Markit CEO Lance Uggla knows the value and power of market intelligence in both good times and bad.
It’s a well-established principle that markets need information to operate effectively. Today, the ever-increasing speed of transactions, complexity of financial instruments and mounting regulation have made this need even more acute.
Credit markets were very opaque and I would say that Markit’s claim to fame is creating transparency.
Financial firms need more information and more detail, faster than ever before. To feed this large and insatiable beast, Uggla founded global information supplier Markit, now a 2,900-strong company with a turnover of US$763m.
The company’s meteoric rise and Uggla’s ambitions – he intends to double its value in less than five years – mean Markit has now become a company to watch.
It was the growth of credit default swaps (CDS), a type of insurance product, in the late 1990s that gave Uggla his big idea.
As a senior member of the executive team at TD Securities, a Canadian bank, he realized that there must be a way of providing the information needed to make the CDS market work better that didn’t involve trying to aggregate pricing data from a variety of sources.
When we meet at Markit’s spacious London offices, Uggla is relaxed and informal, with a ready smile.
“Credit markets were very opaque in 2001 and I would say that Markit’s claim to fame is creating transparency,” he says. It did this by offering the credit default swap markets, followed by the debt and bond markets, high-quality pricing information on a daily basis.
“From credit derivatives, we extended into the loan market and then to corporate bonds. Today, we’re a definitive pricer of credit and that’s more important than ever.”
Markit began in 2001 when Uggla left TD Securities and, with its backing, set up shop in a barn near his home in St. Albans, north of London.
Together with a team of six former colleagues, he began to work toward producing a form of user-friendly, aggregated pricing information that would help participants in the CDS market gain a better understanding of their financial position and manage their risk more effectively.
“At about 9:00 p.m., when the financial institutions in New York closed their books, it was already 2:00 a.m. in London,” he says.
“We had around five hours to create something of value ready for when London opened at 7:00 a.m. Back in 2003, it took us the full five hours. Today, we process millions more data points in less than an hour, thanks to technology.”
Number crunching aside, given that knowledge is power, how did Uggla persuade companies to give up their precious data?
“The key was to allow them an opportunity to participate in the ownership of the company in exchange for the rights to be able to use their information.”
Today, financial institutions own 57% of the company, with funds holding 13% and employees the remaining 30%. The employee ownership is a key factor in Markit’s success, the 50-year-old Canadian believes, because it encourages entrepreneurialism and helps drive the business.
The launch of this first product wasn’t helped by the bursting of the dotcom bubble, but it still found a ready market. Uggla clearly has a talent for identifying the opportunities in any crisis.
“I realized that there were many more datasets that we could use to create new products,” he explains. “We moved from being a data and information company to one that created indices, processed data, valued securities and provided risk services to portfolios.
Today, we reinvest a good 10% of revenues and we’ve used R&D to drive organic growth. We’re extending products globally or combining products to create new ones.”
It’s this creativity that clearly inspires Uggla. Among other innovations, Markit now combines its own data sets with public data sets to create alerts for trading desks.
Meanwhile, its successful Purchasing Managers’ Index, widely used and frequently quoted in the UK, has been rolled out to countries as varied as Japan, Cambodia and the Czech Republic.
The extreme nervousness in the markets means that the release of negative or pessimistic data can be controversial - as the ratings agencies can testify. As messengers have been shot by politicians and commentators, Uggla and the team have had their fair share of fire fighting.
“We’ve had periods where our indices have signalled a substantive collapse in the financial markets,” he admits.
Uggla cites Markit’s ABX.HE index, which allowed investors to take positions in the US subprime mortgage market, the collapse of which contributed to the 2008 financial crisis.
“It gave us some bad PR, for sure. But we were only providing an index, which is just a barometer of the market that participants trade in. That’s our job.”
Although clearly stung by the criticism, which Uggla describes as the first negative publicity the company has received, it was a staging post in Markit’s development and the company learned to handle bad as well as good press as a result.
He had clearly been aware of the value of the data that Markit was providing but the hostile comment that it received made Uggla realize just how controversial that data can be.
He also understood the importance of holding his ground in such situations, and of arguing his case. “We explained that the ABX.HE is such a small subset that it’s clearly not rational to suggest that it was the cause of the problem,” he says.
The company engaged in some informal education. “We also reminded people that ABX was a tool we created to help them to hedge.”
Markit has skilfully used what Uggla admits was initially unhelpful publicity to emphasize its neutrality and objectivity as a provider of data based on extensive research and robust, well-tested calculations.
Although Uggla would be loath to admit it, the furore is a backhanded compliment, demonstrating the growing profile of Markit, its unique position in the financial information sector and the increasing value of its data.
Markit’s goal is to increase the company’s earnings by about 15% a year organically with an additional 5% by acquisition. Acquisitions have become part of the fabric of the company.
“We’re looking to create synergies, but rarely cost synergies.” Instead, Uggla and his team are looking for companies that can complement Markit’s current portfolio to develop new products more quickly and easily.
We maintain a real entrepreneurial culture in the company, especially with our high employee ownership
For example, earlier this year, it acquired a data software supplier called Cadis, which will help it to meet demand for better data management from investment banks faced with increased regulation.
The company’s expansion into new areas with new products has been rapid but Uggla is also cautious. One sector that will require more data and market information is the broader over-the-counter (OTC) market, with its requirements for extra capital due to the Basel III regulations.
“For uncleared trades, there will be quite complex margin requirements,” says Uggla. Margins will have to be posted and it’s going to be quite complicated, with different models being used.
But there’s room for “middleware” - in other words, software that can perform huge numbers of complex calculations to ensure that trades are “cleared” or completed successfully, and that all the necessary reporting takes place. “We’ll adapt our capabilities to help our customers,” says Uggla.
Just as the company has grown and its product offering has evolved, so has Uggla’s role as CEO. “When you start, you want to build the product, then you want to sell it. Then suddenly you’ve got a bunch of employees helping you to make the product and a bunch of customers who are buying it.
So you think ‘What do I do next?’ That’s when you have to put in place the infrastructure. As we get bigger, we need the culture to be about people and customers.” He is passionate about continuing the small-company ethos, despite Markit’s growth.
“We maintain a real entrepreneurial culture in the company, especially with our high employee ownership,” he says. “That spurs innovation and creativity. We’re attractive to entrepreneurs who see that they can consolidate into a company that has greater reach and depth and will allow them to progress their strategies more rapidly.”
His own passion is clearly undimmed.
“I don’t feel any less motivated today than when I started - if anything, more so. The last 10 years have just shot by.”