MARKET DATA: TOO GOOD TO GIVE UP?    

Roger Aitken canvasses industry opinion to see if a more holistic approach can be found.

Exchanges ‘milking’ member firms has been a cry made by industry players on both the buyside and sellside in recent years. Back in June 2008, Clive Furness, Managing Director of Contango Markets, a commodities consultancy, remarked in a Highdeal roundtable in London that a “huge number” of end users of stock and derivatives exchanges were being confronted by a “bewildering array” of pricing tariffs – linked to outright price but also the speed of execution and latency.

Furness even referred to one unnamed exchange where their pricing tariffs stretched across “10 columns on a single page and ran to 11 pages” just for financial products.

Since then and with the arrival of MiFID in Europe a plethora of exchanges and MTFs sprang up. For UK equities alone there were at one stage 19 separate trading venues and Europe became home to 27 exchanges and 19 MTFs. Trade execution fees for equities shrank to an average today of around 0.2 basis points (bps) versus 2.0bps pre-MiFID.

Against this backdrop the exchanges sought to find inventive ways to boost revenues. Here the London Stock Exchange Group’s (LSEG) 2013 annual report offers an insight. It reveals that its information services business segment generated £306.3m representing 36% of the exchange’s total income out of £852.9m (2012, £814.8m) in the year to 31 March 2013. That was almost a 40% rise over a year earlier (£218.9m) and contrasts with the capital markets segment for multi-asset trading declining £34.4m or 11.4% over the same period.

Within LSEG’s Information Services segment sits the sale of real-time price information and a range of other information services from indices to post-trade analytics, as well as fees based on the number of terminals taking the exchange’s real-time price and trading data and subscription fees for data. Meanwhile, LSEG’s technology services, spanning fees for network connections and server hosting pulled in 6.6% more income than the previous year.

Steve Woodyatt, CEO and chairman of Object Trading, a London-headquartered vendor providing a single interface to the world’s markets for the buyside, sellside and technology partners, reflecting on the evolution of charges levied by exchanges refers to a heated industry panel discussion he attended at last year’s International Derivatives Expo (IDX) in London.

Woodyatt noted, “The buyside attendees during that session were raising the vexed issue that the exchanges were not moving their costs, while the sellside complained that they were being pushed thin at the margins. On top of this they had the added cost of regulation and compliance to contend with. And, there is only one place that the increased cost of doing business can go – to the buyside. However, they are saying they cannot or do not want to pass it on to the investor.”

Woodyatt added, “When one looks at the buyside and where it’s going to be squeezed on margins, the issue in Europe and the US is that the exchanges are very busily trying to hold their ground on costs. They are shifting things around and certainly one sees cases in Europe where they are now increasing data and technology charges in order to maintain margins.”

A year on and Woodyatt thinks the situation is pretty much “business as usual” as far as market data and technology charges levied by exchanges go. “It’s rather analogous to the old story of the Emperor’s new clothes. Everyone knows this movement really has to happen but no one probably knows where to start the discussion and does not want to be the first to initiate it.”

The issue remained pertinent for delegates at this year’s IDX event in London in late June. During ‘The View from the Top’ debate with various exchange CEOs an audience poll revealed that 45% believed exchange charges (unspecified) would be higher in 2014.

And, in a sign that there could be some movement in terms of ‘industry stack’ co-operation and addressing issues in a more holistic manner by different stakeholders in the value chain, Andreas Preuss, Eurex CEO, posed the question during the same session as to why the industry does not use a “global liquidity access infrastructure”. That is something Object Trading’s FrontRunner suite is predicated on and facilitates improved efficiency for the industry.

Woodyatt indicated that he is starting to see market participants between the various trading interfaces “beginning to collaborate”, although this is more between buy- and sellside institutions than between sellsides and the exchanges.

Alex Clode, business manager at Bloomberg, who has spent some twenty years providing data, research and execution solutions, commenting on whether fees levied by exchanges in Europe and North America are too high for end users said, “Clearly we would all prefer to see lower fees in terms of market data and that I’m sure is the case for the buyside, sellside and all the vendors. However, it’s not immediately obvious to us that the exchanges are charging too much for market data.”

He added, “One could argue that the overall costs have balanced out to a level where they are at least sustainable.” In relation to the overall exchange charges for the different components, Clode contended, “The most appropriate mechanism for ensuring the market gets what it requires and at price that it can afford, is to ensure that there is enough competition between venues to lead to downward price pressure – certainly on the messaging and transaction fees.”

He added, “All the execution venues need to be able to earn sufficient revenues in order to enable them continue to invest, further innovate and carry on providing the types of trading environments, which the players on both sides need.”

Turning to the data side, Clode however acknowledged, “It’s rather like a balloon. If you press it in one area it tends to become a bit larger in another. And, that I suspect is what has occurred within the data side. That said the data costs have not increased in the individual venues.”

Richard Chmiel, senior vice president of global sales and marketing at OneMarketData, a vendor providing market data management and analytical solutions for financial institutions, concurs with Bloomberg’s Clode that the exchanges “have to be able to make money” to fund future investment. However, the former market maker adds a caveat in that a level could be reached at which exchange charges could become “too onerous” – especially exchanges that have a near monopoly. However, that begs the question at what level?

Andy Allwright, head of regulatory strategy, trading at Thomson Reuters, commenting on the exchanges’ charging tariffs for data, messaging, and transaction, says, “In our view the issue is not about the individual charges of exchanges, MTFs and trade publication services, it is about the lack of an established commercial and contractual model outside of North America for the distribution and consumption of consolidated data across all of these parties in real time.”

He adds, “In the absence of this the only option is to charge the combined underlying real-time fees for all parties contributing the data. The result is that administering access to the consolidated data to only those paying for all the data is problematic and the combined cost prohibitive.”

Bob Fuller, chief administration officer, Fixnetix, a vendor of ultra-low latency trading, market data and connectivity solutions, and former CEO of Equiduct, commenting on the collapse of efforts by the COBA Project to develop a consolidated tape of record in Europe for equities says the endeavour faced difficulties. While most of the big broking houses have their own consolidated tape, for others costs of consuming a consolidated tape would be cost prohibitive.

While the technology is available to achieve the COBA Project’s envisaged goal, Fuller notes other challenges and a “definitional issue” as to who (retail or institutional) will be reading a consolidated tape and for what purposes.

“Fundamentally the problem lies in the fact that once you want to start to redistribute the huge amounts of raw or normalised data one has to pay to all the individual exchanges. This can be an astronomical cost for individual users and consequently this sort of information tends to be confined to algorithmic/HFT desks with an absolute requirement for it.”

For now the debate about exchange tariffs and those in relation to market data is unlikely to abate anytime soon. Both Deutsche Börse and LSEG were canvassed by this magazine for clarification on their market data charges but declined to comment.