Use of real-time market data is increasing, as the consolidated tape is no longer sufficient for many traders, according to a new study by Tabb Group. And with real-time data on the rise, the advisory firm is calling for a revamping of how traders pay for that data.
The report, entitled "Real-Time Market Data: Circus of the Absurd," found that while nearly everyone in the industry purchases information from the consolidated tape, that data is too incomplete and arrives too slowly to satisfy best execution requirements.
Average trade sizes have dropped from 1,500 shares per trade in 1997 to about 250 shares per trade today, the study found, and since odd lots of fewer than 100 shares don’t show up on the consolidated tape, the tape’s data is becoming more noticeably incomplete.
Also, because the tape needs to consolidate feeds from 13 different exchanges, it can never be as fast as a direct feed from a single exchange, so in addition to paying for the tape, most traders have to pay for full depth-of-book data sourced directly from the exchanges, the report said.
"The market has basically passed it up, and now it’s working at speeds that are greater than the consolidated tape," said Paul Rowady, senior analyst at Tabb and author of the report. "You have to go out and access the direct feeds.
Unfortunately, fee structures for that data have not kept up with changes in technology and market practices, and the costs of real-time data are not equitably borne by all market participants, according to Rowady.
Legacy venues like the New York Stock Exchange and Nasdaq have been able to charge premiums for their full order book data feeds, in spite of their declines in market share in recent years, Rowady said. Meanwhile, newer exchanges like Direct Edge and BATS give their data away for free.
Furthermore, use of market data is greatly unequal today, as the rise of new trading methods has caused a spike in message traffic from certain high-frequency traders. The report noted that all traders directly or indirectly support the costs of the infrastructure needed to access data, even though only a subset of traders truly benefit from it.
"As soon as the powers that be make the pipes bigger to accommodate more data, they get them filled back up with data," Rowady said. "The excess capacity doesn’t seem to exist for long. Even the passive users have to get bigger pipes to accommodate increases in message rates."
However, the report said Tabb is optimistic that relatively minor administrative changes could produce meaningful improvements. For one, real-time trading data could be offered through the same infrastructure as the consolidated tape and fall under the same regulatory framework to reduce complication.
"It would give market participants an option, a choice, an alternative mechanism relative to the proprietary feeds," said Rowady. "You’ve already got a mechanism in place for the consolidated tape’s top of book. All you’d really have to do is expand that to include depth of book."
Secondly, pricing models could eliminate the need to count end users, accounts or devices, instead charging higher rates for the more that firms reuse data. This would finally keep up with the rise in automation, the report found.
Rowady said there should be ways to figure out who is storing and reusing data and then to streamline pricing models to remove arcane notions of a user or an account. He said anybody engaged in highly automated trading is likely to put data into a long-term storage device to analyze it and refine their trading models.
"Essentially what they do is perform pattern recognition, so they’re looking for patterns that are replicable," Rowady said. "The average retail investor, the point-and-click trader, is still trading off of human sentiment notions of where the market’s going."
Charging for reuse of data would help ensure that those who benefit the most from the data shoulder more of the costs associated with it, according to Rowady.
