The Market Data Deathmatch: The Increasingly Brutal Fight Over Equity Market Data Costs
Electronic trading has made the US equities market significantly more efficient. It has helped reduce spreads, commissions, and market-maker revenues and has returned billions of dollars into the hands of investors. The one notable exception to this trend is exchange-based data services and market access. As trading volumes, market-making profits, equity brokerage revenues, and institutional trading commissions have all declined, exchange revenues over the past five years are up 16%, and exchange data, access, and technology revenues are up 62%.
The large fee increases that are buttressing data, technology and access revenue growth at exchanges have led to a death match between brokers and exchanges. On one hand, brokers complain that self-regulated exchanges are exercising their regulatory-granted powers and are essentially forcing customers to purchase low latency proprietary data products, exchange-based hosting, and high-speed connectivity services at prices virtually unconstrained by competitive forces. On the other hand, exchanges are public companies, chartered with the goal of creating shareholder value.
If costs are not reined in, it will almost certainly harm our markets as increased fees will push market makers to widen quotes and create an increasingly difficult hurdle for brokers, leaving investors with a less liquid and effective market.
Are brokers and market makers right? Are exchanges right? I am not sure it matters.
While it is easy to blame greedy exchanges, brokers, or market makers for these challenges, if this trend does not change this conflict will not end well. As the volumes, commissions and equity trading revenues decline, the overall market shrinks, knocking out market participants and liquidity. Fewer traders and players mean fewer actors contributing to covering the cost of heavily fixed asset-exchange infrastructures, pushing exchanges to increase the cost of the exchange data products, which further pushes brokers, traders and investors out of the market. This of course shrinks revenues and volumes even further. It is a recursive challenge, which if not stemmed, will harm our markets, leaving investors with a less liquid and less effective marketplace.
Over the long run, the industry will most likely find a solution as they could shift more business to fee-friendly exchanges, fund new competitors, or develop a creative solution that better aligns users’ needs. But in the short term, if we cannot effectively change the governance structure of the CTA and UTP or pressure regulators to think more closely about managing the price of direct-feed data (which would be especially relevant if the SEC and FINRA transition their regulatory focus away from slower SIP data towards direct-feeds), we are left with few options. Lawsuits are never a great option. Besides being arduous, they are long and expensive. Shifting public opinion may work, but changing minds can be challenging as well.
Any way you look at this, the solution is ugly. One person’s fees are another’s revenues. Neither wants to go to the mat as the two-in, one-out scenario isn’t good for anyone. The one thing we know is that this problem needs to be resolved before we get into the Octagon, not after. For everyone’s sake.