Marc Rubinstein wrote an article titled The Business of Benchmarking, which includes the history of the meter, the shipping container, Nielsen TV ratings, FICO scores, stock indices (DJIA, S&P500, FTSE, Russell, MSCI, etc.), and bond ratings.


« Goodhart’s Law states that when a measure becomes a target, it ceases to be a good measure. A variation may be that when a measure becomes a target, whoever owns the intellectual property has a license to print money.  »

« An S&P credit rating and the S&P 500 index both provide what the metre does—there may be other metrics, but their value is diminished by not being universally acknowledged.

For the same reasons, the market is very consolidated. In ratings there are only two main players, Moody’s being the other; they have ~40% of the market each.

The structure of the broader ecosystem is different to the index business, though, where an oligopoly of index providers faces an oligopoly of customers. Here a duopoly of credit rating agencies faces a fragmented customer base. Consequently, they retain considerable pricing power, able to raise prices by around 3-4% a year.

… Their ratings on structured credit were wildly wrong, but as we know from the DJIA and VHS, it’s not about being right, it’s about being the standard.  »

« In the US, the passive share of assets under management is now at 50%; in Japan it’s over 70%. Exchange traded funds in particular have been a boon for index providers. They pay a fee to the index provider that is typically linked to the volume of assets benchmarked. When the London Stock Exchange bought control of FTSE in 2011, $5 trillion of assets globally were benchmarked to it. The exchange has since also bought the Russell group of indices, but in combination $16 trillion of assets are benchmarked today.  »

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