Industry bodies call for tougher regulation to address “excessive” market data fees
Asset managers are calling for stricter rules on market data pricing and licensing, calling it an “essential economic infrastructure” for market participants that ought to be regulated similarly to privatised railways and telecoms grids.
Three industry bodies – the International Council of Securities Associations (ICSA), the European Fund and Asset Management Association (EFAMA), and the Managed Funds Association (MFA) – say in a new report that internationally recognised principles must be set up to address “excessively high market data fees and unfair licensing provisions”.
They say that exchanges have been hiking market data and related fees year after year, charging several hundred times above the cost, all while global computing and storage costs decline.
These high prices have forced investors, banks, brokers and dealers to scale back their market access and products. This means only the largest players can afford data, driving out small players and preventing new ones from entering the market.
“Exchanges’ control of the raw market data generated on their platforms allow them to charge market participants ever greater rents with little consequence,” reads the report, noting that investors have a need to purchase data from exchanges in order to satisfy their best execution, order protection, and fiduciary duty obligations.
The report goes on: “The strong position of exchanges in the economy is similar to companies in sectors operating essential economic infrastructure, such as power and telecommunication grids, airports and railways. When essential economic infrastructure is privatised, regulatory requirements are normally imposed to ensure their market power is not abused.”
The report estimates the cost of producing market data ranges from EUR1.5 and EUR10 million per exchange, while the average market data revenues at large US, European and Canadian exchanges are far above EUR100 million per exchange, a figure that is rapidly rising.
Meanwhile, investors are feeling the pain. In a recent survey by IPUG and Cossiom based on 63 European buy and sell-side firms, 40 to 50 per cent of all data users had reduced their data purchase across regions, while 80 per cent knew of cases where financial institutions had eliminated or curtailed investments, due to high costs.
"The increased cost of data is forcing many asset managers to significantly scale back data purchases. This leads to less informed markets and decreased competition. The high cost of data also negatively affects the net performance of investment funds and, by way of consequence, the return to investors. The recommended principles help remedy this situation and address those concerns," says Tanguy van de Werve, EFAMA director general.
The report recommends three principles for regulating market data costs. Firstly, the price of market data and connectivity should be based on the costs of producing and distributing the data with a “reasonable mark-up”. In addition, trading venues should standardise key market data contract definitions, and licensing contracts should be simplified to ease the burden of administration on broker-dealers.
“Excessive market data fees harm investors and their beneficiaries, including pension funds who require reliable returns to fund workers' retirement,” said Bryan Corbett, president and CEO of Managed Funds Association.
“Access to market data enables investors to participate in capital markets, increases liquidity, and better serves all market participants. Market data fees must be closely related to the production costs of the data in the US and around the world."
Nevertheless, exchanges argue that their fees are reasonable, and that rising costs are not affecting investors. The Federation of European Securities Exchanges (FESE), the trade body for exchanges, said in a white paper last year: “Exchanges are not “the last mile” of market data distribution: changes in market data costs are therefore not necessarily due to exchanges, which are not responsible for mark-ups and/or other fees charged by other participants in the value chain.”
Furthermore, FESE argues that current charging structures for market data are “unlikely to have significant detrimental effects on market outcomes for investors”.
“Fees charged by fund managers to end-investors typically range between 0.3 to 1.5 per cent of assets under management, whereas the portion of such fees attributed to market data only represent 0.001 to 0.005 per cent. Fees ultimately charged by large brokers to end investors represent 2 bp of value of trading, and market data fees represent 1.2 per cent of such fees charged to end investors,” said FESE.