The lack of transparency and rising cost of market data is a concern continually raised by participants across FX, equities, fixed income and derivatives markets.
The issue was brought to the fore again with two major hedge fund trade groups, the Managed Funds Association and the Alternative Investment Management Association, asking the U.S. Securities and Exchange Commission (SEC) to carry out a full review of market data costs and to require exchanges to be more transparent about the fees they charge.
We take a closer look at the industry’s concerns, the transparency of market data packages, their associated fees, what regulators are doing to tackle the issue and where we go from here.
The two hedge fund trade groups are concerned that institutional investors continue to experience significant increases in market data fees, new fee categories and unbundling. They believe this restricts trade and harms competition.
“Our members have likened the practice to ordering a hamburger which used to cost $20, but now costs $7 for the bun, $15 for the beef patty, $3 per fixing and $1 per condiment, for an overall total cost of $33 (with lettuce, tomatoes, pickles, ketchup and mustard),” the petition said, according to Reuters.
The hedge fund industry is not alone in raising these concerns. Back in December 2017, 24 trading institutions, including banks and asset managers, called for more transparency and requested exchanges reveal their profit margins for market data products.
Fees skyrocketing to benefit of exchanges
Over the past decade, the costs and fees associated with market data have seemingly skyrocketed. It is clear from exchanges’ results that this increase in market data fees is positively impacting on their revenues.
This CNBC article reported that market data fees have become the growth area for exchanges. Indeed, ICE gets about 44 percent of its revenue by charging for market data, and at Nasdaq it’s about 26 percent.
Cboe Global Markets reported a 51% increase in income from market data fees for Jan-June 2018 when compared to the same period in 2017. The firm cited increasing market data revenue as a contributor to its 6% year-on-year rise in net revenue.
CME reported an 18% year-on-year rise to $113.8m, primarily due to a fee increase put in place in April.
Furthermore, a report by the Healthy Markets Association found that some market participants have seen the cost for equity market data products rise from $72,150 per month to $182,775 in five years – an increase of more than 150%.
From this, it’s clear to see that prices are increasing and are an important source of income for exchanges. It remains to be seen if exchanges will act to reduce prices and increase transparency themselves or wait for regulators to get involved.
Shining a light on opaque market data packages
Market data fees remain one of the most opaque areas of trading and has been a constant bugbear for FX institutions as well those operating in other financial markets. Institutions are now realising that they are paying different amounts for the data they receive.
Dan Marcus explains: “Large institutions are negotiating better prices and cutting special deals based on how much they agree to trade on a particular venue. This means smaller institutions with lower trading volumes and less bargaining power are struggling to get value for money.”
This is against the spirit of the FX Global Code which advocates greater transparency and equality in the FX market, he adds. “Market participants simply want affordable, accurate market data that allows them to trade, is good value for money and is delivered in a fair, equal and transparent manner.”
Regulators and market participants taking action
There is now a realisation that institutions are paying vastly different amounts for the data they receive. The good news is that the industry participants are increasingly vocal about their concerns, and as a result, the distribution, cost and transparency of market data packages are now coming under scrutiny.
The SEC has responded positively to the industry’s concerns. SEC Chairman Jay Clayton has confirmed the commission would hold an industry roundtable on the issue at some point in the near future, but no date has been announced.
Back in March, the European Securities and Markets Authority said it shares concerns that have been raised over the increase in fees for market data in the region and intends to take a closer look at recent developments.
It’s positive to see regulators such as ESMA and the SEC carrying out reviews and it will be interesting to see if their research results in action which addresses the market’s concerns.
Dan Marcus believes market data doesn’t have to be opaque and expensive: “At ParFX, we deliver market data to our customers at no additional cost – everyone gets the same data, at the same frequency in parallel. We also don’t negotiate special deals – this is in direct contrast to the approach of other providers.”
We see the move towards lower market data costs as inevitable, as the current pricing structure is unsustainable. It seemingly does not provide value for money, prices out smaller participants and provides an unfair trading advantage to those with the deepest pockets.
It’s time other venues and platform providers bring themselves in line with the standards we expect in 2018 by making market data more transparent and affordable for everyone.