IMD Chicago: Exchange Data Fees, Policies Hindering New Entrants

Exchanges are struggling to create data polices that accurately reflect the "computational use of data" in modern-day trading, said Tom Etheridge, managing director at New York-based consultancy Jordan and Jordan, citing the trend of venues implementing flat data licensing fee models, which mean a small startup proprietary trading firms would pay the same as larger firms for non-display data.

"I don't dispute that exchanges have the right to make money from the use of their data. The challenge is finding commercial models that do not create a barrier to entry to the prop shops that may be tomorrow's Goldmans or Getcos. You don't want to stifle those firms at birth," Etheridge told attendees, though he added that the burden of agreeing fair policies should also rest with data consumers, who currently appear unwilling to engage with providers on ways to work together in alignment.

The cost implications of "making sure our competitors don't have more information about what happened yesterday than we do" are a challenge, particularly in periods of low volatility, said Raj Mahajan, chief executive of Chicago-based high-frequency market maker Allston Trading. "Exchanges are looking to make up for falling transaction revenues, but it's counterproductive: if you bring the cost of data up so firms cant opt in, that will hit your bottom line," he said, predicting that market data fee increases will continue-at least until volumes rebound.

While the panel agreed that smaller firms are heavily impacted by exchange data fees, larger firms are also feeling the impact, said Barbara Passy, authorized officer and business advisor at UBS Global Asset Management, who says that UBS has a rigorous market data usage monitoring program to ensure the firm gets the best service available at the time for the best possible price.

"We understand the burgeoning costs of these exchanges, and we make sure from outset that our terminal users' costs are visible and transparent," Passy said, likening the fee increases to "bugs that eat a little at a time, but steadily, like a termite. It doesn't sound like a big cost, but when you add it all up, you get huge costs," she said.

Stephane Dubois, founder and CEO of San Mateo-based on-demand data provider Xignite, agreed that managing market data usage is an effective way to find cost savings. "The challenge isn't buying cheaper data, because people spend tens of millions of dollars on data. The question is how to rationalize the spend you have-how to ensure you don't buy the same feed twice. It's not about substituting sources, but just optimizing that spend," Dubois said.