Bloomberg data wars: Into darkness

By:
Jon Macaskill
Published on:

Bloomberg brought a knife to a gunfight when it tried to pry information out of Goldman Sachs by using details gathered from the data and media firm’s terminals about the bank’s employees. An enquiry by a Bloomberg reporter about whether a partner had left Goldman, given that his terminal was not in regular use, set alarms bells ringing at a bank that has a well-deserved reputation for paranoia.

Goldman has an equally well-deserved reputation for swift action and aggression, and by taking public its beef over the accessing of terminal user data, the bank dealt a serious blow to Bloomberg’s ambitions to extend the areas in which it competes with its customer base.

A scandal about whether Bloomberg gave the reporters in its news division improper access to terminal user data will not necessarily derail the firm’s attempts to develop a swap execution facility or broaden its trading platforms.

But Goldman put Bloomberg on the back foot with its aggressive response to the potential misuse of user data and emboldened other banks to act on their long-cherished desire to pull the data firm down a peg or two.

Goldman might have wished to slow Bloomberg’s diversification into areas that were traditionally the preserve of investment banks, such as profiting from derivatives trading. Introducing some hesitancy into Bloomberg’s aggressive pursuit of news stories would be an added bonus for Goldman, and one that fits the bank’s preference to squeeze multiple opportunities for gain from any given situation.

Bloomberg is under attack in the terminal space
Bloomberg is under attack in the terminal space
There is an obvious irony in Goldman Sachs expressing outrage over conflicts of interest at Bloomberg, although perhaps not one that resonates with some of the more humourless senior bankers at the firm.

Goldman itself has at times been notorious with its own customers for blurring the line between service provider and competitor.

Goldman has been able to offset this concern by providing first-rate service and creating an impression with customers that its information flows are so superior that access to its staff can provide an edge.

Bloomberg needs to ensure that its own service provision retains this must-have aura with its customers. Until the recent storm over potential misuse of data broke, this was not an issue for Bloomberg. The firm was almost bizarrely unaffected by the financial crisis of 2008 and its aftermath. The global investment bank oligopoly was left intact by the credit crisis, with most banks battered but unbowed. There were some changes in cast members, but this had little effect on Bloomberg terminal use, as Bear Stearns was absorbed by JPMorgan, and Lehman Brothers staff found a new home at Barclays or Nomura.

Bloomberg was able to increase the price of its terminals to a current headline level of $24,000 a year per user or an effective rate of $20,000 a year for multiple-user deals. Growth rates at the firm have slowed because of cost-cutting by its clients, but it still generates around $8 billion of revenue a year.

Tensions between Bloomberg and its customers date back almost as far as the firm’s foundation. Investment bank heads, especially the fixed-income specialists who rose to the top of many banks in the years after 2000, felt foolish when they realized that Bloomberg had been able to take their own data and create a product that became an essential conduit for market information.

The knowledge that a quasi-monopoly built on bond pricing had provided an estimated $27 billion fortune for founder Michael Bloomberg made this all the more galling for bankers.

A collective banking industry resolution to avoid being fooled twice over data use has led to some changes in approach. When former TD banker Lance Uggla set up Markit to profit from credit default swap price information in 2003, the big swap dealers such as Goldman and JPMorgan took ownership stakes in return for agreeing to cooperate on data provision. Markit has since expanded into other asset classes and might be able to float later this year or in 2014 at a level implying a valuation of well over $5 billion, which will provide a welcome boost for its bank shareholders.

The biggest banks have not been able to reduce their reliance on Bloomberg terminals for many daily functions, but the current flap over data use at least gives them a chance to fight against further incursions, including competition on provision of trading services to the buy side.

After Goldman had taken a lead in pushing back against Bloomberg, JPMorgan was emboldened to demand logs of Bloomberg staff that had looked up information about the bank’s employees since 2008, while Citi and UBS scaled back use of Bloomberg chat rooms by their FX traders.

The widespread use of the messaging or chat function of Bloomberg terminals has become one of the firm’s main tools in heading off competition, and big banks have now begun to make a more organized push to reduce their reliance on the system.

Goldman Sachs and Deutsche Bank are among the banks that are involved in endorsing a push by Thomson Reuters and Markit to create a rival system to Bloomberg’s messaging, dubbed ‘open federated chat’.

Thomson Reuters has a poor track record in competing with Bloomberg, and Markit’s ambitions to move beyond its core function of price provision remain in their infancy.

But the biggest Bloomberg clients have a strong motivation to attempt to wean themselves and their own customers off reliance on the firm’s terminals. Thomson Reuters is a far more malleable service provider than Bloomberg, while the bank ownership stakes in Markit offer a natural alignment of interests, even if they do not guarantee agreement on tactics.

Bloomberg has a big advantage in the form of its incumbency as the most-used terminal in key markets, however. A messaging system works best when it is the market standard and users such as buy-side firms or banks that are not leaders in derivatives trading do not have the same motivation to reduce Bloomberg’s role in the financial ecosystem.

And one lesson that Bloomberg’s biggest clients have learned over the years is that the firm is run in the same aggressive manner as a Wall Street firm. The Bloomberg empire can be expected to strike back against incursions on its turf, either with greater use of discounting or by outpacing system improvements by rivals.