Suppliers with leverage: index providers, data vendors and custodians

The rise of passive investing (index-tracking funds that simply replicate a benchmark rather than pick stocks) has been a windfall for index providers. Every dollar that moves into an S&P 500 ETF or an MSCI World tracker generates a licensing fee tied to assets under management (AUM).

How the fee works

Index licensing is usually charged as a few basis points (a basis point is 0.01%) on the assets in the tracking fund, often with tiered rates and minimums. So as passive AUM balloons, the index provider's revenue grows without extra work.

Worked example (illustrative, using a round assumed rate):

> A fund tracks the MSCI Emerging Markets index and holds 20 billion USD.

> Assume an index license fee of 1.5 basis points on AUM.

> Fee = 20,000,000,000 x 0.00015 = 3,000,000 USD per year.

That 1.5 bps is an assumption for illustration, not a published rate; actual terms are negotiated and confidential. But the mechanic is real: the index provider earns on scale it did not create.

The market is concentrated. MSCI, S&P Dow Jones Indices and FTSE Russell (owned by LSEG) dominate global equity indexing between them. That concentration is why regulators pay attention. In the EU, the Benchmarks Regulation (BMR), administered by the European Securities and Markets Authority (ESMA), governs how benchmarks are constructed and administered, partly a response to the LIBOR rigging scandal of the 2010s.

MSCI's profitability is public and striking. As a listed company, its index segment consistently reports operating margins well above those of most active fund managers. Check its investor materials directly via MSCI Investor Relations to see the segment breakdown.

The recurring-revenue trick

Index fees are subscription-like: they recur every year, they scale with markets, and clients rarely leave because leaving means re-benchmarking a fund and re-papering client agreements. This "sticky recurring revenue" is why the market values index providers more like software companies than financial firms.

Data vendors: the terminal on every desk

Walk any trading floor and you will see the Bloomberg Terminal, a subscription workstation for market data, news, messaging and analytics. It costs roughly 20,000 to 30,000 USD per user per year (widely cited estimate; Bloomberg does not publish a single list price), and large firms run thousands of them.

Why nobody cancels

Three reinforcing lock-ins:

1. Workflow. Traders and portfolio managers build their entire day around the terminal's shortcuts and functions.

2. Network effect. Bloomberg's chat (IB, the instant messaging network) is where the market talks. Leaving means leaving the conversation.

3. Data dependency. Pricing, reference data and corporate actions feed downstream systems. Rip out the vendor and things break.

Competitors exist: LSEG's Refinitiv (the former Thomson Reuters data business) and FactSet compete hard on price and coverage, and cheaper APIAPIApplication Programming Interface: a standardised interface that lets applications communicate and exchange data without knowing each other's internal workings.View full definition →-first providers are chipping at specific niches. But displacing an embedded vendor across an entire firm is slow and risky, so incumbents defend their base.

Below is the kind of simple APIAPIApplication Programming Interface: a standardised interface that lets applications communicate and exchange data without knowing each other's internal workings.View full definition → call a manager's technology team might use to pull data from a vendor, showing how deeply vendors sit inside a firm's plumbing:

Note the license key. That single credential represents a contract, an audit trail and a switching cost. Once a firm's code depends on a vendor's data format, migration is a project, not a decision.

Custodians: the invisible backbone

Custodians safeguard assets, settle trades, collect dividends, handle foreign exchange, and increasingly provide fund administration (calculating a fund's net asset value, or NAV, the per-share value struck each day). They are the plumbing that lets a fund exist.

Different leverage, different pressure

Custody is a scale, low-margin business. Unlike index licensing, custody fees have been compressed for years because the core service (holding assets) is close to a commodity. State Street, BNY, JPMorgan and Northern Trust compete on price for the base mandate.

So where is their leverage? In the add-ons: securities lending (lending a fund's holdings to short-sellers for a fee), foreign exchange, collateral management and data services. The base custody fee may be razor thin, but the ancillary services carry the margin. This is why custodians push to be the manager's single, integrated provider: the more services bundled, the harder the client is to move and the more profitable the relationship becomes.

Concentration here matters for a different reason: systemic risk. A handful of custodians hold assets measured in the tens of trillions of USD. That scale is why they are supervised closely by banking regulators including the Federal Reserve in the US and the European Central Bank (ECB) in the euro area.

How value and margin split across the chain

Put the three supplier types side by side and a pattern emerges.

| Supplier type | Basis of leverage | Margin profile | Switching difficulty |

|---|---|---|---|

| Index providers | Benchmark written into prospectus | Very high | High |

| Data vendors | Workflow + network + data lock-in | High | High |

| Custodians | Bundled ancillary services | Thin on core, higher on add-ons | High |

The uncomfortable truth for active fund managers: their own fees have been falling for a decade as clients shift to cheaper passive products and negotiate harder. Meanwhile, index providers and data vendors capture a growing slice because their fees ride on total assets, not on performance. When a manager wins a large passive mandate at a wafer-thin fee, the index provider and custodian still get paid.

The counter-moves

Managers are not passive victims. The largest ones fight back:

• Self-indexing. BlackRock, Vanguard and others build proprietary indices for some products to avoid third-party license fees. Regulators require governance to prevent conflicts of interest when a firm indexes and manages against its own benchmark.
• Vendor consolidation. Firms cut terminal counts, replace premium data with cheaper APIAPIApplication Programming Interface: a standardised interface that lets applications communicate and exchange data without knowing each other's internal workings.View full definition → feeds where workflow allows, and renegotiate hard.
• Insourcing analytics. Bigger managers build internal data platforms to reduce dependence on any single vendor.

The result is a slow tug of war. Suppliers hold the structural high ground, but only the very largest managers have the scale to push back meaningfully. Mid-sized managers remain price-takers.

Key Takeaways

• Suppliers can out-earn managers. Index providers like MSCI and S&P Dow Jones Indices collect asset-based fees on scale they did not create, with margins that beat most active managers.
• Lock-in, not superiority, drives pricing power. Benchmarks written into prospectuses, terminal workflows, chat network effects and integrated custody all raise switching costs, which is where the leverage lives.
• Custody is different. Core custody is thin-margin and commoditized; the profit sits in bundled add-ons like securities lending and foreign exchange.
• Passive growth reshapes the split. As money flows to low-fee index funds, the value migrates upstream to whoever owns the benchmark and the data.
• Scale is the only real defense. Self-indexing and vendor consolidation let giants like BlackRock and Vanguard claw back margin; smaller managers stay price-takers.