Following the launch of its investigation into the wholesale data markets last year, the UK Financial Conduct Authority (FCA) has found that competition within them is not working. 

In its phase one report, the UK watchdog concluded that some trading markets are concentrated on too few firms, limiting choice for institutions and making switching suppliers difficult.  

It also found that the process of procuring data – in particular the way it is sold – is too complex, again having the effect of limiting choices for investors when sourcing this essential data.  

Read more – FCA to launch investigation into data competition concerns 

The FCA confirmed it was launching a three-pronged investigation into data competition concerns in January last year following lobbying from both the buy- and sell-side that the cost of data was too high and some firms held a monopoly over the market for it.  

As a next step, the FCA is now set to launch the second phase of its investigation, exploring whether the markets for benchmarks, credit ratings data and market data vendor services are working well. 

Should this study come back conclusive that competition is being hindered, the FCA said it would consider the “most appropriate way to address these concerns” including through rule changes as part of adoption of retained EU law. 

“We will use the findings from our wholesale data work and findings from our market study to guide us in our efforts to achieve these aims,” said Sheldon Mills, executive director, consumers and competition at the FCA, in a statement. 

Consolidated tape 

In its statement, the FCA said it was working with the government to develop consolidated tapes – a solution that could help improve overall cost and accessibility of wholesale data.  

Consolidated tape plans are finally reaching a boil in both the UK and Europe. In December last year, UK Chancellor of the Exchequer Jeremy Hunt announced sweeping changes to the wholesale markets under a set of Edinburgh Reforms. Among the proposals was the commitment to committed to delivering a regulatory regime by 2024 to support a consolidated tape. 

In Europe, a more recent decision on Wednesday saw the Economic and Monetary Affairs Committee (ECON) vote in favour of MEP Danuta Hubner’s draft report on Mifir/Mifid, a decision that finalised the European Parliament’s negotiating position. The review process will now move into its final stages in trilogue. 

Among the proposals now to be hashed out in European parliament is a real-time pre- and post-trade equities consolidated tape. 

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Deutsche Börse

Deutsche Börse and Clearstream have co-developed a new data service, offering analytics and insights into the fixed income marketplace.  

Called Bond Liquidity Data, the new platform will pull aggregated data of settlement instructions for international securities from Clearstream’s ICSD. Investors will be able to evaluate fixed income asset and portfolios, measure liquidity and systemic risk of bond issuers and estimate execution prices for secondary trades.  

Alireza Dorfard, head of market data and services at Deutsche Börse, noted the fragmented and non-transparent nature of the European fixed income market, with relevant data stored with different market participants. “Our customers have, therefore, a strong demand for high-quality data on fixed-income instrument prices and volumes. With this new offering, we further support them in making an informed assessment and decision,” he said.  

Guido Wille, head of eurobonds business at Clearstream, added: “Clearstream processes close to 800,000 new issuances of international securities annually… Being at the beginning and the end of the fixed income value chain, we are uniquely positioned to provide comprehensive post-trade data, making the international bond market more transparent and thus more efficient.” 

The two organisations evidently recognise data as growth point for their businesses. In March this year, Deutsche Börse acquired data specialist Kneip with a view to forming a fund data hub based in Luxembourg – expanding its range of services, including data and post-trade services provided by Clearstream.  

Speaking at the time, Philippe Seyll, head of investment fund services at Deutsche Börse Group, said the move represented a chance to create “a leading European fund data champion” based in Luxembourg. 

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Greenwich Associates highlighted how coming into 2020, three new stock exchanges had announced their planned entrances and a host of regulatory actions loomed on the horizon.

These included new order-routing disclosures, a delayed Transaction Fee Pilot, potential changes to unlisted trading privileges, and a proposed overhaul of the securities information processors (SIPs) for market data.

The pandemic has halted some of these transformative developments, the research outfit explained.

The report also revealed a major shift in US equity trading volumes away from the exchanges. In 2019, the Trade Reporting Facility (TRF) reported a stable level of off-exchange trading between 35 and 40%. Only 16 days reported having TRF volume above 40%.

However, the Greenwich Associates report confirmed that as of June 2020 reported TRF exceeding 40% had already been recorded 58 times.

“Standard market analysis would say that in such volatile times there would be a flight to the stability of the lit exchanges, and initially, this did indeed occur,” said author of the report and senior analyst at Greenwich Associates market structure and technology, Shane Swanson. “However, as the US equities marketplace proved its overall resilience, off-exchange volume not only rebounded but expanded.”

The report confirmed that the role of market makers and retail trading was having a significant impact on this increase of off-exchange trading.

“With proper systems, risk hedging and management, some market makers appear to have been able to internalise more trades with the retail market, resulting in the increase in market share moving away from the exchanges,” said the Greenwich Associates report.

The pandemic has also halted plans for several exchanges to launch. The new exchange entrant Members Exchange (MEMX) was set to go live this month after receiving regulatory approval from the US Securities and Exchange Commission (SEC) in May and financial backing from Citi, BlackRock, Wells Fargo, Flow Traders, Bank of America, Morgan Stanley, Virtu Financial, Citadel Securities, Fidelity Investments, and others.

However, MEMX will now launch in September this year. Other exchanges to experience delays include MIAX PEARL Equities and the Long-Term Stock Exchange (LTSE).

“With massive proposed changes to market data infrastructure on the SIPs, new exchange entrants eager to prove their value, and, of course, the coronavirus itself, the most certain bet is that 2020 will be one for the books,” added Swanson.

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As part of a ‘call for input’, the FCA is seeking comment on the issue to explore whether the regulator should take action to address the problem.

Focusing on the pricing of market data, the FCA raised concerns that firms could pass on the higher costs of data to end investors. Higher prices could also limit access to, and use of trading data, which may impact liquidity, volatility and the pricing of securities.

“There is rapid and wide-ranging innovation in data in wholesale markets as firms become better able to gather and analyse data,” said Christopher Woolard, executive director of strategy and competition at the FCA.

“More efficient, comprehensive and timely data for wholesale market participants have the potential to generate significant benefits. But these changes may also create new risks that may require us to act. We are launching this review to better understand any risks and assess whether FCA action is needed.”

The call for input follows the European Securities and Markets Authority’s (EMSA) recent look at trading data prices in Europe, which found while the picture varied for trading venues and data packages, overall the price of trading data had indeed increased.

ESMA also said in December that MiFID II had failed to address the issue around market data fees, which market participants across the region and in the US have raised with authorities.  

In the US, the Securities and Exchange Commission has made moves to bring down the costs of market data by expanding its equity consolidated tape, or SIPs, to include depth of book data. Exchanges usually charge a premium for the extensive trading data, but banks and buy-side firms have argued that firms that cannot afford that data are at a significant disadvantage.

The FCA’s call for input is open for comment until 1 May this year, after which the feedback will be assessed and a statement published by the regulator in Autumn this year.

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The Securities and Exchange Commission (SEC) has published a proposal in a bid to modernise the governance of National Market System (NMS) plans, which produce the public consolidated tape and disseminate trade and data from trading venues.

Under the current regime, incumbent exchanges, such as Nasdaq, the New York Stock Exchange (NYSE) and Cboe, have total control and voting power over how the consolidated tape is produced and disseminated. Although under the SEC’s proposal, broker-dealers and investment firms would gain voting rights, subsequently limiting the control of incumbent exchange operators.

“The Commission has received extensive public input on issues relating to equity market structure and access to market data, as well as suggestions for how that structure should be updated to ensure that our markets continue to best serve the interests of investors,” said Jay Clayton, chairman of the SEC. “Today’s proposed order is designed to address issues regarding the dissemination of market data that affect the efficiency and fairness of our markets.”

The proposal from the US watchdog is the culmination of intense debate among market participants, many of whom argue that exchanges have an unfair monopoly on the equity consolidated tape, which they suggest is grossly overpriced considering the supposed low-cost of production. 

Mehmet Kinak, a 19-year T. Rowe Price veteran who currently heads up global systematic trading and market structure for the asset manager, has long-been an advocate for sweeping changes across the industry, which he believes in some cases can favour exchange groups over investors. During a heated roundtable discussion at the SEC early last year, Kinak argued that brokers have no choice but to purchase more expensive equity market data products from exchange groups to meet regulatory requirements.

“What concerns me is an ecosystem that slants one direction over another, [the exchanges] set the rules and we have to follow them,” Kinak told the SEC. “That’s a tilted system which needs to be addressed. An ecosystem of a for-profit company that can self-regulate itself and police reform that allows it to get flow is a terrible cocktail that has been created, unfortunately, and it needs to be addressed.”

Similarly, challenger exchange group IEX, alongside the likes of firms such as Virtu Financial, strongly supported Kinak’s argument and slammed the incumbent exchanges for not revealing the true costs of producing the consolidated tape. Shortly after the roundtable at the SEC, IEX made the bold move of publicly disclosing its own costs of producing market data and connectivity, suggesting that incumbent exchanges could be marking up charges for such services by as much as 4,000%.

At the same time, and following the bitter dispute over transparency and costs, nine major Wall Street firms confirmed plans to establish a member-owned equities exchange to rival the incumbents. Known as Members Exchange (MEMX), those involved include Bank of America Merrill Lynch, Charles Schwab, Citadel Securities, E*TRADE, Fidelity Investments, Morgan Stanley, TD Ameritrade, UBS and Virtu Financial.

MEMX’s mission is to increase competition and transparency, while reducing fixed costs and simplifying execution of equity trading in the US, with the latest technology and a low-cost fee structure. Former Instinet CEO, Jonathan Kellner, leads MEMX as chief executive, and the exchange is moving forward with its plans after gaining a green light from the SEC to launch its operations at some stage in the middle of this year.

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Nearly two years after the landmark regulatory regime came into force, the European watchdog published its first review into the progress of MiFID II and concluded that it had “not delivered on its objective to reduce the cost of market data charged by trading and Approved Publication Arrangements (APAs).”

The rising cost of market data has become a key and significantly divisive issue among participants both in Europe and North America, with banks and asset managers becoming increasingly vocal about charges associated with market data imposed by trading venues.

ESMA’s review found that trading venues consider the changes in cost of market data “as a natural consequence of the structural changes in the market”, citing the move from terminal use to increased levels of electronic and algorithmic trading, reflecting the ongoing trend of market data being used within automated trading processes.

“Trading venues stressed that those changes require as well constant investment in hardware and software by trading venues and other data providers. Furthermore, trading venues and APAs consider that MiFID II/MiFIR created a need for adaptation to regulatory requirements that had an impact on data provision,” said ESMA’s report.

However, market participants and stakeholders presented a very different view of the issue, as “data users and vendors complained about excessive fees, complex market data policies and overall higher costs for market data,” particularly since the introduction of MiFID II.

Some market data users also highlighted the “introduction of fees for services which were previously provided free of charge” and changes in the way in which definitions included in price lists have changed.

Under MiFID II, trading venues and data providers are required to publish market data on a ‘reasonable commercial basis’, to provide market data in a disaggregated format, and to make market data available, free of charge, 15 minutes after publication.

Following its review, ESMA stated that it intends to “start working on supervisory guidance on the application of the provision to provide market data on a reasonable commercial basis and towards improving the quality of OTC data.”

The market data fee conflict was also evident in the North American markets earlier this year, when a roundtable discussion hosted by the Securities and Exchange Commission (SEC) resulted in a heated debate between a group of high-profile industry representatives.

Later that month, Investors Exchange (IEX) became the first exchange to publicly disclose its costs related to producing market data and connectivity, suggesting that incumbent exchanges could be marking up charges for such services by as much as 4,000%.

European solution

While the European markets have not seen a similar level of public displeasure directed at the cost of market data fees compared to its North American counterpart, ESMA has recommended the introduction of a real-time consolidated tape for equity instruments as a solution.

“Transparency is important to ensure that markets are fair, sound and efficient. However, after nearly two years of operating under MIFID II, we are still lacking a reliable view of liquidity across the EU,” said Steven Maijoor, chair of ESMA.

“We need to establish a real-time consolidated tape for equity instruments to remedy the fragmentation of EU markets, create a real single market and so contribute to the establishment of the Capital Markets Union.”

While ESMA was realistic enough to note that such an undertaking would present a “technically demanding task” requiring “substantial investment of both time and resources by all parties involved”, as well as changes to the current legal framework.

MiFID II laid out the requirements for voluntarily consolidated tape providers to come to the fore, however ESMA recognised within its review that “it appears unlikely that within the current legal framework a CTP (consolidated tape provider) will emerge in the future.”

ESMA identified three primary reasons as to why such a provider has yet to materialise – a lack of a business case and limited rewards for an equity tape provider, the strict legal requirements stipulated by MiFID II on such an entity, and competition from non-regulated entities that would hold a significant advantage by not being subject to the same regulatory framework.

Market data users also highlighted issues relating to data quality, timing, consistency and completeness, alongside the “significant cost and complexity” of market data agreements, as key reasons why a consolidated tape has yet to be implemented.

ESMA stated that despite these challenges it will recommend the establishment of a consolidated tape for European equities to the European Commission and will continue to publish reviews on the impact of MiFID II in consultation with the industry.

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Leslie will take up the new role on 1 January 2020, as well as a position on the SIX executive board, replacing the outgoing Robert Jeanbart, who is to retire in December this year.

Having joined Refinitiv in 1994 when the firm was part of Thomson Reuters, Leslie has held a series of management positions with the data vendor and was most recently a managing director for enterprise, with responsibility for the data business in the areas of regulation, pricing and reference data.

“I am very pleased to welcome Marion Leslie to SIX,” commented Jos Dijsselhof, chief executive officer of SIX. “I am proud to have been able to attract such an experienced professional and internationally active leader for SIX. Marion knows the financial information business very well and with her at the helm we will drive our financial data business to the next level.”

Robert Jeanbard is due to step down as the current head of Financial Information and member of the executive board later this year, having held both positions since May 2014. Jeanbart led the restructuring of the SIX Financial information unit, building out its regulatory data and services, reference data and corporate actions activities in the process.

“On behalf of the Board of Directors and the Executive Board of SIX, I would like to thank Robert Jeanbart for his enormous and tireless dedication to SIX, his leadership in driving a very successful transformation of Financial Information,” concluded Jos Dijsselhof.

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The exchange group’s chief executive and co-founder, Brad Katsuyama, said in a statement on social media that a new fee structure will be implemented later this year for a small subset of highly active clients that use extra ‘logical ports’.

Logical ports, also known as trading sessions, are used by broker dealers to submit orders to exchanges. As of October, IEX will offer its members access to five ports for free, and then charge $100 per month for additional ports. Katsuyama said around 25% of IEX’s clients will incur the extra fee.

The move follows IEX’s decision to disclose its costs of producing market data and connectivity earlier this year, which stated that the costs associated with supporting logical ports is around $1.5 million per year, or roughly $83 per month, per port. IEX was the first US exchange operator to publicly disclose its market data and connectivity costs amid widespread debate about overpriced exchange data and connectivity products.

“After disclosing our costs to provide market data and connectivity, we actually had some members encourage us to at least cover our costs in providing these services,” Katsuyama said about the new fee structure.

“We were also focused on ensuring that our new fee filing aligns closely with the requirements of the Securities Exchange Act of 1934… which [requires] that exchanges provide the information necessary to show that fees are fair and reasonable and do not impose a burden on competition.”

Despite market data and connectivity fee filings traditionally effective immediately, IEX said it has decided to delay the adoption of the free structure to provide its members with time to assess the changes, and provide any feedback.

“We are hopeful that our rationale for this change makes sense and that the standard we are setting for exchange fee filings raises the bar for all exchanges going forward,” Katsuyama concluded.

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The agreement combines the fixed income data capabilities of MarketAxess with Refinitiv’s vast market information network, which feeds the global financial community with an average of 40 billion market updates a day.

“The increasing electronification of the bond market and heightened regulatory pressure to demonstrate best execution means fixed income traders and investors need more data to power smarter trading engines, find an investment edge, and meet their regulatory obligations,” said Brennan Carley, managing director for enterprise, Refinitiv.

“As customers look to simplify their data management by using a single trusted source of data across their business, we’re excited to be expanding our fixed incomed data choice for customers with MarketAxess’ innovative and award-winning market data.”

The data made available through Refinitiv, as part of the agreement, includes MarketAxess’ flagship Composite+ and Axess All pricing tools.

Composite+ is MarketAxess’ algorithmic pricing engine for corporate bonds, while Axess All is the first intra-day trade tape for European bond markets.

Chris Concannon, president and COO of MarketAxess, explained how the partnership will bring near real-time fixed income data for traders and investors in order to stay ahead of the market.

“The integration of real-time, enhanced market data throughout the fixed income trading workflow has never been more critical than today.  Data based on liquidity and transactions will benefit the entire investment process to better manage liquidity risk and portfolio execution performance,” added Concannon.

It is the latest partnership for MarketAxess as it looks to expand its trading and data tools to a wider client base.

Earlier this month, it partnered with Virtu Financial to provide global, multi-asset and multi-currency fixed income and exchange traded funds (ETF) coverage to their mutual client base.

The joint service will also see the launch of real-time trade analytics supported by Composite+ and Virtu’s own suite of TCA tools.

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Through a detailed review of the costs for IEX to provide depth of book market data, physical connectivity and logical connectivity, co-founder and CEO Brad Katsuyama said in a statement that “exchanges owe us all some answers”. 

IEX concluded in its review that for depth of book data products, incumbent exchange operators including NYSE, Nasdaq and Cboe, are charging fees that are between 900-1,800% more than IEX’s costs to offer the same product. In addition, for physical connectivity in data centres, IEX said incumbent exchanges charge fees that are between 2,000-4,000% more than IEX’s costs to provide the same connectivity.

A spokesperson for NYSE told The TRADE: “While IEX is free to cherry pick and conflate their numbers, the fact remains that the all-in cost to trade on NYSE is lower than IEX.”

Similarly, a spokesperson from Cboe said: “The IEX Group report fails to take into account significant differences in transaction fees when comparing IEX with the leading exchanges that operate fully displayed markets. By focusing exclusively on direct expenses the study overlooks the full range of costs incurred to attract displayed liquidity and operate trading platforms that produce valuable market data. It also ignores the significant value of exchange data that contributes to meaningful price discovery. Transparent markets are valuable to investors and our charges reflect that value.”

The bold move by IEX makes it the first US exchange operator to publicly disclose its costs of producing market data and connectivity to investors, which Katsuyama has described in the past as being “almost complete cloaked in darkness”. 

“The costs IEX incurs to offer these products and services include the same basic costs incurred by other exchanges,” Katsuyama said about IEX’s report. “The potential profit margins that are implied by our study, on their face, contradict the claims by the major exchanges that the fees they charge the industry for their market data and connectivity are fair, reasonable, and competitive.”

At the same time, Phil Mackintosh, chief economist at Nasdaq, stated in a blog post published the same day as IEX’s costs disclosure that all-in-costs to trade, including the costs of colocation, data and trading per share, are under 10 mils (or 0.1 cents per share) across all venues, Cboe, Nasdaq, NYSE and IEX.

“Interestingly the “free data and colocation model” offered by IEX is the most expensive exchange on a per-share basis,” Mackintosh added. “Given the fundamental role of the market is to allocate capital efficiently, it’s a little bizarre that professional asset allocators think creating a free-rider problem is good for markets.”

The battle over exchange market data costs and connectivity came to a head in October, after the US financial regulator hosted a roundtable discussion with industry heavyweights on the issue. Broker-dealers, trading firms and IEX, heatedly argued the fees that exchanges charge for depth of book data, as well as SIP data, are grossly overpriced considering how little they supposedly cost to produce.

Major Wall Street firms, alongside IEX, have urged the Securities and Exchange Commission (SEC) to examine the fees in terms of revenues and costs, but incumbent exchange groups countered that for full transparency, every firm must reveal their operational costs. 

Against this backdrop, a band of institutions in the US announced plans earlier this month to launch MEMX, or Members Exchange. MEMX aims to reduce fixed costs of trading with a low-cost fee structure, a move that some in the industry suggested could be a ploy to bring the issue of costs to the incumbent exchanges.

“All exchanges, including IEX, have a distinctive responsibility to help maintain a healthy capital markets ecosystem and must be held to a higher standard than any other participant. With this unique regulatory position comes the responsibility to prove that the prices they charge their members are fair, reasonable, and promote rather than undermine competition. The exchanges owe us all some answers,” Katsuyama concluded.

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