(Bloomberg) — Intercontinental Exchange Inc., owner of the New York Stock Exchange and some of the worlds biggest derivatives markets, is setting up a clash with customers with its plan to generate income by licensing patents and boosting market-data fees.
The company has asked its biggest customers what theyre willing to pay for licenses to trading-technology patents it bought a year ago, according to executives at four different trading firms who asked not to be named because the discussions are private. ICE proposed to one company that it would waive the licensing fee if it directed stock transactions to the NYSE, which has seen its share of the equities business dwindle, instead of rival exchanges, an executive at the trading firm said.
While some firms already have the legal right to use the patent and others have proposed licensing terms to us, we have not made any proposals at this time, Kelly Loeffler, an ICE spokeswoman, said in an e-mailed statement. She denied that the exchange has told customers it would waive patent fees if they traded exclusively at the NYSE.
See Also:Just How Would a Financial Transaction Tax Would Burden Mom and Pop?
The patent effort marks the latest time ICE has attempted to increase profits from something other than the traditional business of an exchange: helping buyers meet sellers. Its recently more than doubled the cost of some subscriptions to data feeds that carry vital information on the price of stocks, drawing criticism from the industry. Last year, ICE also boosted rates for using a critical interest-rate benchmark called Libor, then exempted smaller companies after theycomplained the plan was too costly.
Exchanges have a monopoly on the market data that investors generate, said Jamil Nazarali, head of Citadel Securities LLCs execution services. Their double-digit price increases dramatically increase trading costs, hurt liquidity and ultimately threaten the U.S. markets they are supposed to empower.
Diminished Business
ICE bought the New York Stock Exchange in 2013. Years of regulatory changes have weakened NYSEs near-monopoly on the trading of the companies it lists, helping competitors like Nasdaq OMX Group Inc., Bats Global Markets Inc. and dozens of other venues steal business away.
The patents involve how an electronic exchange network is able to accept orders from customers. One relates to a trading system that rapidly, accurately, and safely responds to desirable trading opportunities. When announcing the purchase of the intellectual property rights last year, ICE said they were for automated trading systems used in futures, options and cash equities markets.
The companys chief strategy officer, David Goone, said in astatement last year that ICE acquired these patents with the goal of preventing third parties from using these intellectual property rights against our customers. He added: ICE intends to make these patents available broadly for license to customers that provide beneficial liquidity in ICEs and NYSEs markets.
Market Data
ICE has also stirred up controversy by raising fees for market data. Since acquiring NYSE, it has in some cases doubled what customers pay for information on stocks — things like prices on trades, and the amounts buyers and sellers are willing to pay — and more increases are scheduled for 2016.
In one example, a professional trading firm subscribing to NYSEs OpenBook Ultra feed — a key service for customers who want the fastest, most up-to-date price and order information — would have paid $5,000 a month in2013. This year, the same service costs $11,000. Starting Jan. 1, 2016, itll be $18,000 a month, according to a notice on its website.
And thats just a single product. A trader wanting every NYSE data feed paid about $10,000 a month in early 2013. It now costs $30,500.
Exchanges are trying to generate revenue away from pure trading fees any way they can, said Rich Repetto, an analyst at Sandler ONeill & Partners LP. Repetto added that hes never heard of another exchange trying to extract patent royalties from customers, and ICE risks angering them by stepping away from the traditional role of an exchange: acting as neutral ground where buyers meet sellers.
Exchanges including NYSE have battled trading firms over market-data fees in lawsuits dating back to 2009. The main case today was filed by the Securities Industry and Financial Markets Association, or Sifma, against NYSE and Nasdaq, which is under review by an SEC administrative law judge.
Sifma argues exchanges have monopoly pricing power. The exchanges argue the fees are set in a competitive environment and are therefore fair. Hearings in the case were held in April and a ruling is expected next year, according to a person close the case.
At an earlier stage, the lawsuits included a plaintiff group known as NetCoalition. Bloomberg LP, the parent company of this news organization, was part of NetCoalition and is currently a Sifma member.
The SECs Equity Market Structure Advisory Committee has begun discussing whether the agency should regulate how much exchanges can charge for market data, according to an executive on the committee who asked not to be named. A subcommittee thats examining the role of self-regulatory organizations such as NYSE is expected to discuss how to move the possible regulatory process forward at a meeting next month, the executive said.
Officials at IEX Group Inc., which has billed itself an alternative to the complex way modern stock markets operate, are among those who have protested the fact that stock exchanges oversee and set prices for market-data offerings. The company has sent two comment letters to the SEC pointing out what it sees as conflicts of interest in how data fees are set, said Don Bollerman, head of market and sales at IEX.
Our sense is few people are happy, Bollerman said by e- mail. The worst part is that theres not much a market participant can do, once pricing changes are approved as rules.
