Markit, the UK financial information group, signalled its move into the securities lending market with the purchase of Data Explorers.

The deal will allow Markit, which supplies data on opaque markets such as credit derivatives, to build on London-based Data Explorers’ information on equity and fixed income markets, where the securities lending analytics group has become known for data on short selling of stocks.

Regulations drive information needs:  The provision of market data has emerged as a new battleground in the wake of new regulation that is forcing banks, brokers and investors to increase the amount and quality of the capital they hold.  Legislation such as Basel III and the Dodd-Frank act in the US require banks and investors to hold more collateral – the security pledged in a trade as part of a trade – and analysts have estimated the industry may need to find up to $2tn to plug the gap.

Institutions can earn fees by lending securities to help them plug that gap and is a market estimated to be worth $12tn.  A recent report by Morgan Stanley and Oliver Wyman said the battle for business from institutional investors was leading to a “land grab” between market infrastructure providers and broker-dealers.

The deal is the latest in a string of purchases for Markit in recent years.  Lance Uggla, chief executive, told the Financial Times that Data Explorers’ proprietary data could be used to create new products for customers of Markit.   “They collect a lot of fixed-income data but have not made product sets out of it yet,” Mr Uggla said.

Markit could develop products allowing clients to improve their use of collateral, while developing products for equity market participants in areas such as exchange traded funds, dividend forecasting and quantitative research.

The acquisition for an undisclosed price follows an auction by Bowmark Capital, the midsized private equity firm that bought Data Explorers in 2007, which drew offers from several other financial information vendors and stock exchanges, according to one industry executive. Deutsche Bank led the sale process. Bowmark declined to comment, but is believed to have valued Data Explorers at close to £60m when it invested in 2007.

Data Explorers has been run since 2008 by Donal Smith, a former Thomson Financial executive, who is expected to leave the company after a short integration period. In a statement, Mr Smith said: “Data Explorers has achieved fantastic growth over the last four years. We have more than doubled revenues and tripled profitability with new product innovation and expansion into Europe, North America and Asia.”

The companies declined to disclose further details of Data Explorers’ revenues or profitability, but Mr Uggla said the acquisition was the second-largest Markit had made, and would be financed from cash reserves. Markit was looking for “revenue synergies” rather than cost savings, he said, and expected to retain the rest of Data Explorers’ 100 staff.

Markit is majority-owned by a group of financial institutions including JPMorgan, Goldman Sachs and Morgan Stanley. In January 2010 General Atlantic Partners invested $250m for a 7.5 per cent stake, valuing the group at about $3bn.

Source: Financial Times