Issues with connectivity and transparency continue to divide exchanges and traders in the US as the equity market looks to redefine the way that derived trade data is sold.
Despite days of intense debate at the Securities and Exchange Commission’s (SEC) roundtable on market data and market access at the end of October, the industry is no closer to getting the answers it needs. Exchanges, financial firms and traders all hold differing opinions regarding how the data accrued in the equity capital markets should be collected, processed and eventually sold, and despite the SEC’s best efforts, little progress made.
The vast majority of the US’ exchanges doesn’t want the way that data is charged to clients to change. Earlier in October the SEC ruled that the two largest exchanges in the country, NYSE and Nasdaq, had raised market fees without due justification – sparking a litigation that is set to take at least a year to be resolved.
Investors Exchange (IEX) is a smaller stock exchange based in the US – and the only such exchange that hasn’t charged its clients for access to its market data. According to John Ramsay, IEX’s chief market policy officer, the current landscape looks very different to previous iterations and there is evidence of a change in the regulatory treatment of the space.
“Connectivity in particular is an issue, some exchanges are charging 3,000% mark-ups on what it costs to actually provide connectivity,” he said. “The heat has ramped up on market data fees over the last couple of years, but they have continued to jack up the market data fees and have siphoned more of the increases in the connectivity charges, because perhaps they thought there was less attention being paid to those.”
As a practical matter, unless you are physically connected to the exchange you can’t receive its market data. Ramsay said this isn’t entirely necessary and this data could be reached through some sort of third-party data centre. But because of the emphasis on speed and the importance of being able to manage risks, brokers representing their clients currently have very little choice.
“The fundamental point is that firms that do the bulk of their business trading on the market have no choice other than to be physically colocated in all the major market data centres, and to receive proprietary market data of some type from each of those three companies,” he added.
Basically, he feels that nobody can remain competitive in this instance. IEX’s complaint on the industry is that other exchanges have an extraordinary degree of pricing power and leverage because of the fact that they have a special status and people have no choice but to just not connect, or not pay for data.
KEY TAKEAWAYS
Issues with connectivity and transparency continue to divide the equities market in the US as the SEC looks to redefine the way that derived trade data is managed;
Exchanges, financial firms and traders all hold differing opinions regarding how the data accrued in the equity capital markets should be collected, processed and eventually sold;
The buy side is pushing for transparency with the costs associated with receiving data, while the exchanges want to hold on to the ability to price the data as they see fit;
Independent exchnage IEX currently does not charge for data and wants to see the market become more competitive.
Buy side
There was a lot of debate on market data at the roundtable in October - one takeaway was that the exchanges were very focused on moving the conversation away from the cost of the data and more towards the value of the data itself. The suggestion being that if the exchange can demonstrate that what they are selling is of value to the client, then it should be able to charge a price that they are willing to pay.
Doug Cifu, the chief executive officer of Virtu Financial – one of the largest high-frequency traders in the US – told IFLR that his firm’s argument back to the exchanges is that selling data like this would be great if the market was competitive. But this is not the case because traders can only get the proprietary seeds for Nasdaq or NYSE, from Nasdaq or NYSE.
“What we are really pushing for is transparency; that the market offers transparency to the cost associated with creating and delivering these products” he said.
The SEC is not just concerned with the pricing of data, but with the connectivity charges, the shipping and handling associated with getting the data, and the cost of managing the entitlements, reporting and usage of the data.
A source from another trading company said that the SEC told them that in this process they are trying to understand what the cost is for the exchanges to produce this data. They are not so naïve as to say it is just the cost to produce the data that must be accounted for, they realise the data is part of the wider system and that there are costs associated with it.
“They have to look at it from our perspective, we have a lot of experience in the space and just because we happen to operate effectively, we know that the costs they are claiming are not reasonable,” they said.
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"We know that the costs they are claiming are not reasonable" |
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“It would be a recognition that these exchanges have been grabbing money because they can. Their business is matching trades and that is where they compete for business, the data and connectivity are not competitive products and they should just be priced accordingly,” they added.
“It’s worth remembering that the products that everyone is complaining about are derived from our inputs, the exchanges love to talk about derived data, they say ‘you may not be using our data but you are using derived data,’ but their whole product is a derived from our data.”
According to Ramsay, most of the industry believes that the market is not constraining prices on its own and has believed that for a long time. Rather it is that the regulators have been a little behind the curve in coming to that realisation.
“This is why it’s important that the SEC is appropriately skeptical about these changes in the argument about competition,” he said. “For the last 10 years exchanges have been able to churn out these rule fillings and like a catechism they keep justifying these things based on rote language, saying that these price increases are appropriate because other people are charging similar prices, that the market is competitive and therefore whatever we charge is fine.”
“If that underlying premise is false, then all of their arguments to justify all of those fees over the last ten years fall apart,” he added.
Exchanges of blows
Of course, in the opinion of the remainder of the exchanges there is a different side to this argument. The opinions shown by the SEC, and other market participants, are now subject to ongoing litigation.
Chris Concannon, president and chief operating officer of Cboe Global Markets, said that his exchange feels comfortable about what is laid out as a standard and is of the opinion that the exchange has the data to support this.
“We feel comfortable about our data and being able to support price adjustments based on that data,” he said.
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"We feel comfortable about our data and being able to support price adjustments based on that data" |
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Referencing a cable that was shown at the roundtable to represent the inflated cost of accessing the data, Concannon said that things were not so simple.
“We don’t charge for that cable, we charge for what that cable gives you,” he said. “Access to seven exchanges and the ability to send trillions of messages into our seven exchanges. There is a value in that, everyone seems to be ok paying cable for access to the internet - trading is a much more profitable enterprise than home access to the internet - there is value in being able to send trillions of messages.”
Concannon added that he felt IEX would take a different view in suggesting that everything is changing, and that the SEC is very likely to really clamp down.
“But the true story is that most of the activity is going to be on the central securities information processor [SIP], and it’s clear to me from the round table that the five commissioners are not going to spend valuable SEC time rewriting rules that restructure the SIP, they are going to ask the exchanges and the industry to work it out.”
In an op-ed piece published a couple of days after the roundtable, NYSE president Stacey Cunningham outlined her thoughts on the issue, which are aligned to that of Cboe and other exchanges. The appetite for market data is only going to get bigger, she said, and [we] must continue to meet industry demands to deliver significant, and continuous, technological enhancements.
‘To deliver the products and services that our customers demand, we need free market principles to drive how prices for them are determined. An overzealous agenda of government price setting will only benefit the bottom lines of Wall Street firms, at the expense of our ability to reinvest and innovate,’ she wrote.
See also
