- 1997: Volume 6, No. 2 IIA Works Toward Defining Data

The Financial Information Services Division Securities Administration Committee has been looking into the problems related to the lack of standards for defining the rules, conventions, components, processing requirements, and special conditions of closing prices worldwide. According to both users and pricing vendors, "price types" are not defined in a uniform or consistent manner by exchanges on a global basis. Each marketplace has its own local rules and conventions, which leads to problems with the accuracy and consistency of data. In addition, there are inconsistencies in how terms are used across the various marketplaces, leading to discrepancies in the way vendors process and calculate prices.

The lack of standard price definitions leads to uncertainty among mutual fund managers, global custodians, technical analysts, securities administrators, and others. The challenge is to define a standard template, containing precise definitions of what each price component means. so that users can make informed decisions on which price to use, under which circumstance, for which market, and for their specific application. To do that, FISD is initiating an effort to:

• identify the different price types which are frequently disseminated by exchanges;
• define the attributes of each price in a consistent manner; and
• define and clarify local pricing conventions and special characteristics used for portfolio valuation.

Scope of the Problem

Two factors are making the need for standard price definitions most important. First, firms are increasing their reliance on automation to deal with growing volumes of data from an increasing number of marketplaces. Second, users are becoming more sophisticated. Users are no longer willing to just accept a price. They need to know how it was derived and how it relates to their specific application. Portfolio valuation is a global process and complex analytics need precise definitions. In addition:

• There is a general and widespread lack of awareness about what information is available and the appropriate ways in which it should be used. There is a lack of understanding in the U.S. about how the markets abroad operate. Local marketplaces have unique approaches based on regulations and conventions for their specific markets. Those rules/guidelines for portfolio valuation are not widely known or well understood.
• There are inconsistencies in the ways vendors process and calculate end-of-day pricing, which creates confusion among customers in trying to reconcile why one vendor does its calculation one way and why another vendor does it another way. The problem is compounded by database structure limitations as vendors attempt to adapt local pricing conventions into pre-defined fields within their databases.
• Pricing values are not subject to standardization because each market has the prerogative of making judgments about the closing price (i.e. rapid price run-up at close, where closing price is vastly different from the last "set of prices," and where marketplaces want to exercise judgment by averaging the last prices). There seems to be no mechanism for dealing with exceptions or to make clients aware of exceptions.
• Definitions, interpretations and conventions all need to be understood within the context of the local market. Terms such as "end-of-day" are loosely used to reflect a variety of different prices and each marketplace does not use the same term in the same way (i.e. last trade does not always mean the same thing in all marketplaces).

The goal of this initiative is to move towards consistency and uniformity in terms of identifying how a price was derived and establishing guidelines on making the components known by all participants. The objective is not to establish the "right price," not to attempt to have all vendors display the same closing price, and not to establish standard operating procedures for exchanges. Simply stated, the objective of the project is to define the components of pricing valuation and to provide users with the tools they need to make rational decisions based on their specific needs.