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This article appears in the March 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

For years, industry trade groups and others have complained about the cost of market data in Canada and the monopoly pricing power of the marketplaces that produce and distribute data.

To meet regulatory obligations, industry firms are effectively forced to pay for data from a growing crop of trading venues, whether they value that data or not. The data has become an increasingly important source of core revenue for the marketplaces, rising to almost 50% in 2019 from 40% in 2006, according to the Canadian Securities Administrators (CSA).

Industry firms are understandably critical of a rising, uncontrollable cost, but critics say the issue disadvantages retail investors too.

In response to a consultation launched in late 2022 by the CSA into market data issues, Cboe Global Markets Inc. (and its subsidiaries, NEO Exchange Inc. and MATCHNow, an alternative trading system) argued that retail investors are harmed by the current approach.

Given the high cost of market data, retail investors and financial advisors can only access trading data from the venue where a particular security is listed, not the full scope of trading activity in that listing, Cboe said.

“Without a consolidated, holistic view of market pricing, liquidity and volume, the ability of retail [advisors and investors] to make sound investment decisions is critically impaired,” Cboe’s comment stated. This can result in uninformed investing decisions and poor trade-execution quality, it added.

BMO Capital Markets echoed that sentiment: “Real-time market data is to trading as oxygen is to life; it’s a must have. From the retail trader to the world’s most sophisticated investors, from academics to financial planners, all need access to timely, accurate and reliable data.”

This need for data, coupled with the data providers’ pricing power, underpinned industry complaints about the existing system.

“It is this monopoly power that allows venue operators to increase prices steadily over time without losing customers,” BMO said. “[S]imply put, exchanges are selling oxygen.”

TMX Datalinx, the data services division of TMX Group Ltd., agreed in its submission that there’s room for improvement concerning real-time market data, but encouraged regulators to conduct a “robust” cost-benefit analysis before altering current arrangements.

TMX Datalinx argued that marketplaces “are already subject to significant ongoing regulatory obligations with respect to fee changes” for regulated users, such as a requirement that fees not create barriers to access. The company also noted that it provides some of the lowest market data fees for non-professional subscribers among its international peers and that commercial users “have not seen escalating costs.”

Cboe said that the availability of consolidated data also is critical to public companies and exchange-traded products. Lack of comprehensive data can understate an issuer’s true liquidity, Cboe’s submission said, limiting its appeal to investors and harming its market value.

Cboe also suggested that limited market data can undermine overall market liquidity and resilience, as an outage at a major trading venue can leave traders who don’t have data on the activity in other markets high and dry.

“This harms the entire marketplace,” Cboe said.

Other feedback to the CSA consultation noted that foreign investors typically are charged even more for data from certain Canadian markets, which not only undermines the reputation of Canada’s markets, but also drives order flow for interlisted securities to the U.S.

Regulators are aware of the challenge of fair access to market data. After the CSA held a public consultation on market data issues in 2012, the regulators developed a methodology for overseeing the provision of market data.

However, these efforts have not resolved the complaints, and the responses to the latest consultation reinforce the complexity and contentiousness of the issues. Regulatory action risks creating winners and losers: curbing data costs to retail investors and industry firms would cut into a major revenue source for marketplaces.

Not just the cost of the raw data is at issue. Industry firms also pointed to access fees, location fees and other extras.

This isn’t only a Canadian concern. Last spring, the International Organization of Securities Commissions published a report on costs of and access to market data around the world. That report found opposing views on the need for regulatory oversight of market data and failed to identify common principles to help regulators set requirements in this area.

The CSA’s consultation laid out several options, such as increasing transparency regarding fees and adopting an entirely new model for providing market data. The submissions showed there’s no easy, consensus solution.

For example, the Canadian Security Traders Association Inc. (CSTA) agreed that the costs of data are too high and that regulatory intervention is warranted. However, its members are divided about what that intervention should be.

The CSTA’s submission suggested the industry consider two options: regulating the provision of data as a utility, requiring it to be priced based on the cost to produce plus a “reasonable” return; or creating a centralized securities information processor (SIP), as the U.S. markets have done, to ensure access to comprehensive data for retail investors and other amateur users while also encouraging greater competition among trading venues.

“Our members are divided on which option is best,” the CSTA’s submission stated. Those that favour utility-like regulation see it as the “more pragmatic approach,” while supporters of a SIP model believe it would better address the lack of competition.

The comment from the Investment Industry Association of Canada recommended creating an independent, regulated information processor to consolidate and distribute data using a cost-recovery model.

In addition to addressing the problems with the existing model of producing and distributing market data, Cboe argued that regulators should prioritize access to consolidated, real-time market data for retail investors and advisors. To that end, it recommended that regulators require investment firms to provide consolidated data to their clients.

“Without such a mandate, it is highly unlikely that dealers will voluntarily provide [retail investors and advisors] with access to consolidated data,” Cboe said.

Mandating the provision of consolidated data to retail investors “will only be achievable if today’s cost prohibitive and pass-through fees are addressed,” it added.