Market Data, Reference Data and Blockchain

This blog was originally published by Xenomorph (

Blockchain, or distributed ledger technology (DLT), has the potential to disrupt a wide range of business models across the financial services industry. However, the potential application of blockchain to the worlds of market data and reference data has not received that much attention.

It’s difficult to predict the extent to which this emerging technology will impact the financial industry. Advocates of cryptocurrencies will tell you the disruption has already happened.

Bitcoin, together with a growing list of alternative coins (all powered by various guises of blockchain technology) have already enabled individuals to store wealth and transact entirely outside the remit of the established industry. From central banks that mint currencies, to deposit-taking retail banks and the myriad of intermediaries involved in payment and transaction processing – the entire system has been displaced by cryptography and a decentralised network of miners, churning out a stream of newly validated transactions.

Lately, cryptocurrencies have been in the spotlight for the volatility of their valuation. But they remain marginalised by the established financial services industry. That is hardly a surprise given their potential to disintermediate incumbents (financial institutions would hardly queue up to champion their own disappearance).

Yet from the perspective of any individual institution, the blockchain technology underpinning cryptocurrencies holds undeniable promise. The industry is full of intermediaries. Being able to cut out links in a value chain – to disintermediate intermediaries – has the potential to make processes more efficient.

The Data Value Chain

In the financial information industry, market participants serve as both data consumers and data producers. While they source and license data to fuel their investment and trading operations, they also generate data every time that they interact with the market. This might happen when they publish a quote, send or amend an order, execute a trade, agree a bilateral OTC deal, or underwrite a security and bring it to market. All of these events (and more) result in the market participant being a source of market and reference data.

But although market participants are original sources of data, the value from the data they consume is captured entirely by intermediaries. Exchanges, interdealer brokers, data aggregators and technology vendors all serve a role in aggregating, cleansing and distributing data back to market participants. These intermediaries take ownership of the data, and license it back to market participants under increasingly strict terms and conditions.

Market Data Blockchain?

In theory, blockchain could disrupt this value chain significantly. Let’s assume the global financial services industry were to embrace the technology head-on. All securities and derivatives transactions would be validated and recorded on a decentralised ledger. This ledger would be open to all market participants to access, and as a result, the information contained therein would be free of any licensing restrictions.

There would be no commercial models restricting use of market data contained in the blockchain. The data would also be of undeniable quality because it would be integral to the way transactions were processed and would undergo validation prior to being recorded.

Transparency would not only mean market participants get free data, but also regulators get a clear picture of what’s happening. The need for a ‘consolidated audit trail’ or any form of transaction reporting would be negated. Details of all trades – whether executed on-exchange or OTC – would already be recorded publicly, along with details of counterparties and beneficiaries. The audit trail would be built in to the market’s infrastructure. Regulators would find it much easier to identify any wrongdoing. This heightened transparency would also serve as a deterrent, discouraging participants from acting inappropriately in the first place.

Unrealistic Expectations

A future where market data is freely available, market mechanisms are completely transparent and participants behave impeccably may sound like utopia. But is it feasible? Probably not anytime soon.

Within the financial services industry, finding an optimal solution to an industry challenge is never that straight forward. Whether something sounds like the most practical solution from a technical or logical perspective can be beside the point. Political and economic barriers will stand in the way of adoption. Incumbents that stand to lose out from disruptive technologies will fiercely protect their interests.

Were we to design a global securities market infrastructure from scratch with the technology that is available today one would expect something different from that which emerged organically. But new technology needs to fit into legacy infrastructures, processes, rules and regulations.

Blockchain has the potential to be revolutionary and disruptive to the industry. But its adoption will need to happen gradually, first focusing on processes where it might add the most value (like international trade finance).

One would sense that market data might not be the right use case to tackle first. So what of reference data?

Reference Data Blockchain?

Perhaps a decentralised ledger could be a great way to record and distribute accurate reference data. Every time a bookrunner was looking to bring a security to market, they would publish terms and conditions via a global blockchain. The same would apply for newly created derivatives. And when a company was due to pay out a dividend or a coupon, split its stock, or announce a merger – it could publish that information to be validated and recorded via the same blockchain.

Imagine having all of that information recorded on an immutable, distributed ledger. Everyone would have access to the same high quality, validated reference data, straight from the source, without the need to reconcile or validate multiple records. It sounds like another mini nirvana.

But we could probably achieve the same result using different technology. The barrier to adoption is getting everyone to agree to change. And by threatening the destruction of existing value chains, we immediately run into opposition.

Many disruptive innovations deliver value to consumers, but also result in many of the spoils concentrating with a single entity and proving bitterly unpopular with incumbents. Amazon angered book sellers, Uber incensed incumbent taxi drivers and Airbnb irked hoteliers. Any blockchain-powered data vendor would run into some pretty stern and well-organised resistance.

Even if all participants in the global capital markets agreed that it would be more efficient to publish reference data via a single entity (something that isn’t that far-fetched), the question of who would own that entity would quickly prove a stumbling block.

The one thing that counts in blockchain’s favour is its potential to support a distributed ownership structure. In theory, a blockchain-powered reference data utility need not be owned and governed as an individual entity, but rather by the network as a whole. Such a model might make the benefit easier to sell.

That said, the impact of such disruption would be significant and the effort to get it off the ground colossal. Whether it is feasible remains to be seen.