By Maria Trombly | Securities Industry News | May 23, 2005

It was inevitable. After pirated music CDs, pirated films on DVD, and pirated software--not to mention illegal brand-name knockoffs of consumer goods that sell on a scale rivaling the originals--comes pirated market data. According to Jack Sabo, a New York exchange official with a penchant for sleuthing, real-time data feeds from every major derivatives market in the world can be had in China for just $600 a year--a steal next to the estimated $120,000 to $240,000 a legitimate subscriber might pay annually.

That's what Sabo, VP of market data services at the New York Board of Trade, told a meeting of the Commodity Futures Trading Commission's technical advisory committee late last month in Washington, D.C. He repeated the tale to Securities Industry News last week. But if it seems incredible, Glen Madeja, director of information products at the Chicago Mercantile Exchange, confirms that his exchange has also investigated high-quality piracy of its data feeds related to the same apparently legitimate Chinese enterprise identified by Sabo.

Although neither Sabo nor Madeja would name that Chinese company, SIN dispatched a freelance translator posing as a prospective purchaser to test the availability of such illicit services in the financial capital of Shanghai. The result: It was easy to locate at least one firm with the goods for sale-- the Shanghai Pobo Finance and Economic Information Co. (www.pobo.com.cn).

The U.S. Information Technology Association, based in Beijing, is looking into the matter. So is the U.S. Embassy in Beijing, the U.S. Department of Commerce, and the cabinet-level Office of the U.S. Trade Representative.

The firm quoted a fee schedule that ranged from $1,200 to $3,600 a year, depending on whether the client--presumably a brokerage--would require hosting services or use its own servers to handle the incoming data.

Our agent did not plunk down the cash, of course--but Nybot's Sabo did buy a subscription and tested the service from his New York base to see how it stacked up against the real thing. For $600, Sabo reported, Nybot did indeed get high-quality, real-time data from the world's major derivatives exchanges. Nybot also asked the provider whether equities data were available. According to Sabo, "They said, No, we're not authorized for that.'" (Stock exchanges and other equity-data suppliers are known to be aggressively enforcing their rights and permissions.)

Both Sabo and Madeja stress that it's not yet clear whether Web sites distributing this data are the work of deliberate pirates or reflect an honest mistake about distribution rights. Shanghai Pobo, for example, may very well not have deliberate ill intent. Sabo had a letter hand-delivered about five weeks ago to the undisclosed company whose service he tested. He hasn't heard back yet, he told SIN, and is continuing to try to trace the leak to its source.

He's also called in some big political guns. The U.S. Information Technology Association, based in Beijing, is looking into the matter. Sabo also has discussed it with the U.S. Embassy in Beijing, the U.S. Department of Commerce, and the cabinet-level Office of the U.S. Trade Representative.

"We're thinking of going to the next step, which is sending a letter to the chairman of the parent company of the pirate," Sabo said.

Little Guys Hurt the Most

Sabo says that legitimate market data vendors are the ones most hurt by these pirates. An executive at a global market data provider said it isn't significantly affected by the piracy because its customers demand high reliability of their data.

Smaller legitimate vendors are more vulnerable.

"It's unfair to us while it benefits smaller and illegal vendors," said the IT manager at a reputable market data vendor in China, who asked that his name not be used. "The copyright problem is very serious, but the government hasn't taken any concrete action to solve it so far."

Rubbing salt into his wounds, local exchanges raised franchise prices in March, he added, giving even more of an incentive and edge to the pirates.

He said that there are several ways pirates can commandeer data feeds. "I think the most common method is to decrypt the satellite transmission," he noted.

Some doubt that there's enough interest in these kinds of services in China to pose a real threat to the integrity of the market-data industry--unlike, say, DVD or software piracy. Chinese investors' ability to trade foreign financial instruments is currently very limited, after all.

"The value of this information is directly related to people's ability to trade these marketplaces," notes Madeja. "The magnitude of the market-data problem is much smaller than in other products with "much more economic pull."

But Sabo argues that the pirates wouldn't have zeroed in on market data if it weren't lucrative. He adds, tantalizingly: "Number two, they have a big beautiful building in Beijing."

Sabo considers China a special case. "In the U.S., [piracy is] easy to stop, because the laws are on our side," he says. "In Europe, the laws are on our side. In any instance where we've had something in South America, we've been able to shut them down." The Chinese site, however, has been running for at least two or three years. Sabo--who happened on the case while playing a simple hunch--expects to see piracy in Russia and other former Soviet states, though he has uncovered no evidence of it yet.

One aspect of the problem Nybot and other exchanges face in China is a pervasive lack of respect for intellectual property rights. "Basically, everybody told me, China just does not recognize your rights here," Sabo said.

Fraser Howie, co-author of Privatizing China: The Stock Markets and Their Role in Corporate Reform, says, "A lot of companies don't view market data as having value--or value that they should be paying for." Douglas Clark, an intellectual property expert in the Shanghai office of international law firm Lovells, says that even though there is no specific law protecting market data, any piracy violates copyright law: If a subscriber resold data without permission from the rights holder, that would also be considered a breach of contract.

"There has been a case where a person has been criminally convicted for misusing market data" in China, Clark reports. On the other hand, says Jones Day intellectual property lawyer Xiang Wang, the case law is not yet well developed, and cases can take years to settle. "Even the person from the U.S. Embassy there wasn't sure what the Chinese government's policy was regarding market data," says Sabo. "It's a very complex issue, and it's not going to be solved this year."

Chinese exchanges, meanwhile, are careful to control information flow by keeping a close eye on distribution channels. "The control of data sources in the derivatives market is quite tight," says Jianfeng Chen, a marketing manager at Financial China Information & Technology Co. "Only those companies which are granted rights by the exchanges can do business in this sector. This is due to the problem of copyright, which is a big one in China."

Chen's firm is able to provide equities and funds data, but it can deliver derivatives data only through a partnership with another market data vendor, Esunny Information Technology Co., which has a distribution deal with the Zhengzhou Commodity Exchange.

Chen says that he prefers a low-key approach to dealing with loose practices, first notifying the vendor that there's a problem and then offering to resolve the situation amicably. He has never gone to court to shut down a data source. Sometimes it's simply an honest mistake; Chen recalls instances in China and India where vendors misinterpreted their contracts.

Keeping a close eye on distribution channels is the preferred option for the Chicago Mercantile Exchange, says Madeja. But when it sees out-and-out piracy, the CME will track down the source of the stolen data feed and shut it off. It has done so at least once in China.

Tracing the source is the hardest part, Madeja says. "We send it out to A, who sends it to B, who sends it to C. By the time it gets to D, I only know that I sent it to A." Once B and C are tracked down--which can take weeks--the improper feed can be shut down overnight.

Madeja notes that market data piracy "is a global issue"--he's also seen it in Singapore, Brazil, Hong Kong and the Caribbean. "We've seen more than one company in China, but I'd like to reiterate that we've seen more than one company in other countries as well."

However, Madeja points out that the piracy brought to his attention by Nybot has taken an unusually long time to resolve--between three and six months. Part of the problem has been the language gap, though Nybot had a Chinese-speaking employee who helped the process along. This particular case also involves a maze of complicated corporate relationships.

The Bargain Basement

So why don't brokerages the world over just start cutting costs by subscribing to cheap data from China? Sabo says there is no technical reason they can't. "The Web site that I was talking about--we accessed it from here in New York," he explains. "This gives you access to a database over the Internet, and the company that gets the data probably receives the continuous streaming data from all of the world's derivatives exchanges out of a leaked land line."

The resulting feed is clean, but the site that SIN and its translator inspected was published exclusively in Chinese. That's not to say that other market data pirates don't have English versions, and there are many Chinese speakers overseas.

Then, too, there's the issue of reliability--the risk that a pirate operation might be shut down at any moment. "While the industry has been fighting about the price of market data for years, I don't believe that we will see bulge-bracket or even medium-tier brokers or investment managers buying hot market data anytime soon," says Larry Tabb, founder and CEO of the Tabb Group, a research firm in Westborough, Mass.

John Pironti, enterprise solutions architect and security consultant at Unisys, says one of his company's financial industry customers did briefly toy with the idea. It's not unusual for global firms to purchase some services locally.

Two months ago, a customer Pironti met in Asia asked him to look at an extremely low-cost offering from a local market data vendor, which turned out to be pirated. Pironti would not reveal further details, except to say, "Once they realized that this was a pirated feed, they decided not to go ahead."

A smaller organization, Pironti notes, might have been more willing to take the chance. "The reality is that you can get this pretty much anywhere, if you know how to get to the right guy," he says. "This is a natural progression of software piracy."

However, piracy is disruptive to the orderly conduct of a market and adds a layer of cost for market participants, says Tabb, adding that China's reputation on intellectual property doesn't help. "It's a shame that this is happening in one in the most opportunistic markets we have seen in a long time."