These products represent a burgeoning line of business for exchanges.

The advent of algorithmic and high-frequency trading has upped the ante for market data services, enabling exchanges to carve out new revenue streams from the vast stores of information they produce each day.

Exchanges are repackaging that data into forms that can be fed into algorithmic or HFT trading strategies, encompassing multiple assets, machine-readable news and other rich content.

“As a core product, this is crucial to how exchanges work,” said Dr Jock Percy, chief executive of Perseus Telecom, a trading connectivity firm. “As a source of revenue this is significant. Trading applications consume volumes of market data before the first order is made or even executed.”

Under the new paradigm for data delivery, developers can program applications to select specific data sets, obtain them on demand and process them instantly, instead of combing through very large data sets of historical tick data.

“Unlike traditional means of market data delivery, such as feeds and files, on-demand market data distribution gives applications a way to cherry pick the specific subset of data that the application needs with pinpoint accuracy,” said Stephane Dubois, chief executive of Xignite, a financial market data cloud provider.

For exchanges, data is mission-critical. “Real-time market data is at the core of the business for exchanges,” said Vladimir Kislenkov, trade routing product manager at CQG, a provider of analytics and order routing software.

“With algo trading increasing, and algos becoming more and more adaptive and sophisticated, traders are looking to test algos, taking historical data into account,” said Kislenkov. “All the lit exchanges are producing more data and making that historical data available for back testing. It’s definitely becoming a big part of their business.”

Growth Business
Market data, though, has always been a core business for the Bombay Stock Exchange (BSE).

“We would like to be involved in the entire range of securities processing—from market data to order management to risk management, and all the way through to trading, clearing, settlement and other record keeping functions,” said BSE spokesperson Ketan Mehta.

Xignite’s Dubois added: “The data business is something exchanges can invest in and grow. Many realize there is a lot of data generated and they need to figure out how to deliver and monetize it.”

Xignite’s XigniteOnDemand is a cloud-based system designed to help financial marketplaces grow revenues for their market data businesses and accelerate product launches.

“Exchanges have historically relied on third parties to deliver market data,” said Dubois. “Now it’s possible for exchanges to go direct to clients and provide more value-added services without relying on a third party.”

NYSE Technologies, the commercial technology division of transatlantic exchange operator NYSE Euronext, and Xignite are collaborating on a new service providing access to real-time, historical and reference market data for all NYSE Euronext markets via the internet.

Called Market Data Web Services, the new service is geared towards non-latency sensitive clients and those in remote locations.

The first phase offers real-time retail reference pricing for NYSE, NYSE MKT, and NYSE Arca markets. The second phase, scheduled for the third quarter of 2012, will offer NYSE Bonds data, NYSE Liffe Level 1 and Level 2 data, and NYSE and NYSE MKT Order Imbalances.

“Market data is a big business for us,” said Don Henderson, chief technology officer at NYSE Technologies. “It’s a combination of proprietary assets that we deliver to the market to facilitate trading decisions, and provide access to real time and historical data.”

Market Data Web Services, which is powered by XigniteOnDemand, allows clients to access only the content that they need for a wide range of purposes, from developing trading solutions for financial web portals to enabling internet-powered devices.

Market Data Web Services provides clients with a third alternative for market data delivery, in addition to co-locating in NYSE Technologies’ data center in Mahwah, New Jersey, or connecting to its Secure Financial Transaction Infrastructure network, which gives a single point of connection to a wide array of markets.

“We want to build products and differentiated market data streams that make it easier for customers to trade in any market or asset class,” said Henderson.

Quality Is King
Access to historical data in real time is critical to testing of trading strategies before putting them into production.

“Historical data replaying in a real-time environment is used to test algorithms in a more authentic scenario,” said Henderson. “Data quality has to be so much better than it has at any other point in our industry’s history because, for many customers, the quality must be perfect and delivered appropriately or they will throw it away.”

High-frequency trading applications are being provided with state-of-the-art data feeds that eliminate the need to consolidate disparate data from multiple exchanges.

In addition to selling their own data, they are pursuing distribution deals with other exchanges to make their data available to each other’s customers.

Nasdaq OMX Group’s UltraFeed, for example, is a data feed that aggregates all North American equity, options, futures and index data feeds.

With its acquisition of the business of RapiData, transatlantic exchange operator Nasdaq OMX is offering machine-readable news, which is being consumed by a greater variety of users for a growing number of reasons.

RapiData delivers U.S. government and other economic indicators to a variety of market participants, giving them instant access to events that are incorporated into algorithmic trading systems.

Potential beneficiaries include trading firms that incorporate macroeconomic news into their trading algorithms, conventional traders who use machine-readable news to manage risk and institutional investors who seek long-range strategies, liquidity opportunities and target investments.