New Perspective: Exchange Data Fees Under Fire

At this year's Inside Market Data Chicago event, panelists and audience members continued the ongoing debate over how—or even whether—exchanges should charge end users for market data. This is an argument that doesn't seem to have an end in sight, as market data fees account for 30 to 40 percent of exchanges’ profits, and the end users haven't found a way to bridge that gap. By Anthony Malakian

Peter Nabicht was peeved. The chief technology officer (CTO) of market-maker Allston Trading didn't understand why firms like his—the firms that created the market data—had to turn around and pay an exchange for that data, in addition to tracking it.

"It drives me nuts that we have to pay for market data at all, because the trading firms paying for it are the ones generating the orders and creating the data," he told the audience at the Inside Market Data Chicago event last week.

"Why do we have to pay for market data for developers and operations, and even for our traders, when we are also paying the fees for trading that comes from getting that market data? In my mind, paying for market data seems like nickel-and-diming, when what we should really be doing is making data available for all the users to trade to drive liquidity and volume."

While some participants agreed with Nabicht, at least one did not. "In addition to the revenue that we take, we incur an expense to collect and aggregate the data. So we have to look to balance those two sides," said Elizabeth Freeman, director of information products management for the CME Group. "So 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."

So while Nabicht and Freeman defended opposing fee models, some favored a more balanced approach. Bank of America Merrill Lynch's (BAML’s) Scott Redstone, for example, found the middle ground between the exchange point of view and those views of the trading firms.

He said that BAML recently did an audit of all its market data charges, which came out to be about $12 million a month. Redstone said there is nothing wrong with spending money on market data, but pointed out that in one instance, a developer was being charged seven different times for the same set of data between the various distribution venues that BAML uses.

"We are not averse to paying, but the amount of time and energy it takes to track that and pay that seems to be wasted money on our part. So I think we'd be willing to actually pay a little more rather than going through these crazy machinations to try and figure who used the data,” he says. "That's how exchanges structure their business. They are there to make money—we’re all here to make money.”

Redstone says the exchanges have something of value, and the firms see the value of it. He says he’s not averse to paying for it. “What we’re averse to are these arcane methods of having to track data. If it costs me $100,000 to report to you $200,000 worth of use, now I’ve spent $300,000 and basically wasted money. I say to the exchanges, ‘Let’s split the difference.’ I think there is a more efficient way to do business.”

Some advocated pressing the exchanges to improve their response times. Tom Etheridge, managing director of market data services for Jordan & Jordan, said that BATS, for example, has a better response time when it comes to getting data turned on due to its smaller size and resultant nimbleness.

Etheridge also weighed in on the fee debate, pointing out that a move to wipe out a revenue stream that makes up an estimated 30 percent of an exchange's business could lead to increased execution and clearing costs. He then asked the attendees: “Is that what you really want?"