A good way to enliven a conversation with a top banker, fund manager or trader is to ask if they are happy with the cost of their market data: core information such as the prices offered and paid for a particular stock, or the sizes and volume of trades.
The question goes to the heart of securities markets, which routinely churn billions of dollars of orders per day. The sale of such data increasingly underpins the business models of stock exchanges, which have faced big squeezes on revenues for the core trades they process.
But exchanges’ big customers such as banks, high-frequency traders and asset managers have complained of being handed annual double-digit increases in fees for receiving the data.
Without it, they cannot meet regulatory requirements such as getting the best price on trades, reporting transactions or valuing assets. Their suspicion is that exchanges are exploiting that regulatory imperative, and charging whatever they think they can get away with.
Regulators across the continent have opened the door to changes this year, as pricing appears to clash with new Mifid II rules requiring that data be supplied to the market on a “reasonable commercial basis”. “It appears that Mifid II has so far not delivered on its objective to lower the prices of market data,” observed the European Securities and Markets Authority, the EU’s markets regulatory agency, in July.
On the face of it, then, there is a fair case for intervention from Brussels. But the dangers of wading into the fight are also clear.
In Europe, the market relies on exchanges’ prices as ever-present benchmarks. The exchanges themselves argue their data goes hand in hand with other crucial but unpriceable factors such as the quality and reliability of the market.
Without their presence, “exchange market data as we know it today would either not exist or not have the value it does to those who consume it”, says Nandini Sukumar, London-based chief executive of the World Federation of Exchanges, a trade association. Surveillance for market abuse and the incentive schemes like rebates for volume that banks enjoy are part of the package.
Moreover, exchanges argue, prices are not unreasonable. The five biggest equities trading banks made €5.7bn in revenues from trading shares in Europe last year, according to WFE estimates. The biggest exchanges pulled in just €245m in market data revenues at the same time, it said.
Trying to decide whose case carries more weight is difficult but an appropriate policy response is trickier still. Brussels has yet to open an antitrust investigation that could dish out fines, perhaps because cases can be hard to prove.
Besides, determining a fair price for data seems as intractable as defining Brexit. Any definition risks introducing price controls, which is a pathway few people want to tread. Even so, more targeted responses are available.
Greater transparency in the pricing of market data, from its production to its distribution, would be a first step in mollifying irate users. Another policy option that Esma will decide on by the end of the year is whether to proceed with a so-called “consolidated tape”: a single, near real-time record that contains crucial data such as size and price of deals, and which is available at a low cost.
The US market, which is another jurisdiction where trading is spread widely between exchanges and rival venues, has had such a tape for decades. In the EU, where regulators had the power to push for one under Mifid II, they did not, despite years of threatening to do so. Brussels opted for a solution to emerge from the private sector, which has so far failed to provide one.
In theory, a tape would require all exchanges and trading venues in Europe to contribute. There are more than 200 venues across the continent supplying data, so the project could be hugely ambitious.
Politics also casts a shadow. The EU is at a sensitive point in its relations with the UK and Switzerland. Without data from two of Europe’s biggest trading markets, the value of any tape of record would be questionable.
But trading executives say some kind of mega-tape is still possible, if the regulatory requirements are carefully written. It will need to include deals that are reported only after they are completed; typically more than half of European shares are traded off-exchange, on internal networks run by banks or other so-called “dark” venues — a proportion even higher than in the US.
Another sensible proposal, from the FIA Epta, a lobby group for traders, is to split the revenues that accrue among the providers.
A consolidated tape would not be a panacea to the problem of a “reasonable” price for market data, especially for the real-time numbers that professionals require. But judging by the responses Esma has received so far, exchanges, traders, fund managers and banks alike accept that Europe’s fragmented equity markets will be improved by a tape of record. Policymakers now have to rise to the challenge.
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