The Exchange Data Fee Debate: Trick or Treat?

Halloween is a spooky time of year, but there’s something even more terrifying on the minds of the market data industry than ghosts or zombies: exchange data fees. Financial firms would have us believe that the exchanges are the vampires of the capital markets, sucking the blood of unsuspecting victims, while exchanges might say they’re the Frankenstein’s monster—a misunderstood marvel of engineering, created by geniuses and not appreciated by the pitchfork-wielding hordes of investors.

Well, maybe they wouldn’t go that far. But last week the entire cast of characters decamped to Washington, DC, to play out the horror story via information-gathering panels in front of commissioners from US capital markets regulator the Securities and Exchange Commission, where recent appointee Brett Redfearn represented Van Helsing wielding a massive wooden stake.

While I’m not sure that holding the panels in public necessarily brought anything to light that those in the industry or at the regulator wouldn’t have already known, or exposed any illicit practices, there’s no question that the SEC’s efforts are shining a spotlight on an area of the financial markets that has traditionally been opaque and overlooked.

It also allowed some participants to show off their amateur dramatics skills, practice their poker faces, and demonstrate their ability to exercise restraint by not throttling the person next to them who just called them a liar. But the important part is what comes next behind closed doors as the SEC commissioners decide how fundamental market data is to market structure, and what the regulator’s role should be in overseeing data access and availability.

They now have the unenviable and thankless task of fact-checking every claim from each side of the industry about whose fees are higher, and deciding what to do about it. The SEC’s recent decision to overturn previous fee approvals for NYSE and Nasdaq, and to institute new procedures for how exchanges should file proposals for fee-liable data services is being seen as a warning shot at exchanges. And while they played nice in Washington, recent statements from the exchanges in response to the SEC’s decision made their displeasure plain, and were, to say the least, combative.

Nasdaq was perhaps most diplomatic, saying it was “disappointed in the SEC’s decision,” which it said represented “the latest in a 20-year long series of attempts to over-regulate the best capital markets in the world, in order to benefit the largest financial institutions,” adding that it intends to appeal the decision. Nasdaq even asked Brett Redfearn to recuse himself from the decision, because he had authored a paper on the subject while at JP Morgan.

NYSE was on the same page, calling the decision “a troubling shift by the SEC,” accusing the SEC of “regulatory overreach” and “prioritizing the interests of powerful Wall Street interests over those of retail investors and listed companies,” adding that the exchange believes the decision will not withstand its “challenge”—though officials decline to elaborate on exactly how NYSE plans to challenge the decision.

A week later, CBOE Global Markets, which owns the Bats equities exchanges, filed a motion requesting that the SEC vacate its order, saying that the SEC “exceeded its authority,” and calling the new review processes “unprecedented and unlawful.”

The exchanges weren’t the only ones name-calling: Virtu Financial CEO Doug Cifu called some exchange data fees “unconscionable,” while Mehmet Kinak, global head of systematic trading and market structure at T. Rowe Price, turned exchanges’ claims that they protect and innovate on their heads. “I don’t feel protected by exchanges, and I don’t feel that they are innovating for me,” he said.

And therein lies the rub: nobody likes being told what to do by someone else who they feel shouldn’t control their activities. Exchanges don’t like being told they can charge for their data, and how they should justify the fees. At the same time, consumers of that data don’t like being told what datasets are good for them.

For consumers, market data is the cost of doing business. And because of this, they say exchanges see this growing revenue stream as easy money from a captive audience. The SEC’s new processes by which exchanges must justify fees won’t make that audience any less captive—and, if they follow the process and provide sufficient justification for fees, then they have nothing to fear: they can even build the increased cost of meeting the more stringent rules into their pricing.

Privately, exchange officials criticize their members for making billions of dollars from trading strategies enabled by “moderately-priced” data that they say doesn’t always reflect the costs of creating it. Now, I thought one of the objectives of exchanges was wealth creation. And if they feel their members have come by those profits as a result of any nefarious behavior—rather than by simply utilizing data in the way that the exchanges no doubt intended—they can bar them from participation. But I don’t see them banning their most profitable customers any more than I see those firms radically changing their trading strategies to rely only on fee-free delayed data.

Both sides know market data is essential, but differ on its inherent worth. The SEC’s new processes will force exchanges to justify that worth—which, by the way, doesn’t automatically assume that current prices are inflated or that we’ll see lower prices; it just means that the price will have to be carefully justified, using the costs and investments behind it.

With exchanges consolidating, and buying index businesses and analytics providers, it seems feasible to me that exchanges have already seen the writing on the wall: that one day they will be forced (either by a regulator or by competitive market forces) to make the core of their market data available publicly free of charge, and will fatten their balance sheets with revenues from value-add services such as indexes and analytics. Fortunately, there are smarter people than myself charged with deciding what to do. Maybe one solution is to beef up the SIP industry consolidated feeds and free them from being run by organizations that sell competing for-profit datafeeds. But more on the SIPs another time. Happy Halloween!