Securities regulators are agnostic on the issue of whether market data costs have gotten out of control. The financial services industry is eager to convert regulators to the view that those costs have risen dramatically, and that some form of price control is desperately needed.
Late last year, the Canadian Securities Administrators (CSA) issued a report that finally takes on a long-standing industry complaint: market data costs have become too high, and regulators need to step in to help curb them. In that paper, the CSA presents itself as neutral on the issue. It compares data costs in Canada with those in the U.S. and Europe, and concludes that it’s not clear that Canadian costs are excessive.
The CSA report says that data costs in Canada are comparable with those in European markets. And although these costs are much higher than those in the U.S., the gap may be explained by the difference between the size of the markets; there are greater economies of scale in the U.S.
The brokerage sector isn’t buying this conclusion.
Indeed, at a time when much of the financial services industry is struggling to break even, all costs are under scrutiny. And the cost of market data is particularly aggravating because it’s not just the overall size of these costs that firms are worried about, it’s also the growing disconnection between the cost of data and the value they provide.
Dealers feel compelled to buy data from all the trading venues in order to ensure that they are meeting their “best execution” obligations. As a result, some firms feel that they are being forced to subsidize various alternative trading systems (ATSes) that don’t generate much trading volume – and, therefore, don’t contribute much value through their data.
TD Securities Inc.‘s comment argues that market data is a “public good” that’s produced by participants in the market. The value that marketplaces have provided in the past is aggregating and distributing that data, it says, which is worth paying for.
However, the TD Securities comment notes, with the growth in the number of trading venues, the task of aggregating the data from these various markets has reverted to the consumers of the data. So, the value-added has diminished, while the costs have risen. And, ultimately, the TD comment suggests, some of these upstart ATSes are being subsidized by their ability to charge excessive fees for their data.
Says the TD comment: “After all, one has to ask how a marketplace can last for several years with less then 2% or 3% market share in Canada without ancillary revenue such as market data. To the chagrin of market participants, not only are some of these small markets surviving, they are launching second platforms.”
According to the latest data from the Investment Industry Regulatory Organization of Canada, most of the existing ATSes have less than a 3% market share of the trading volume in Canada – and a handful of ATSes account for less than 1% of the volume.
@page_break@Apart from the complaint that dealers aren’t getting value for money, there’s also a general sense that the costs are objectively too high. Many of the comments submitted on the CSA paper argue that the CSA is off the mark when it concludes that there’s no clear evidence that costs have become excessive.
The comment from the Investment Industry Association of Canada (IIAC), which has been lobbying regulators to address the cost of market data for a couple of years now, says that it is “surprised” with the CSA report’s conclusions. The IIAC comment insists that the CSA’s comparisons with other markets aren’t entirely valid, and that the CSA understates the comparative costs.
Even accepting the CSA’s methodology, the IIAC comment adds, justifying the cost disparity between Canada and the U.S. based on the difference in the size of the markets “would lead to absurd results when applied to any product other than market data and should not form the basis of a regulatory policy analysis and recommendation on this issue.”
Not surprising, the CSA report’s conclusions get a more welcoming reception from some of the marketplaces. They support its finding that Canadian market data isn’t clearly too pricey and dispute the assertion that firms are forced to buy this data whether they see value in them or not.
Notwithstanding this fundamental dispute over whether Canadian market data is excessively expensive, the CSA report sets out several possible options for regulatory intervention, including setting caps on fees, establishing a market utility to provide the data at cost and enhancing the transparency of the fee-setting process.
Assess the alternatives
Here, too, the CSA report doesn’t favour a particular approach, leaving it up to the industry to assess the alternatives.
The industry isn’t unanimous, either, although several comments that say market data costs are too high do favour the creation of a public utility, which would operate on a cost-recovery basis, as the best option to ensure that the distribution of data is fair and equitable. However, there are concerns that such an approach could be tricky to set up and run – and it could prove costly in its own right, too.
There is also some support for setting a minimum threshold that a marketplace has to reach before it can begin charging for its data. This, by itself, would not be enough, the IIAC comment says. It maintains that there must be a cap on “core data” fees and a formula developed to value the data sold by each marketplace.
It remains to be seen what, if anything, regulators decide to do about data fees. But at a time when dealer costs are under a microscope, anything that helps curb waste will surely be welcome.
© 2013 Investment Executive. All rights reserved.