Conflicts of Interest in Data Cited11.21.2017
Its all about the data.
Traders need data like the automobile needs gasoline – one cannot function without the other. And for traders, the one who gets the best or premium data the first can usually execute the fastest and most efficiently. But premium data costs money. And so does getting it the fastest. And for those who cannot afford the best premium data there are always the free standard feeds.
And recognizing the need for data and slumping execution profits, the exchanges have gotten into the data provision business. Selling market data has been big business for the bourses – who have unlimited access to their data streams and the economies of scale to distribute them to customers. Data is often sold in tiers – the fastest and best data for the highest price – and so down the data chain. This can leave smaller institutional and retail investors at a disadvantage as they cannot bear the high costs of data.
Survival of the fittest, right?
Well, in its recent report, “US Equity Market Data: How Conflicts of Interest Overwhelm an Outdated Regulatory Model and Market Participants,” Healthy Markets Association noted there are conflicts of interest as to data provision by the exchanges and that these issues “overwhelm an outdated regulatory model.”
The 80-page report, which was shared with Traders Magazine, provides a comprehensive review of the regulatory framework, uses, and costs for both public and private US equity market data.
Amongst other findings, the Healthy Markets Report found that:
- the exchanges that oversee the government-mandated public market data process are competing directly with that public data by selling their own data and connectivity offerings;
- market participants rely on both the public and private market data to stay competitive and fulfill their regulatory obligations;
- the non-competitive forces for market data and connectivity create significant upward pressures on prices, wherein both public and private data and connectivity prices have skyrocketed in recent years (e.g., a market participant who wanted the fastest connections with the most relevant trading information for BATS, NYSE, and Nasdaq has seen its costs rise from $72,150 per month on June 1, 2012 to $182,775 per month on June 1, 2017);
Healthy Markets also said that despite admitting that exchanges’ tape revenues and private data and connectivity products are material to their businesses, none of the major exchanges clearly discloses the sizes of these revenues; and the vast majority of exchanges’ data and connectivity changes and fee hikes are implemented with effectively no regulatory scrutiny.
“The outdated regulatory regime combines with unchecked conflicts of interest to simply overwhelm both regulators and market participants,” said Tyler Gellasch, Executive Director of the Healthy Markets Association. “The current market data system is little more than a government-sanctioned, private tax on all market participants to the benefit of a handful of exchanges. Increasing transparency and reducing the conflicts of interest would would reduce costs and improve the markets.”
Based on these and other findings detailed in the report, Healthy Markets offered recommendations that regulators could take to improve the regulation and oversight of market data.
- Requiring justification of data, connectivity, and fee changes for both public and private feeds, and thoroughly review all such changes for fairness, reasonableness and potential discriminatory impacts and undue burdens on market participants;
- Expressly acknowledge the governmental function of the SIP data feeds, and so require exchanges to return all revenues in excess of expenses incurred to operate and maintain the SIP data processing;
- Revise NMS Plan governance to include voting representation from investment advisers and broker-dealers;
- Eliminate “one vote per exchange registration” and replace with “one vote per exchange group”;
- Simplify pricing models within the SIP to eliminate the need to count end users, accounts or terminals, and eliminate the distinctions between professionals and non-professionals;
- Establish clear parameters for market data audits by exchanges or their representatives;
- Increase the transparency of public market data revenue collection and costs so that the public is aware of both on a quarterly basis;
- Improve the relative value of the SIP feeds by expanding the information to include order depth of book information;
- Minimize the time discrepancies between when market participants may receive information from the private data feeds and the SIP feeds;
- Clarify that rule filing requirements apply to all data derived from an exchange’s role in the national market system and marketed to anyone, including a data vendor, whether by the exchange or an affiliate and that standards for market date filings apply;
- Require all exchanges to provide detailed financial information regarding their public data fees, their revenues and expenses related to public and private data, as well as connectivity or other related products and services;
- Increase the transparency and disclosure of enhancements to SIP resiliency;
- Mandate monthly public reporting of latency across SIP plans and how that compares to the private market data products offered by the exchanges; and
- If competing SIPs are permitted, establish protections to mitigate conflicts of interest and abuses that may be created by differences between the SIPs.
“The exchanges essentially set the rules for what’s covered by the public data feeds, and at what cost,” said Christopher Nagy, Director of Healthy Markets. “But the exchanges also sell data and connectivity services that directly compete with the public market data and they make millions from both the public and the private offerings.”
The Healthy Markets’ Market Data Report follows on the heels of a recent report from the U.S. Treasury Department that specifically called the market data markets “non-competitive” and urged numerous reforms.
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