Initially, some had hoped that MiFID II would introduce caps on market data fees, though they were left disappointed. Instead, the European Commission’s Regulatory Technical Standard (RTS) 14 instructs trading venues to make pre-trade and post-trade data, which has traditionally been “bundled” together, available to the public in an “unbundled” fashion—i.e., broken up into separate data items. The EC says these requirements will “reduce market data costs for market participants by allowing them to acquire only the very specific pre-trade or post-trade data they need.” Trading venues will 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.

In theory, unbundling pre- and post-trade data should give customers more flexibility and choice, and reduce their market data spend. Bundled packages may be fine for large banks and asset managers, but can prove costly for smaller fund managers. 

But in practice, while the basic premise of these rules is logical, some market participants argue that they have created unintended consequences for the end users they are intended to benefit in the form of both technical and commercial complexities. 

Critics of RTS 14—primarily vendors and exchanges—say that while the European Securities and Markets Authority’s (ESMA’s) intentions around reducing the cost of market data and making it more readily available may be well-intended, they will increase the overall cost of data as a result of the level of customization required to meet client requests, and create an added administrative burden. 

“If one took the letter of this regulation and applied it to some of the more larger and sophisticated exchanges, there could be thousands of price-line items, if you take into consideration all the combination of sub-sets that should be made available to sale,” notes one industry observer. Commercially, this means that “the person selling the data has to present a price list of thousands of different options, and then the customer has to select what they want and manage the magnitude of different packages now available. Suddenly, you have an onerous, complex task on both the selling and the buy side, which I don’t think anybody had really thought about,” the industry observer adds.

However, Mark Spanbroek, vice chair of the European Principal Traders Association, a division of the Futures Industry Association—which has not made this specific article a topic to either lobby for or against—disagrees. “The arguments used against this are not shared by EPTA. Exchanges and platforms will do their utmost to argue that this will increase costs, but this is not true. The business model of some exchanges is completely reliant on data fees, clearing costs and trading fees, almost split up evenly,” he says. “EPTA is of the opinion that after decreasing the trading fees over time, the data fees are now the one to lower significantly. The end user has received great benefit from the decrease is trading fees, and we hope to achieve the same in data fees. The huge amount of data fees is an area of concern for all end users, including pension funds, and one we bring to attention of the regulator internationally,” Spanbroek adds.

Fund management industry body the Investment Association (IA) was unable to make a spokesperson available for comment, though IA senior advisor for capital markets Arjun Singh-Muchelle, told Inside Market Data last year that the rules represented a “missed opportunity to introduce proper transparency to this market.” He also said that “venues will still be able to charge for bundles of data, until a venue ‘determines’ there is a ‘request’ for further unbundling. As it stands, if an asset manager only wants to purchase ETF data, she will continue to be forced to purchase all equity data, even though this is irrelevant to her business.”

Higher Priorities

Exchanges contacted by Inside Data Management were universal in their opinion that the majority of clients—preoccupied with much bigger fish to fry in the run-up to MiFID II’s go-live date—don’t want the way they receive data to change. David Howson, chief operating officer at Bats Europe, says that while “data strategy is one of the top five costs that firms face… the focus [for most] with MiFID II is on compliance.” So while data disaggregation is a topic of conversation, it’s not top of the list of pressing issues that must be dealt with, he says. 

However, data strategy teams still want to know want to know how Bats is approaching the obligations, Howson adds. “At the moment, they’re asking whether or not we’re going to make their lives complicated from day one with our data policy. The strong guide has been to keep our current data policy intact and then introduce a new one that incorporates data disaggregation.” The challenge for venues, data consumers and data vendors is the increase in the complexity of the fee schedules that disaggregation will create, Howson says. “If you’re going to offer it separately, you need to charge for it separately as well. Bats will offer those price points in a separate commercial policy—expected in September—alongside its existing commercial policy.” 

Howson says he’s unaware of any clients looking to make major changes to their data architecture from day one. “People are focused on MiFID II compliance first. Next year, they may start to look at how to most efficiently architect their data strategies and their internal data consumption, both within larger and niche organizations. If I’m a Nordic broker, it’s quite a neat opportunity to say ‘I only care about my region’s data and that’s all I want to receive and pay for.’”

Hartmut Graf, head of data services at Deutsche Börse, agrees: With banks’ entire business model ultimately at stake, data fees may not be enough to distract firms’ focus from “business-critical” items. “They definitely will revisit their data policy and their data architecture at some point, but it will take them some time. We do not expect any immediate changes in January,” he says.

While the German exchange will comply with the disaggregation requirement by making the products available on its CEF Core Feed, Graf also says there is “significant demand for our existing bundled product, for instance our Level 2 products. [Clients] require these products to remain. They require bundled products.” 

Graf acknowledges that Deutsche Börse’s retail clients will reap some benefits from the changes, bus says this is largely a result of the exchange opting to “significantly lower data fees for retail clients.” For example, Deutsche Börse will cut the cost of its Xtra Core Level 1 retail package from €15 to €4.90 from Jan. 1, 2018, and will expand the scope of the product to include the Xetra US Stars and Xetra European Stars products, while also cutting the cost of Xetra Core Level 2 by 10 cents from €20 to €19.90 for retail investors. A Deutsche Börse spokesperson says this is because retail clients typically don’t require the Level 2 product, which provides in-depth order book data.

Beyond retail customers, Graf says he can’t predict what types of clients would benefit for the disaggregation, and is also unsure of the extent to which clients would choose to take up the new pre- and post-trade data options now available to them. “A significant number of clients prefer the existing structure,” he said. 

For Michael Hodgson, head of information services at Euronext, the beneficiaries of disaggregation will depend on who has the resources to invest in unpicking which data users use what across their organizations. “Clients who are able to do the work in terms of analysis of their individual users and what data they’re using, and having a greater understanding at a granular level of what data items their clients require… will be able to take advantage of that. But if they’re not able to, or don’t have the resources to do that, then possibly not.”

“If you are an organization that specifically deals in [one specific] asset class, then disaggregation may be something that you can take advantage of,” says John Mason, head of regulatory and market structure strategic response and propositions at Thomson Reuters, adding that clients can already consume data by asset class from the vendor. “It’s not something that really from our perspective [technically] affects us. We don’t have to make any system changes specific to disaggregation…. But there are significant changes happening to feeds in general as result of MiFID for all manner of reasons, be it increased timestamping or other areas. It’s not something you can look at in isolation and say ‘Does this piece make a change, or does that piece make a change’.”

Graf also expresses doubt at whether RTS 14 will ultimately result in lower data costs for end users as financial firms seek to satisfy an insatiable appetite for data. “The entire world is going to shift and become a much more data-driven economy. More data is going to be consumed on an ongoing basis by organizations in order to run their business. Data costs may go up because more data is being used. Data is going to be a major item in banks and successful organizations. They’re going to use data in a much broader fashion going forward.”

Others agree that the regulations are unlikely to result in lower costs overall. “The data disaggregation rules have always seemed to me to be misconceived because they focus on just one aspect—data content—and do not address the other key issue of what data access and usage rights are required by MiFID to be made available for any given data content package,” says Reg Pritchard, managing director of data contract and usage policy consultancy Rights Management Associates. “No doubt the data content disaggregation requirements will result in additional administrative cost and complexity for the industry as a whole. Under any cost-based system for controlling total market data income, this would mean overall market data income could rise. I would be surprised to see it fall,” he adds.

Some are less conservative in their comments, with a managing director at one data vendor calling the EC’s review of data costs a “witch hunt… [which] ultimately undermines the objective of restoring market transparency. Banks would rather see transparency in data costs to apply pressure to reduce them.”

Like other exchanges, Hodgson says Euronext’s experience is that disaggregation is something that data consumers “would like to put on hold for now and think about later.” Once MiFID II takes effect in January, “they’re going to have so much on their plates as it is—members, non-members and vendors alike have overwhelmingly said to us, ‘Keep your existing packages so that we and our clients can continue to report the existing services, and we don’t necessarily have to do everything from day one,’ … [and] on Jan. 3, they can just carry on exactly as they are at the moment,” he says. “The overwhelming message now is ‘Don’t change anything for day one.’” 

However, Hodgson notes that clients initially supported the disaggregation rules. “Initially, the push from clients was for the disaggregation. We thought running two lots of packages would be confusing and expensive, and it also adds extra complexity on our end,” so Euronext initially considered only offering disaggregated packages, he says.

As clients began to have second thoughts about disaggregation’s more complex fee models, the exchange decided to retain its existing commercial packages, alongside new offerings. For example, its cash market will be split into equities and ETFs, warrants and certificates, and fixed income. And whereas previously pre- and post-trade data for derivatives was in the same package, Euronext will now offer separate pre- and post-trade derivatives data. 

While the rules create a burden for exchanges, they also create complexities for market data managers, Hodgson says. “We’re one of x number of exchanges/trading platforms across Europe. If every exchange came out with multiple disaggregated packages, then it’s going to take some time to work through those across your user base to work out what the benefit is. The unintended consequence is that while there will be more granular data out there, there are questions around how you permission your users for that, how you count and report those users, and ensure that you are complaint,” he says. “People just want to make sure that their users are getting the data that they need. As the year progresses, you’ll see more clients working on this to maximize savings.”

Vendor Concerns vs. Vendor’s Concerns

Between the warring factions of exchanges and end users lie the data vendors, who will play a critical role for many by delivering these regulated data packages, even though they are unregulated—or at least, not subject to the same regulations.

“If your data is delivered via a data vendor, then the effort is on whatever changes the vendor is making rather than your subscription to us…. Vendors aren’t regulated in the same way that exchanges are under MiFID II. Clients have to push the vendors if they want to see those disaggregated packages on the vendor product,” Hodgson says. 

Bats’ Howson agrees that most of the burden to offer the new packages will fall to the unregulated data vendors. “Data consumers will be reliant on vendors being able to entitle and segment the data and having the reporting tools in place to allow them to provide the data to those consumers in the way that they are trying to access the data.”

According to the industry observer, data vendors have raised concerns about how much work is potentially required to accommodate disaggregation, and suggests that some of the current push to retain the status quo may be coming from vendors rather than end users. “A lot of data vendors have taken the view that broadly they don’t want to make this available to their customers. The main message from them to exchanges is to continue to deliver your existing packages in the same way. If the exchange says ‘We’ve made the technical and commercial changes for data to be available in a disaggregated fashion,’ but the data vendor chooses not to implement that, the data vendor is perfectly in the right,” the observer says. 

But for some users, this is exactly why they use vendors, rather than absorbing the burden of direct relationships and connectivity with exchanges themselves. “We subscribe to Thomson Reuters or Bloomberg to aggregate our data for us. We would never take price or security data separately from the exchanges. It might be cheaper to do it that way, but then the bank has to build as many interfaces as there are exchanges in the world. We don’t have the capacity for that. Nobody does. It would be a waste of money, and nobody is going to pay for it,” says the head of market and reference data at a European bank, adding that if the legislators had “any experience with building and maintaining these solutions and these datafeeds they would not have written this.”

Since the majority of consumers will receive most of their exchange data via data aggregators such as Bloomberg and Thomson Reuters, ultimately RTS 14 might not produce much change. In fact, some say this lack of change would be a welcome relief for firms trying to navigate MiFID II. “The biggest fear is that on Jan. 3, 2018, everything is going to change, and they’ll have to undertake massive amount of investment, time and effort to set up for something they’re not particularly interested in, when their systems are set up to handle the existing setup,” the observer adds.

However, Thomson Reuters’ Mason says the rules will have “minimal impact” on the vendor, which will continue to offer data in the packages that its customers want. “Not much changes, as far as we’re concerned. This is part of the MiFID approach in terms of increased choice—to allow organizations to be able to select their packages from exchanges,” he says. “If you go to Costco, you have to buy 24 bottles of water, all shrink-wrapped, whereas what MiFID is allowing you to do is buy a single bottle of water if that’s what you want.”