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Competition is the mother of innovation

By: Mark Makepeace, CEO, FTSE Russell

Critics from many corners of the political and financial spectrum are calling for Google, Facebook and Amazon to be broken up.1 A key aspect of the argument is that these tech giants have become powerful businesses that stifle competition and in turn hurt innovation. A similar assertion has been whispered around the market data industry by some regarding the biggest index providers. However, aside from each industry being led currently by a group of leading firms amongst a wealth of other providers, the comparison falls flat under closer review.

In fact, we would argue that growing competition continues to drive innovation in the market data and information space. And, while leading firms may have additional scale, products and services in this very fast-moving industry can become commoditized very quickly and the barriers to entry are low for anyone with a great idea. Consider that more than half of ETFs launched in the US last year were based on indexes that came from providers other than, for example, FTSE Russell, S&P and MSCI, according to XTF data.

In addition, innovative, niche-driven smaller index providers operating in the industry in numerous jurisdictions are disrupting the status quo, delivering more fuel to the competitive fire. And data “aggregators” such as Bloomberg, Thomson Reuters, and Morningstar to name a few, deliver low cost, and even free, index calculation services, further levelling the playing field. When coupled with self-indexing by asset managers, you have a very competitive market where end investors have a lot of choice and, for institutional investors, a strong say in the construction standards and methodologies used by the major index providers. For global index providers like FTSE Russell, we need to constantly examine where we sit in the value chain and continuously evaluate the products and services we offer the marketplace.

This self-examination, fostered by competition, is very healthy. It is driving innovation while also enabling index firms to showcase the tremendous value we offer. As an index provider, we recognize that it is actually very easy to create a broad market index. With free or low-cost data available daily from numerous sources, virtually any investor could select a group of stocks, create a basket and establish their own index. In fact, FTSE Russell even provides the recipe for how to create our indexes: the ground rules for our indexes are fully transparent and publicly available so that people can understand how our indexes are constructed.

What’s difficult is running indexes accurately, in real time, within a regulated environment on a large scale. When creating and maintaining indexes that are used for trillions of investment dollars, the execution, particularly in a regulated environment, becomes crucial. A mistake is a serious issue that can ripple across markets and investor portfolios. Striving to achieve flawless execution, we have built a formidable team of analysts and index managers who maintain more than 250,000 indexes daily.

Great care needs to be taken in the construction of index methodologies to ensure that they are written clearly and unambiguously. Poorly crafted index methodologies can lead to unexpected changes to index composition that can have a material effect on security prices. Take as an example the potential inclusion of China A-shares in our global indexes. FTSE Russell applies years of intellectual property to assess numerous facets of the Chinese markets and their listed companies. The process also requires a significant level of engagement with local officials and entities from regulators and exchanges to trading and custody firms.

And needless to say, once we move beyond broad market, cap-weighted indexes and into fundamentally-weighted indexes, indexes screened against ESG factors or indexes weighted according to risk measures, the resources and sophistication of the calculation infrastructure need to ramp up significantly. This is particularly the case with the ever-growing number of smart beta or factor indexes. In just the last five years, the number of indexes – particularly those used to underpin an investment product such as ETFs – has exploded.

And I believe we must also reframe our value proposition to move to the next level of growth and development. Yes, our clients need indexes, but they also need unique data sets and market analysis. They need market cap-weighted indexes for broad market exposure, but they are also interested in smart beta indexes for more unique index-driven investment approaches. They need smarter tools for market analysis to better understand changing market dynamics. And, by the way, they need these tools across a broad range of asset classes, not just equities.  

In short, the bar is getting higher. As the financial industry continues to evolve, index providers will continue to adapt and innovate. The increasingly competitive index industry creates an environment that rewards the best. Products that fail to meet investors’ or the marketplace’s expectations will falter. The rapidly changing investment landscape also focuses attention on methodology, something we welcome at FTSE Russell. The more investors seek to identify and measure increasingly complex investment factors, the better opportunity index providers are afforded to showcase their capabilities.

 

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Vanity Fair, December 2017; CNBC February 19, 2018; The New York Times, April 22, 2017  

 

© 2018 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, “FTSE TMX”) and (4) MTSNext Limited (“MTSNext”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE TMX and MTS Next Limited. “FTSE®”, “Russell®”, “FTSE Russell®” “MTS®”, “FTSE TMX®”, “FTSE4Good®” and “ICB®” and all other trademarks and service marks used herein (whether registered or unregistered) are trade marks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, or FTSE TMX.

All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for any errors or for any loss from use of this publication or any of the information or data contained herein.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell indexes or the fitness or suitability of the indexes for any particular purpose to which they might be put.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this communication should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group index data and the use of their data to create financial products require a licence from FTSE, Russell, FTSE TMX, MTSNext and/or their respective licensors.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.

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