US equity exchanges increasingly depend on charging for data in a world of rapid-fire automated trading and that has sparked plenty of friction with the broader market. In the latest salvo, Healthy Markets Association, an investor trade group whose dozen or so members include Calpers and OppenheimerFunds, this week released a report on market data that describes a system rife with conflicts and calls for a broad overhaul led by chief US regulator the Securities and Exchange Commission. Echoing a recent report from the US Treasury, Healthy Markets makes the argument that market participants are under increasing pressure to buy premium data both to stay competitive and comply with rules requiring them to execute trades at the best price available in the market at any given moment. The reliance of exchanges on charging more for market data has helped them to offset a margin squeeze on transaction volumes but pressure is building on Washington regulators as Wall Street prepares to close the books on a tough year. Traders have been undercut by low volumes and volatility while investors continue to grapple with the shift to passive from active investing — making costs such as data feeds a natural issue to examine. “Revenues in the equity trading industry have been stable or declining but the cost of market data are going up,” says Jamie Selway, head of market structure at ITG, an agency broker. “That is the angst in the industry.” “Market data costs are one of the few numbers that is going up lately in this business. Volatility is down, commissions are down, investor satisfaction is down and the cost of people is down. Why is the cost of data going up?’’ he adds. Exchanges sell detailed order and trade information for a premium, while contributing to, and earning revenue from, another widely available data feed that consolidates all prices from every US trading venue, known as the Security Information Processor. The SIP includes less information about market making prices for quoted stocks at any given moment and is delivered at a slower speed than proprietary feeds. In its 80-page report, Healthy Markets says “exchanges have exploited an overwhelmed regulatory approval process to push through numerous significant changes and fee hikes in both the public and private data feeds that impact nearly all market participants, sometimes raising fees hundreds of per cent over just a few years”. It found that a market participant who wanted the fastest connections with the most relevant trading information for CBOE, New York Stock Exchange and Nasdaq has seen its costs rise from $72,150 per month on June 1 2012 to $182,775 per month on June 1 2017. “This has evolved from a problem that was really constricted to vendors and brokers to now impact every investor and other market participant,” says Tyler Gellasch, executive director at Healthy Markets. “Investors pay for these fees directly and they also have them passed through from their brokers and other service providers. Add it all together, and they get to be very significant.” NYSE, Nasdaq and CBOE declined to comment on Healthy Markets findings or for this article. CBOE’s equity exchange, formerly called Bats Global Markets, historically has charged less than rivals for data while exchange officials have also previously argued the market data fees are dictated by competitive forces and pointed to a history of legal victories on the matter. Recently, the Securities and Exchange Commission named Brett Redfearn, who was outspoken about data costs in his previous post as global head of market structure at JPMorgan, as head of its trading and markets division. “There is no doubt that [market data] will be a big 2018 issue,” says Larry Tabb, founder of the Tabb Group, a capital markets consultancy. “The courts have ruled in the exchanges’ favour so the SEC would need to step in for something to change.” Tabb Group estimates that while trading volumes, market-making profits, brokerage revenues and institutional trading commissions have all declined, the revenues of US exchanges have climbed 37 per cent from the first quarter 2010 through the third quarter of 2017 — largely thanks to data revenue. Among Healthy Markets’ recommendations are a review of fee changes for “fairness, reasonableness and potential discriminatory impacts and undue burdens on market participants” as well as allowing investment advisers and broker-dealers greater say in market governance. Similarly, the Treasury recommended the SEC consider whether data fees are “fair and reasonable” when approving changes. The Treasury does not have direct jurisdiction over these fees, which means regulatory changes likely fall to the SEC. The SEC declined to comment.
Typical Wall Street. My favorite story from the Flash Boys book (not a recommendation) is when the guys who created a faster routine come to pitch it to Wall Street and are told that they will only invest in it if the price/fee is raised to a ridiculous amount ... Effectively only making it affordable to the very few largest players. I think equity exchanges will become irrelevant and will only serve as utility for passive institutional investing. Perhaps going back to the non-for-profit organizations status. New technologies (blockchain/dao) will create (already did) new trading venues and instruments. ICOs will replace IPOs. Of course it will not be easy to penetrate Wall Street + SEC coalition, but the course is set.
the Arab oil states are looking for diversification of their investments as oil business is going down. they have the money to start an exchange that can compete with all the us exchanges. if they add the taxfree trading they apply now they might take over a big piece of the cake.