While calls to US regulator the Securities and Exchange Commission (SEC) to scrutinize how exchanges’ market data fees are determined have focused the limelight on data fees in recent months, trading firms in Europe are now turning up the heat on an issue that has been playing out between brokers and exchanges in equities for years.

Most recently, market participants have directed their ire at Bolsas y Mercados Españoles (BME), Spain’s national stock market, which raised its market data fees at the start of this year and set “special cases” fees for operators of venues that use its data to feed into price formation mechanisms on their own platforms. The higher fees particularly hit dark pools—private venues run by banks, exchanges or independent operators—and market makers and banks registered as systematic internalizers (SIs), which use proprietary capital to trade against customer orders.

Cboe Europe, the operator of Europe’s largest dark pool, has said it is “extremely concerned” about BME’s move. In a statement, Cboe Europe’s chief legal and regulatory officer Adam Eades said, “BME was already by far the most expensive exchange for market data. Its proposed increases in 2018 are truly excessive and anti-competitive.” 

Virtu Financial, which operates an SI in Europe via its division in Dublin, used its response to a European Securities and Markets Authority (Esma) consultation on another matter relating to SIs as an opportunity to propose that the industry has an “honest dialogue about the rapidly increasing costs imposed by trading venues,” saying,  “Recently, a sudden, arguably anti-competitive increase by one market operator in its market data fees targeted specifically at the operator’s competitors, MTF operators and systematic internalizer customers, was so prohibitive that those participants were no longer able to support that market.”

Indeed, UBS MTF announced at the end of December that it would no longer be trading Spanish equities where it uses BME as the reference market because of the “significant increase” in the exchange’s market data fees. 

“It seems BME is wary of dark pools and SIs potentially taking its market share and one way it can prevent this is to make it prohibitively expensive to use its data,” says a London-based analyst.

BME, however, has previously insisted that its fee changes are not anti-competitive. BME declined to comment for this article, but told the Financial Times in December that it had discussed the fee package with customers, had cut some trading costs, and was surprised at UBS MTF’s move.

Fighting on Two Fronts

The clash between BME and the trading platforms is one dispute in a much wider battle playing out on both sides of the Atlantic over fees that exchanges charge customers. 

Market data has become an increasingly important revenue stream for exchange operators as they have moved to diversify away from transactional revenues in the face of lower trading volumes, muted volatility (until recently) and new competition. Revenues have been boosted by the rise of high-frequency trading (HFT), which has made stock market information more valuable and prompted new contract and usage models at exchanges. 

Revenues from the data businesses of the world’s 13 biggest exchanges grew 29 percent to $5.4 billion in 2016, with data accounting for one-fifth of total exchange industry revenues, according to market research firm Burton-Taylor International Consulting. Its most recent figures show that exchanges’ market data revenues for the first half of 2017 totaled $2.9 billion, an increase of 5.6 percent over the first half of 2016. 

“The [exchange] market data and indexes segment continues to show significant growth with the sector recording a compound annual growth rate (CAGR) of 11.99 percent since 2011, and has become an engine of revenue growth for exchanges,” Burton-Taylor’s research says.

At the same time, the lack of volatility across financial markets has hurt the profits of market-making firms, while institutional trading commissions have declined and investors continue to deal with a shift from active to passive investing, placing trading costs—including data— under naturally greater scrutiny.

“Market data is becoming a more important revenue source for exchanges, and with this comes a need to invest in the infrastructure needed to capture, clean and distribute data. However, some brokers and venues feel that exchanges are going too far in raising market data fees each year. Brokers are particularly wary of rising data fees, given the constant pressure on trading commissions, which has just been exacerbated by the Mifid II unbundling rules,” says Anish Puaar, European market structure analyst at Rosenblatt Securities.

One complaint leveled at exchanges is that in today’s high-speed electronic markets, market participants have little choice but to buy premium data and other add-ons from exchanges, both to stay competitive and to comply with rules requiring them to execute trades at the best price available in the market at any given moment. 

US exchanges do contribute to consolidated industry-wide datafeeds—the Consolidated Tape Association and the Unlisted Trading Privileges (UTP) Plan—but these provide a less complete picture of market activity. Critics argue that because the Securities Information Processors (SIPs) that collect and disseminate the data are slower than exchanges’ direct feeds, which also include more comprehensive data, such as depth-of-book and imbalance data, they are compelled to buy the pricier proprietary feeds to remain commercially competitive. 

“Over the past few years we have worked hard to improve the performance of the SIPs and increase the transparency around their operations. We work very closely with the Advisory Committee, which is made up of individuals representing firms from across the industry, to ensure that its views are taken into consideration,” says Emily Kasparov, chair of the SIP Operating Committees.

Some studies have found big increases in trading firms’ market data bills. A report published at the end of last year by the Healthy Markets Association, a coalition of investment managers, found that market participants who wanted the fastest connections with the most detailed order information from three of the biggest US exchanges paid $182,775 per month in 2017, an increase of more than 150 percent over the $72,150 per month they paid in 2012.

Other participants spoken to by Inside Data Management expressed concern that the rise in market data fees could create market instability. “Some exchanges have pushed the levels of data fees, especially for non-display application usage, to such extremes that market participants have decided to stop executing orders themselves. Instead, they give away their orders to brokers using broker strategies,” says Jork Muijres, product developer at Transtrend, a Netherlands-based asset manager. “It thus creates a market where only a few broker algorithms are active. When different market participants with different investment strategies send their orders to the market using the same broker strategy, this effectively becomes one large order. This reduction in the effective number of different market participants is a recipe for market instability. It harms the price discovery process in the market and it leads to an increase in systemic risk.”

Exchanges, meanwhile, reject claims that they are abusing their market power, and counter that market data pricing is fair, that no trading firm is obliged to purchase faster and more comprehensive order data, and that they can terminate feeds or co-location arrangements if they become too pricey. In the US, exchanges also cite investments that have dramatically increased the speed of the SIP over recent years, and argue that market participants have a say in any decisions regarding the SIP through the SEC’s public comment process. 

They also say that the sale of data is competitive and the cost of proprietary data has risen commensurate with the fragmentation in the marketplace. In the US, exchanges do have some reason to feel vindicated. In June 2016, an SEC administrative law judge sided with exchanges against trade association Sifma in a long-running legal case over the cost of market data, saying that market data sales were subject to “significant competitive forces.” Sifma has since appealed the decision, though the SEC has not yet ruled on the appeal.

The situation in the US has become even more tense recently after 24 brokers, traders and asset managers—including Morgan Stanley, Citigroup, Fidelity Investments, Virtu Financial and UBS—filed a comment letter calling on the SEC to review its process for approving new market data fees filed by exchanges. The firms also called on the SEC to force exchanges to disclose more information about fees, and to scrutinize how these fees are determined.

The group argues that securities laws in the US require exchanges to sell market data on terms that are “fair and reasonable” and non-discriminatory, and that exchanges’ published rules do not disclose enough cost information related to their market data products to show whether the price increases conform to these legal standards. 

Rising Costs

“There has been quite a public spat between trading firms and the exchanges in the US, but frustration has been building in Europe, too,” says Tim Cave, an analyst at capital markets consultancy Tabb Group. “The issue with the Spanish exchange has really brought into the public domain the concerns market participants, particularly trading firms, have around the rising costs from exchanges—not just for market data, but for connectivity, execution fees, co-location, access fees, and clearing and settlement.”

In fairness, BME was not the only exchange in Europe to make changes to its market data fees at the start of the year. Other exchanges that raised data fees include Nasdaq, Euronext and Deutsche Börse. 

While Euronext declined to comment for this article, both Nasdaq and Deutsche Börse say their new prices mean that some users will actually see their costs fall. “Changes that have come with Mifid II, such as unbundling of pre- and post-trade products, as well as a number of other policy changes, can result in more consistent and—in some cases—lower prices for customers,” a Nasdaq spokesperson says,

Mifid II, the new pan-European capital markets regulatory framework that came into force at the start of this year, contains requirements for exchanges to create new products and unbundle some existing products, says Hartmut Graf, head of data services at Deutsche Börse.

“There were significant changes that needed to be made to the product structure, and some prices went up, others went down,” Graf says. For example, Deutsche Börse introduced a new pricing model for non-display usage, which is use-case specific, so the more intensely a client uses the data, the more they pay, but if they use less, they pay less. It has also lowered its fees for non-professional users trading on Eurex and the Frankfurt Stock Exchange, cutting the cost of its Xtra Level 1 retail package from €15 to €4.90.

However, he notes that the exchange’s fees include costs of supporting the significant amount of technology required to distribute its data—more than three billion price messages a day—and that these costs get passed on to customers.

More generally in Europe, exchanges cite the additional costs of compliance with Mifid II. For instance, Mifid II’s Regulatory Technical Standard (RTS) 14 instructs exchanges and trading venues to make pre-trade and post-trade data, which has traditionally been bundled together, available to the public in an unbundled fashion. Exchanges have to disaggregate their data by asset class, country of issue, currency and whether the data comes from auctions or continuous trading, as requested by clients, which creates an added administrative burden.

Still, some industry observers have questioned whether the exchanges’ price increases are in the spirit of Mifid II. “Exchanges are going to have to produce a lot more data as a result of Mifid II, and the cost of complying with Mifid II is one of the reasons they’re giving to trading participants for the increase in some of their data fees. But actually, Mifid II is meant to be helping to control costs for market participants,” says Tabb Group’s Cave.

Alasdair Haynes, CEO and founder of Aquis Exchange, which offers a subscription pricing model that includes data, says talk of reduced fees at some exchanges belies a resulting overall net increase in revenues.

“I’ve heard exchanges say that prices are going down for lots of people, but, net, they are going to make more money out of data than they have in previous years. Using regulation as an excuse to raise data costs goes against what the regulation is trying to do. Data is a billion-euro business in Europe. We’re not talking about small amounts of money here,” Haynes says.

Industry observers have also questioned how effective Mifid II will be in addressing the perceived high cost of market data. When the Mifid II negotiations were under way, some participants had hoped that the regulation would introduce caps on fees. Esma, however, said it decided against price capping as it did not want to hamper investment, innovation and product development.

The final rules state that exchanges and other trading venues must price their data on a “reasonable commercial basis,” that their fees should be based on the costs of producing and disseminating data “whilst being allowed to obtain a reasonable margin,” and that data should be provided on a non-discriminatory basis so that all customers in the same category are offered the same price and other terms and conditions.

“Mifid II does give exchanges a lot of leeway in how they determine their market data fees,” Rosenblatt’s Puaar says. “While regulators did consider stricter price controls during the Mifid II negotiations, it’s not really the domain of financial market regulators to intervene on these kinds of competition issues.”

However, the unbundling of pre- and post-trade data, as outlined in RTS 14, should give customers with a narrow focus more flexibility and choice, and potentially reduce their market data spend, he adds. 

Consolidated Tape or More Red Tape?

One idea that has been mooted in Europe is the introduction of a US-style consolidated tape for equities, a provision that is mandated for other asset classes in the Mifid regulation, as a means to provide a central source of prices. 

While the industry has previously debated creating an equity consolidated tape, it has failed to materialize. “Mifid II will give the industry one more chance to create its own consolidated tape, but there doesn’t seem to be the appetite for it, possibly because there is little commercial imperative,” Puaar says.

Haynes agrees that the industry is unlikely to create a consolidated tape on its own, and advocates that regulators mandate it. “I believe it is necessary for a consolidated tape [for equities] to be introduced in Europe. I have always believed that the industry will not bring it in on its own, and it will have to be mandated. It was an error not to have put in a mandate about it in Mifid II. There are lots of people out there who have wanted to see a consolidated tape, but it won’t happen unless it is mandated as there are too many vested interests,” he says.

In addition to calls for a mandated consolidated tape, there have also been calls for regulators in Europe to step in and examine the overall issue of rising data costs, despite the authorities’ hands-off approach to exchange market data fees so far. In its response to Esma’s consultation on SI pricing, Virtu Financial said that escalating costs are having “profoundly negative effects” on the availability of liquidity and on price formation in the European Union. “These increasing costs are evident across all areas of the trading lifecycle, from market data… through to clearing and settlement,” the firm said in its response. “The spirit of the regulation seeks to ensure a ‘level playing field between means of trading.’ As such, we respectfully suggest that it is expedient for the relevant European authorities and institutions to assess whether these developments are beneficial or detrimental to the markets [and] whether Mifid II is the catalyst for these cost increases; it is frequently being used to justify those increases. This issue is not unique to the EU, but it is an opportunity for the EU to take a leadership role in reining in the problem.”

Calls for “shining a light on opaque costs” have also come from other quarters in the financial markets. Roger Rutherford, COO of electronic dealing platform ParFX, says that regardless of asset class, financial markets need market infrastructures to take the lead on transparency, fairness and equality, and to make market data affordable and cost-effective for everyone. 

The long-fought battle over market data fees shows no signs of abating. But what were once individual disputes over fees are now crystalizing into organized battle lines. In the past, these battles were fought by market participants creating their own platforms for trading and post-trade services. The question is whether the situation will descend to all-out war (and whether that will deliver the desired competition and lower fees), or whether regulators can broker a lasting peace.