IMD Chicago 2011: Market Seeks Truce on Exchange Fees

In the ongoing battle over exchange data fees, where end-users still want to pay less for data they ultimately create and exchanges seek to justify fee increases, some market participants are looking for ways to meet in the middle to keep both sides happy.

Some end-user firms expressed concerns over how much they pay exchanges for data—and whether they should be charged for the data in the first place. “It actually drives me nuts that we have to pay for market data at all, because the trading firms paying for the market data are the firms generating the orders and creating the market data,” said  Peter Nabicht, chief technology officer of Allston Trading, at last week’s IMD Chicago event.

However, Elizabeth Freeman, director of information products management at CME Group, noted that exchanges incur significant costs in running the marketplaces that consolidate those orders into a market data stream, and disseminating that stream to subscribers. “We have the trading fee waiver, we have the user-licensing agreement, and we are always trying to work with our customers to make sure that we’re not being unfair—at least we don’t think that we’re being unfair,” she said.

However, Scott Redstone, vice president of data acquisition and vendor management for electronic trading data at Bank of America Merrill Lynch, proposed a novel alternative: Pay more for data with more flexibility and fewer constraints, and have exchanges foot part of the bill for reporting data usage.

“Exchanges have something of value, and… we’re not averse to paying for it, but the amount of time and energy it takes to track that and pay that seems to be wasted money on our part,” he said. “I think we’d be willing to actually pay a little more for the beneficial user and not have to go through these crazy machinations to try and figure out who used [the data],” Redstone said. “If it costs me $100,000 to report $200,000 worth of use, then I’ve spent $300,000—of which $100,000 is basically wasted money. I’d say to the exchanges: ‘Let’s split the difference.’”

Redstone described how BAML recently audited all of its market data charges and not only found that the bank was paying “something like $12 million a month,” in data fees, but also that one developer was being charged “thousands and thousands of dollars” for receiving the same data from seven separate distribution points.

And moderator Tom Etheridge, managing director of market data services at Jordan & Jordan, warned against completely wiping out a revenue stream that can account for up to 30 percent of an exchange’s business: “That could lead to increased execution and clearing costs—is that what you really want?” he said.