Sparks flew at the recent Securities and Exchange Commission (SEC) roundtable in Washington DC as regulators attempted to drag exchanges and market makers to a compromise over the long-running controversy of market data fees. The SEC recently ruled that the New York Stock Exchange and Nasdaq had not justified the price they charge for market data. That ruling has kicked off a new round of the century-old debate.
The global revenue for exchanges who sell data to market makers reached a staggering $30bn last year, up 8% on 2016. This has been driven by the cost of the data they provide, which increased by 20% year-on-year between 2011 and 2016. SEC Commissioner, Jay Clayton, also rebuked exchanges for the conflict of interest in their dual role as a regulatory body and a for-profit company.
Traders argue the data they receive from exchanges is essential to their business and the operation of markets. They also argue that exchanges have abused their monopoly position to drive a surge in the cost of the data, which for many firms has become their second largest expenditure after payroll. But data sales are now an important revenue stream for stock exchanges as competition and regulatory change has squeezed their profit margins. The New York Stock Exchange, for its part, has said the October 16th SEC decision represents the latest in a 20-year-long series of attempts to over regulate the best capital markets in the world, in order to benefit the largest financial institutions.
But the SECs decision does not necessarily mean that fees were too high, rather the exchanges had not adequately justified the prices they were charging. The two-day roundtable marked an attempt by the SEC to bring the players closer to agreement on a way forward, but it proved a tense meeting fraught with seemingly intractable positions.
Currently, there are two systems available to obtain market data. The basic service is the Securities Information Processor (SIPs) which consolidates the best bids, offers and details of executed trades on the exchanges. But exchanges can also sell proprietary data (company data controlled to safeguard competitive edge) to give a more complete picture of market supply and demand.
Traders argue in the modern and fast-paced marketplace they need this proprietary data to stay competitive. Despite the protestations to the contrary by exchanges, the feeling is that the SIP data sources cost too much. Further, many accuse exchanges of deliberately starving SIP systems of data to increase the need – and therefore value – of the proprietary feeds. Just three companies control the 13 major exchanges in the U.S., and as brokers are obliged by regulators to execute the best trades possible, this leaves them little choice but to pay the maximum.
It was apparent at the roundtable that exchanges feel victimised by brokers and the SEC, while traders felt similarly aggrieved, saying the exchanges got greedy. If neither side compromises, we may end up with a situation where regulators feel obliged to step in with a blanket solution. All-encompassing changes to regulation are rarely an effective solution.
Events in Europe show how overbearing packages of regulatory reform – like the second Markets in Financial Instruments Directive (Mifid II) and General Data Protection Legislation (GDPR) – have hampered EU trade markets, with many firms now too small to comply. In the US and Canada, we may argue over the cost of data, but there is never a question of its quantity. In Europe, the EUs heavy-handed regulatory approach has led to a massive drop in the commission of data analysis, particularly on mid and small caps.
The SECs use of roundtables has been effective in the US at making more nimble and reflexive policy that better suits the needs of market operators. Better a carving knife than a sledgehammer. Engaging all market participants in a two-way dialogue is vital to understanding the nuances of operating in the markets. The Roundtable itself is livestreamed for all to watch – though my one suggestion would be that these roundtables should take questions from viewers to ensure each industry group is fully represented.
As CEO of Select Vantage, a day trading firm that marries human insight with technology and industry-leading compliance and surveillance systems, the cost of data is a matter of deep concern. The feeling is for prop trading firms or market makers like us is that if it werent for our activity, exchanges wouldnt have any data to charge for.
The exchanges cannot justify charging exorbitant (and ever increasing) prices to their members for them to see their own data. Robert Jackson, the Democratic commissioner on the SEC, said that competitive forces, rather than market power, must justify any increase in the price exchanges charge for stock market data.
The roundtable made it clear that lines of communication between exchanges and market participants need to be repaired: this is the only way to craft effective regulation that allows the market to flourish while avoiding the mistakes that lead to the 2008 crash. As it stands, we are in no-mans land and the situation is untenable.
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Daniel Schlaepfer is President and CEO of Select Vantage Inc (SVI). SVI is a global leader in electronic market-making.
