- The vast majority of traders at hedge funds and asset managers think exchanges’ fees for their data are not fair, according to a survey by financial research firm Greenwich Associates.
- Traders don’t believe an alternative feed that exchanges offer, but is slower and less detailed, can be used by their brokers.
- Richard Johnson, the author of the report, said exchanges could be pressured into rethink their market data fees in 2019.
The equities market might be close to a tipping point in its fight over market data fees.
A new survey conducted by financial research firm Greenwich Associates found 79% of traders at hedge funds and asset managers believe fees charged by exchanges for their market data feeds are not fair.
Complaints over rising market data fees have served as a rallying cry for banks, broker-dealers and market makers in recent years. Wall Street firms have criticized the fact that data critical to their job is controlled and sold by the three major exchange groups: Intercontinental Exchange, Nasdaq and Cboe Global Markets. Financial firms say that gives the exchanges a virtual monopoly over pricing, as there’s no competition.
A recent analysis of market data fees by industry group the Securities Industry and Financial Markets Association found that price increases for individual firms were anywhere from 967% to 2,916% to get the same data in 2018 they were getting in 2010.
Hedge funds and asset managers don’t typically buy exchange’s direct feeds. With some exceptions, most buy-side firms purchase consolidated market data feeds sold by third-party vendors as opposed to tapping directly into exchanges.
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But such a strong position decrying data fees from yet another group of market participants puts additional pressure on exchanges and could finally lead to price changes in 2019.
“Banks, brokers and market makers have not given up the fight to get these fees reduced, and with sentiment changing at the SEC, 2019 could well be the year we see some compromise on this issue,” said Richard Johnson, vice president of the firm’s market structure and technology practice, in a report this week that included responses from 64 equity traders at hedge funds and asset managers across North America.
There is an alternative to paying for direct or consolidated data feeds. Brokers could use data from the SIP, an industry utility run by the exchanges themselves that aggregates their feeds. However, SIP data is slower and less detailed than direct or consolidated feeds.
As a result, brokers choosing to only use SIP data would have a hard time finding clients. Only 2% of the survey’s respondents said they would trade with an electronic broker whose algos just used market data from the SIP feed. Another 34% said they would trade with a broker only using SIP data, but only if they had certainty from regulators they would be meeting their best-execution requirements on trades.
Joe Saluzzi, co-founder and co-head of equity trading at broker Themis Trading, told Business Insider that high-frequency traders and market makers need the granularity and speed that comes from feeds direct from exchanges. Many brokers can use consolidated data feeds, but no one dealing with Wall Street firms can rely just on SIP data.
“Anybody trading with just the SIP, you are essentially just a retail broker at that point,” said Saluzzi.
In an emailed statement, a spokesperson for Cboe countered that exchange proprietary feeds are not a regulatory requirement. Cboe has a “sizeable” number of members that choose not to purchase them, the spokesperson said.
“It may be good business for them to buy the data, but it is not required,” the spokesperson said.
The Cboe spokesperson said the exchange has no plans to increase data fees currently, but will make “pricing changes as necessary to drive increased use and distribution.”
A spokesperson for NYSE, which is owned by ICE, declined to comment but pointed to a comment letter filed to the SEC regarding its roundtable held in October 2018 on market data and market access. The spokesperson also cited recent statements from Stacey Cunningham, NYSE’s president, and Michael Blaugrund, the exchange’s head of transactions.
John Ramsey, IEX’s chief market policy officer, reiterated the exchange’s previous stance of the need for exchanges to lower their fees in an emailed statement.
”Are these products optional or not? Brokers have loudly said they are not. Institutions have clearly said they won’t use brokers who don’t buy them,” Ramsey said. “The only people who pretend the industry has a choice are the exchanges making billions in risk-free profit from selling them.”
Oliver Albers, head of strategic partnerships with Nasdaq’s Global Information Service, maintained the importance of the exchange’s position within the industry.
“We strongly believe in the value our entire ecosystem brings to this highly competitive marketplace,” said Albers in an emailed statement. “We will continue to work with our clients on different innovative and cost-saving services.”
Saluzzi also believes the three major exchange groups could look to make some type of deal this year to reevaluate market data fees to quell the industry’s anger. He pointed to other industry initiatives exchanges are also dealing with, such as the SEC’s pilot for analyzing transaction fees that was approved in December 2018, as incentive for the exchanges to address their fees.
“Traditional stock exchanges have a major problem this year. There are regulatory issues coming down on these guys that they are trying to fight off. The holes are popping out all over the boat,” Saluzzi said. “They will do something because they want to try and snuff out as many forest fires as they can.”
The debate over market data fees has reached new heights in 2019. This comes after the SEC ruled against fee increases by NYSE and Nasdaq on certain market data in October 2018, citing a lack of ‘sufficient factual and legal support to continue to charge those fees.’
In early January, nine Wall Street firms, including banks, market makers and retail brokers, announced plans to launch a new exchange that would offer reduced market data fees. The founding firms of the Members Exchange, which includes Fidelity Investments, Morgan Stanley and Citadel Securities, voiced their frustration with the consolidation of power in the equities market amongst the three major players. The trio own all but one of the 13 national securities exchange.
IEX, the lone independent stock exchange, has also been vocal critic of market data fees. The exchange’s co-founder and CEO, Brad Katsuyama, published a letter on LinkedIn in late January he sent to the SEC outlining the costs IEX charges its members for connectivity and market data compared to Ice, Nasdaq and Cboe. The exchange also published a whitepaper, which found market data fees at other exchanges were as high as 1,800% more than IEX’s.