovation and efficiency for wholesale market participants, the FCA has expressed its concerns about the increased risks and potential harms that such developments have brought.

Responses to the CFI are due by 1 May, 2020. Following this, the FCA has expressed its intention to publish a Feedback Statement in Autumn 2020, setting out its analysis, findings and any next steps, potentially including a market study to identify the sources of market failures, implementing regulatory action such as supervisory, policy action or competition law enforcement, or taking no further action.

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