Data Fee Complainants Buoyed by SEC Appointee

The global head of market structure and liquidity at a global banking giant says his firm signed the letter because, “There just seems to be no ability for firms to negotiate on market data pricing whatsoever. We legally have to buy market data. We feel compelled to buy whatever we feel is the most accurate, fastest, quality data we can consume. But it seems that as an industry, we are stuck in an arms race where it is not clear what the benefit is.”

In the US, the debate around market data is part of a broader discussion about the role of exchanges as self-regulatory organisations and the conflicts of interest they face in performing both as a regulator of their members, and also as a commercial enterprise.

“We’re asking the SEC to take incremental steps in advancing the debate over market data—to force the exchanges to disclose more information about how much money they make from data and related fees,” says John Ramsay, chief market policy officer at IEX, which also signed the letter. He says the standard response from exchanges when criticized over fee increases is that they compete with each other and are disciplined by market forces and competition. “I think much of the industry believes these assumptions are faulty. But it’s very hard to challenge them when you don’t have access to the data.” 

Forcing exchanges to disclose more granular information on how much revenue is generated by each product, along with related costs, and how these increase over time, “would allow people to test the assumption that this is an open and competitive market, and competition by itself will constrain fees,” Ramsay says, adding that since exchanges already collect this information for “business purposes,” it would not be burdensome for them to also provide it to the wider market. 

Outspoken Critic

Several firms who signed the letter highlight the October appointment of Brett Redfearn as director of the SEC’s trading and markets division as significant. Redfearn is expected to play a central role in potential tweaks to market structure rules, such as exchange order types, tick sizes, and how exchanges are regulated.

One source says Redfearn’s appointment has already angered exchanges. “He was a pretty outspoken critic of the large exchanges and their market data practices while he was at JP Morgan. He testified several times in front of the equity market structure committee that the SEC set up, including at least once on this particular topic,” the source says.

Redfearn has a history of criticizing the Securities Information Processor (SIP) consolidated market data feeds. In 2015, while working at JP Morgan, he submitted comments to the SEC’s Equity Structure Advisory Committee on The Regulatory Structure of Trading Venues. In his remarks, Redfearn noted that the regulator model for trading venues and market data dissemination is “one of the most important” topics in the market structure debate.

He also took issue with exchanges selling proprietary data products that are “far superior” to the product produced by the SIPs. This meant that broker-dealers are left with no choice but to buy these proprietary datafeeds from exchanges to provide competitive trading products for their clients. 

He also said National Market System plans—a creation of the 1975 Amendments of the Securities Exchange Act—should be “updated and modified in light of the business realities of today’s marketplace,” and urged the SEC to take action to ensure a “healthier outcome for our market data infrastructure.”

Beyond the appointment of Redfearn, Ramsay says having Jay Clayton as SEC chairman is a plus. “While equity market structure has not been his primary focus, he has shown an interest in looking at potential for reform in this area, and has been shown to be well-versed on those issues—and I think open-minded about it.”

A head of investor relations and corporate strategy at one of the firms behind the letter says Redfearn’s appointment has given fresh impetus to their battle against rising exchange market data fees and related costs.

“He understands the issues more than most…. People are excited. People that know Brett know his passion for this and his common-sense approach,” the IR head says, adding that no specific fee increase provided the tipping point, but that market data, market access and connectivity and co-location costs overall are “becoming such a bear.” He says the letter is a response to the feeling that “We’ve just got to stem the tide of fee hikes. The fact that so many big names signed speaks volumes about how big of an issue this is.” 

He also says that he hopes the Commission will be moved to take a look at the fee-hike process, and signal to exchanges that it is examining this process. “When you’re a protected exchange, people have to buy your product. People can say ‘Well you don’t have to buy depth of book market data; you’re only forced to comply with top of book.’ But any sort of broker doing routing for customers needs to demonstrate that they’re buying what’s available to make sure they have the best information for their customers. So you’re in a situation where you really are forced to buy it.”

According to IEX’s Ramsay, firms are becoming increasingly agitated about the way new market data feeds are constructed and sold by exchanges. “Exchanges are creating very narrowly tailored datafeeds which are designed to benefit a narrow group of traders and by necessity potentially disadvantage other folks, including big asset managers and institutional investors—and I think the buy side has definitely latched onto that as a point of concern, too.” 

The banking head agrees that data fees are no longer just the concern of the sell side. “This letter is signed by many of the big buy-side firms. Retail brokers are also getting much more involved as well. This tells you it’s not an issue that’s just impacting one part of the market: it’s impacting broader capital markets.”

What next? 

The IR head says that while they haven’t heard any response for the SEC yet “we definitely heard from the exchanges. And everyone else on the street who didn’t sign it gave us a nod of appreciation. They were apologetic that they couldn’t get approval from legal and compliance in time. We didn’t want to sit on this letter for too long.”

IEX’s Ramsay says that none of the signatories expect immediate action from the SEC, but also do not expect to be dismissed out of hand because it is “hard to argue against more transparency.” However, he says that the bind that the SEC finds itself in is that even if it has sympathy and accepts that fees are too high, what would it actually do about the situation? “The SEC doesn’t want to be a rate maker because it’s not well set up to do that. It’s hard for them to decide this is a fair price or not… other than within general boundaries. The question is, what else do you do? The first step in figuring out what you do requires a lot more public information about how much exchanges are actually earning and what it’s costing them to produce.”

A head of government and regulatory affairs at one of the signatories to the letter raises another issue, describing how the Securities Industry and Financial Markets Association has been engaged in litigation with the SEC over market data fees for nearly a decade.

“In a nutshell, the Court of Appeals in the district of Columbia has twice agreed that the fees currently being charged by the exchanges are effectively illegal. They violate the 1975 act. One of the things in this letter that is called upon is a plea to the SEC to actually implement those two holdings,” this exec says.

And though some believe Redfearn will be more sympathetic to the complainants, this exec says the timing of the current petition was not specifically motivated by Redfearn’s appointment. “While it is further encouragement that there people now being brought into the SEC who inherently understand this aspect of the market a bit better—that certainly is helpful. But as long as you have exchanges with monopoly power abusing that monopoly power… market participants will continue to voice concerns on this matter as long as it persists.”

The SEC did not respond to request for comment by press time.