Shining a Light on Market Data Costs
The argument between the big exchanges and the industry about the rising costs of market data has reached a fever pitch over the last year. In response to critical comments about a recent New York Stock Exchange (NYSE) fee increase, NYSE went so far as to lash out at its own members, suggesting they were being hypocritical for complaining about the cost of paying for trading advantages that they profit from.
But as much heat as there is around this debate, there is remarkably little light in the form of data about rising data costs. Throwing more light on this issue is one good way to make progress on resolving it.
The positions on each side of the debate are well-established. The industry complains about the sharply rising costs of data (particularly proprietary feeds), as well as the cost of connecting to exchange systems directly. Fee increases are routinely approved by the SEC on an “immediately effective” basis, and there seems to be no effective ability to challenge them.
For their part, the exchanges argue that the industry exaggerates the extent of the fee hikes, they are needed because it takes money to operate the data centers, and anyway, the pricing of their data products and access charges is constrained by competition.
IEX is a different kind of exchange that does not charge for market data (or access), and we think the justifications of the incumbent exchanges are obviously self-serving and frankly not credible. For one thing, an argument that competition constrains price increases because, for example, you could choose to run a trading business by receiving the securities information processor (SIP) data feeds or exchange alternatives from some remote location is an insult to the intelligence of anyone who is in that business.
In any event, it is hard to make headway on this issue as long as there is so little objective information that could be used to challenge arguments on either side. Consider this: the only available data consists of whatever the exchange holding companies choose to disclose in their financial filings or other public documents, and those are opaque. They variously lump together data and connectivity revenue, or they combine revenue from different geographies and businesses in a single number. What the disclosures do clearly show is the increasing reliance of exchange companies on market data and related revenues. For example, in one report, NYSE’s parent ICE discloses “Data Services Revenue” for 2016 of nearly $2 billion (including acquisitions), compared to $116 million in 2010. And there is no complete public data about the revenue received from the public consolidated data SIPs, even though that data is provided under national market system plans with the thin pretense that they are operated like a public utility. In fact, the exchanges that dominate the governance of the SIPs are much more invested in the sale of proprietary, rather than public, data, and there is no effort to hide or avoid the apparent conflicts of interest.
So here is one idea. Why not require the exchanges to disclose the amount of money they make from the sale of market data, by product? In fact, the SEC proposed just that in 2004 as part of a sweeping set of disclosure and governance reforms for exchanges and other self-regulatory organizations. In particular, exchanges would have had to disclose “their revenues earned from market information fees, including market data fees, itemized by product.” The Commission said at the time this disclosure could help give market participants, the public, and the SEC itself a better understanding of these revenue sources and how they compare to what the exchanges spend on regulatory programs.
These changes were never adopted in the face of fierce resistance by (guess who), but the idea of disclosing data revenue is well worth reconsidering. Thirteen years ago, the debate over market data was focused on SIP data, since the exchanges had not yet begun to fully exploit their advantages in selling prop data feeds. No one would question that exchanges’ reliance on market data revenue is dramatically greater than it was then, and the arguments about data costs have only gotten louder. Disclosure would allow impartial observers to evaluate exactly how reliant exchanges are on this source of revenue, how the amounts and composition of data revenue have changed over time, whether trends are consistent across exchanges, and whether the numbers are consistent with a well-functioning competitive market, or something else.
I would add the costs of exchange connectivity as a separate disclosure item. Those costs, which have also skyrocketed in recent years, are an integral part of the costs of trading for every firm that has to connect directly in order to compete in a speed-driven ecosystem. And without that disclosure, under the business model used by the dominant markets, they could easily use sleight of hand to hide data increases by calling them “connectivity” charges. The bottom line is that no one can receive data unless they have a way to connect to it, and the exchanges are the ultimate sources of both the data itself and the means to receive it.
No doubt, the exchanges will argue (as they did in 2004) that it is unfair to require them to disclose what they see as sensitive proprietary information of a type that other businesses don’t have to disclose. My response: Tough. Exchanges are subject to more scrutiny than other businesses because they play a unique role in the functioning of the financial markets that everyone relies on. If you want to operate a company that is free from public obligation or scrutiny, consider pursuing a different type of business.
To make this idea a reality, the SEC would need to go through the usual rulemaking process. But in the meantime, the SEC has all the authority it needs today to require exchanges to report this information to the agency for its own benefit, as it considers policy alternatives. A statement by the Commission that it is doing so would go a long way to convince the industry and investors who are affected by these cost increases that it is giving this issue the serious attention it deserves. Moving to make the same information public would do even more.
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