IEX’s First Fees Buck Data Charge Trend

Startup exchange IEX plans to introduce limited connectivity fees starting in October, and—unlike other exchanges, for whom market data sales represent a growing revenue stream—has decided against introducing fees for its market data, focusing instead on costly and under-used mechanisms by which broker-dealers send orders to the exchange.

In a statement published Friday, August 9, accompanying a Securities and Exchange Commission filing seeking approval for its plans, IEX CEO Brad Katsuyama said that after examining options for fee-liable services, the exchange dismissed the idea of charging for data because after the upfront cost of building its ticker plant, market data distribution incurs little or no incremental cost to add new users, and that the exchange wants to sign up as many subscribers to its data as possible to encourage trading.

Instead, the exchange proposes to charge fees for logical ports—also known as trading sessions—by which traders send orders to IEX. Here, Katsuyama noted, each additional logical port does incur extra costs for IEX—about $83 per port per month, or $1.5 million per year. This cost is because—unlike the near-zero cost of adding a new client to a multicast data distribution feed—ports require additional hardware and software, as well as staff to manage them. In addition, just 10 firms among IEX’s membership account for half of all logical ports delivered by IEX, more than 25% of which went completely unused during May this year.

For each client, IEX will provide five ports free of charge, then will charge $100 per month for each extra port. Katsuyama says this means three-quarters of IEX members will pay no port fees, because they use fewer than five ports. IEX estimates that once introduced, the fees will recoup up to $960,000 per year, but also expects that this number may be lower if members “optimize their port usage”—i.e. stop requesting ports that they don’t use—in response to the fees.

In fact, one of the reasons for delaying the fees until October rather than charging immediately under the “effective upon filing” approach is to allow firms time to analyze their port usage and eliminate unnecessary ports.

While IEX believes five ports is a reasonable number to ensure redundancy and failover, some firms request significantly more—for example, to segment order flow from a particular client or trading desk, or to better manage latency and throughput on each port. Sources say that the upper tier of IEX member firms have “dozens” of ports, and that there are a few firms with more than 100 ports each.

Clearpool Group, an algorithmic trading tools provider and agency broker, which was ranked among the top 10 brokers on IEX by agency matched volume in July, uses eight ports to connect to the exchange, says Clearpool co-founder and CTO Ray Ross.

“We are able to manage such volumes with only eight ports because we are effectively sending real institutional orders. There are several larger players out there who are only sending quotes with no real order flow behind them. Since they are putting the majority of the burden on the system, it only makes sense that they pay for that usage, or take advantage of the grace period IEX has provided and reevaluate the necessary number of ports to conduct their business, and make adjustments,” says Ross, who praised IEX’s approach, saying the proposed fees offer a fairer approach than other exchange fees that disadvantage smaller firms.

“Our current market structure has created an environment where smaller broker-dealers end up subsidizing larger-sized firms when it comes to the costs surrounding trading. For example, for larger-sized broker-dealers, the high fixed costs associated with market data and connectivity are more than offset by the favorable tiered pricing structure for execution and related volume discounts provided by the exchanges to these brokers,” Ross adds.