Why Audit?

Why take the time and trouble to audit the Quote Vendor ("QV") population disseminating 3rd party fee liable data? Indeed, why incur the expense and effort associated with auditing the End-User populations of 3rd party fee liable data content? Large amounts of fee and licensing income flow from the QV population and the End-User population to the Data Content Providers almost automatically, and after all, the QV population is in the business of packaging and selling 3rd party data content.

Can't it be taken for granted that that the QV population will look after the Data Content Providers interests and report data usage accurately? Keep in mind that our End-User populations are, in some cases, members of the Exchange community and even of our own Exchange, and comprise some of the pre-eminent financial institutions operating in the world. Surely, incorrect reporting to the 3rd Party Data Content Providers by such an auspicious user population would be an exceptional occurrence affecting the occasional firm very infrequently?

The answer, unfortunately, is "no" - incorrect reporting to 3rd Party Data Content Providers is rife and is actually the norm in the industry. All participants in the industry are aware of this fact to a greater or lesser degree. So, why has this situation occurred? There is primarily one reason, and that is: due to the vast number of differing sources providing fee liable data content, the End-Users of 3rd party data content have tended to build reporting models which automatically produce reports complying with the reporting requirements of an idealized 3rd Party Data Content Provider.

As such, these reporting models may comply with some reporting requirements, for some of the Data Content providers, for some of the time but they do not comply with all reporting requirements, for all 3rd Party Data Content Providers all of the time. The unwritten rule would seem to be that the Data Content Providers must engage in the audit process in order identify and recover their under-reported fees, in addition to safeguarding future revenue streams. It is worth noting that there is generally no desire within the QV or End-User populations to change from this "one size fits all" model".

In addition, over the course of the years the QV population has successfully managed to divert the bulk of potential liabilities in respect of the vast amount of audit claims to the End-User population. They have achieved this feat by the use of the "self-certification of usage" by the individual End-Users as a basis of reporting to their 3rd Party Data Content Providers. What was intended to be an effective tool in the accurate reporting of data in "uncontrolled" environments, has been clung onto by the QV population, despite having been made redundant by technological advances, purely because such certification indemnifies the QV population and shifts the liability to the individual End-User.

The continued pressure from the QV population for the wide-spread introduction of "Direct Billing" of End-Users by the Data Content Providers is the last attempted "giant leap" on the path to insulating the QV population totally from any audit claims lodged by any individual Data Content Provider.

So, given that we are all aware, or at the very least suspect, that reporting to Data Content Providers is on the basis of an "idealized" reporting model which leads to inaccurate reporting in respect of the vast majority of data sets, are there any other factors which would support the case to invest in the Market Data Audit Process? We would summarise the potential benefits to the Data Content Provider contemplating the introduction of an Audit Programme as follows:

  1. The Open Nature of the Agreements (see below);
  2. Financial Prudence(see below);
  3. Recovery of Underreported Fees(see below);
  4. The Deterrence Effect(see below);
  5. Premium Audit Claims(see below);
  6. Stress Testing Agreements(see below);
  7. Market Intelligence (see below).

One final point - your Audit periods are perishable - each month you delay introducing an audit programme, another month at the start of the audit period goes "out of time" and the underpayments become unrecoverable month after month after month.


The Open Nature of the Agreements;


The fundamentally Open Nature of the Market Data Dissemination Agreements and Market Data Usage Agreements was apparent and recognized at the genesis of the industry and addressed by the insertion of Audit Clauses in Agreements. The Audit Clauses are not included in the

Agreements just to "plump-up" the contract; they are included because it was recognised that any Data Content Provider that did require accurate reporting would have to engage in the audit process. What was not recognised was that the need to audit would increase and not diminish as time went on!

Financial Prudence;


The revenue generated by Data Content Providers in respect of the sale of Market Data now tends to be an increasingly important source of total revenue and Financial Prudence would dictate that there should be robust independent Market Data Audit Processes in place to verify this revenue. In addition, the Data Content Providers own Internal Audit Functions and possibly even External Auditors conducting Statutory Audits may require some assurances that these revenues have been verified in some robust manner. Without the Market Data Audit process, the revenues paid to each Data Content Provider are supported by nothing more than verbal assurances.

Recovery of Underreported Fees;


One of the most attractive reasons to audit is purely monetary - the audit will identify Underpayments of Fees Due and allow the Data Content Provider the opportunity to invoice for these underpayments. In addition, the financial benefits of accurate reporting will accrue to the Data Content Provider from the date of the audit. One question which you, as a Data Content Provider, may well ask is "by how much are we being underpaid"? The answer, unfortunately, is that no-one knows until the audit process is introduced. However, discussions with our clients have indicated that they conservatively estimate that for each £10 million paid annually in respect of data products, between £1 million and £3 million is not reported or paid. As time goes by, the underpayments accumulate to a tidy sum, a greater proportion of which becomes unrecoverable as the clock ticks through the audit periods.

The Deterrence Effect;


There is a case to be made that the Deterrent Effect enjoyed by Data Content Providers that are regularly auditing their Market Data fee revenue provides an added level of assurance that the fees they are receiving are correct. After all, if your organization is known to audit regularly, it makes sense to treat your data sets with care.

Premium Audit Claims;


One of the major monetary advantages in conducting active auditing programmes is the increased likelihood of being the Data Content Provider which identifies the Premium Audit Claims. The Data Content Provider which identifies this type of item can expect a large once off payment for an item which will rectified the moment it is identified. The Premium Audit Claims which are systematic in nature will be "disappeared" immediately and the next Data Content Provider to audit will be none the wiser. This, of course, assumes that your auditing firm is operating on your behalf only - "bucket-shop" audit firms acting for multiple clients during the course of the same audit may not be an optimal solution for any individual Data Content Providers interests.

Stress Testing Agreements;


The audit process allows the individual Data Content Provider to Stress Test their Agreements in the real market place. Do our Agreements reflect the realities of the market place? Do our Agreements state our requirements as we understand them? Do our customers interpret our Agreements as we intended? Do our Agreements state our current polices and procedures? The audit process will identify any weakness in the Agreements and, ultimately, lead to clearer and more transparent Agreements.

Gain Market Intelligence


We now come to Market Intelligence. The only really effective method of discovering exactly how your data is stored, processed, utilised and disseminated is to actively audit. The market is a dynamic and changing environment where it is essential that the Data Content Providers keep themselves fully informed of developments at all parties utilizing their proprietary data in order to judge the impact of developments on current Market Data Policies and Procedures.

It is very clear that the players in the market utilize 3rd Party Data Content as authorised by their executed Agreements. In addition, it is clear that 3rd Party Data Content is utilized for purposes and in manners which have not been explicitly prohibited by these same Agreements. The audit process allows the Data Content Providers to identify new and innovative use of their proprietary data sets and to introduce appropriate and timely fees for such usage.