Indexers Go Global

Index providers’ business models are evolving rapidly in the face of globalisation and technological change, FTSE’s chief executive, Mark Makepeace, tells editor Paul Amery How has the indexing business changed since you started FTSE in the 1990s?

Makepeace: First, it’s become much more global. Sixteen years ago, when I set up FTSE, each index provider had its own particular niche, often country-specific. Second, indexing is now seen as a business in its own right, and a very valuable one at that. Third, the technological and other demands on the index firms are becoming more complex and the levels of service required are now much greater. In their commercial activities, some index providers appear to focus more on the provision of benchmarks, others on index-related trading and data. Has the recent acquisition of FTSE by the London Stock Exchange put you more into the trading-focused category of index firms?

Makepeace: I wouldn’t say so. Of the main index providers, MSCI and FTSE continue to focus on the provision of global benchmarks for investment managers, both active and passive. The LSE said that its purchase of FTSE represented a diversifying move specifically because of our exposure to the buy-side. Other index firms—S&P and Stoxx, for example—are more focused on the trading community and particularly derivatives, and their respective links to futures exchanges, CME and Eurex, reflect that.

Going forward, the largest index firms will probably all aim to cover a range of activities: both benchmarking and index-related trading, but for the time being there are still some differences in focus. There’s an increasing demand for the provision of real-time index data. What challenges do you face as a result?

Makepeace: Technology has enabled us to provide information much more quickly. We typically calculate most of our headline indices on a real-time basis, adjusted for tick-by-tick changes in the underlying securities, and our latency can be as low as on many of the stock exchanges. Given the importance of trading data for your index calculations, is it an advantage for an index provider to be affiliated to an exchange?

Makepeace: I’d say the affiliation should be seen more from the perspective of trading rights, and the trading venue benefiting from an affiliation with the index provider. FTSE takes a neutral approach and we are not tied to any one platform. How is the fragmentation of share trading in Europe affecting the index business?

Makepeace: The impact is currently limited. As an index provider, we could take prices from any source; the question is whether there’s client demand for us to do so. On an intraday basis, people are primarily concerned that prices reflect tradeability and, up to now, people haven’t indicated a real desire for us to source prices from alternative venues. Investors are primarily concerned that the prices used in the end-of-day index calculation come from exchanges and are based on an auction process. What do buy-side clients want from you in particular?

Makepeace: They’re interested in a wider range of indices and the customisation of existing benchmarks, whether by tax position, risk level or some other measure. Ultimately our job is to provide choice and opportunities that fulfil the investment need, whatever that may be. How do you value the different components of your business?

Makepeace: The brand, our intellectual property and FTSE’s client servicing capabilities are all important. We constantly assess our standing with clients through a regular survey process. What do you make of the increasing trend towards self-indexing—that is, fund managers choosing to develop their own benchmarks and to track them?

Makepeace: I’m not sure this is a trend. It is happening, but most ETFs continue to track indices calculated by independent providers. Under the current environment of increasing regulation of the investment industry, I think you’ll continue to see that reliance on external index provision.

But there’s also significant price competition in the ETF market and it’s understandable that some issuers are looking at ways in which they can reduce their costs.

I think it does matter, though, that the index provider is independent. Our policy decisions, for example, are based on the feedback we get from a large cross-section of investment firms. If a single fund manager were able to determine benchmark policy, with cost considerations playing a role, then I think there is scope for things to go wrong—whether in the selection of stocks, managing index changes, price calculation, and so on.

For our part, and as an independent index provider, we have to make sure that our pricing and levels of service meet client needs, and that we remain competitive.

  • Luke Handt

    Luke Handt is a seasoned cryptocurrency investor and advisor with over 7 years of experience in the blockchain and digital asset space. His passion for crypto began while studying computer science and economics at Stanford University in the early 2010s.

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