On 25 October 2018, major US exchange operators went head-to-head with Wall Street during a roundtable discussion hosted by the Securities and Exchange Commission (SEC), as part of a two-day event on an issue at the heart of market controversy: Exchange market data and access fees.
At the heart of the debate are the SIPs – or Securities Information Processor feeds – which are real-time consolidated feeds of trade and quote data, including ‘top of book’ quotes for stocks consisting of each exchange’s best bid price, thus providing key information on the national best bid and offer (NBBO) for NMS stocks. Alongside this, exchange operators offer direct data feeds to subscribers which contain data on trades, quotes and prices other than the best bid and offer, known as the ‘depth of book’ information.
Investment banks, broker-dealers and trading firms argue that SIP and direct data feeds are grossly overpriced considering how little they allegedly cost to produce and how important they are in terms of regulatory compliance. The first roundtable of the day included participants Doug Cifu, CEO of Virtu Financial, Chris Concannon, president and COO of Cboe Global Markets, Mehmet Kinak, the global head of systematic trading and market structure at T. Rowe Price, and Brad Katsuyama, co-founder and CEO of Investors Exchange (IEX). Those panellists not representing exchange operators, with the exception of IEX’s Katsuyama, heatedly argued that market participants cannot rely solely on the SIP data, and therefore must purchase direct data feeds in order to stay competitive.
“Given the realities of the modern electronic market, no market participant that desires to route an order effectively and consistent with its best execution obligations – either as a principal or an agent – can do so without paying for full depth of book market data from 11 exchanges (again, NYSE, Cboe and Nasdaq) and connectivity from them all,” Virtu’s Cifu said in his opening statement.
“While the SIP is useful and necessary for some parts of our business, we and every other modern market participant are compelled to purchase proprietary data feeds and exchange connectivity. Virtu’s clients take their fiduciary responsibilities very seriously and hold all their brokers to the highest standards available, including using all publicly available information when routing orders.”
Cifu claimed that exchanges charge a total of $1,188,000 every year for six cross connects, which are cables that plug into the exchanges for connectivity. He added that his firm contacted a cable vendor in Hicksville and bought one for just $189 – it can even be found on Amazon for $89. Six cables in total, one primary and one backup, to connect to NYSE, Nasdaq and Cboe, means the cost to the exchanges on this basis, in terms of providing access and connectivity, could be as low as $1,300.
The actual costs of producing the SIP feeds, providing market access and direct data feeds are unclear, and were described by IEX’s Katsuyama during the roundtable as being “almost completely cloaked in darkness”, with his exchange estimating that the mark-up by NYSE, Nasdaq and Cboe for providing connections to exchange data centres could be as high as 3,000%.
The exchanges, specifically in this case Cboe’s Concannon, argued that SIP revenue has been flat-to-down over the past decade and that firms have a choice when it comes to purchasing direct data feeds and market access due to increased competition. Concannon took no prisoners when delivering his opening statement to the SEC, highlighting that the debate has led to a battle between Wall Street and the regulated exchanges around profits and economic frets.
“When I first heard about this roundtable several months ago, I was very hopeful,” Concannon said. “I thought this will be the opportunity to make some real changes to the SIP and that we would come here with productive proposals and offer our help. However, in light of the recent unprecedented and unwarranted public assaults on exchanges, we now have less appetite for compromise. I come here with no proposal in hand and little willingness to suggest compromise.”
Unwillingness to compromise
Representing the buy-side was Mehmet Kinak, a 19-year T. Rowe Price veteran who currently heads up global systematic trading and market structure for the asset manager. He slammed Concannon’s comments about unwillingness to compromise as representative of an industry which favours regulated exchanges over investors.
“What concerns me is an ecosystem that slants one direction over another, [the exchanges] set the rules and we have to follow them,” Kinak told the SEC. “Now when [Concannon] comes in here and says, ‘I’m not looking for compromise’, that’s basically the kind of system we have now. They get to set the rules for us, and we basically have to follow them. That’s a tilted system which needs to be addressed. An ecosystem of a for-profit company that can self-regulate itself and police reform that allows it to get flow is a terrible cocktail that has been created, unfortunately, and it needs to be addressed.”
Kinak urged the SEC to consider that purchasing SIP and direct data feeds is a best execution, and therefore regulatory, obligation. He added that if T. Rowe Price’s brokers do not have access to, and are not using the most robust data feeds, they do not get flow from his firm. The way to deal with this, he said, is to lower the costs by encouraging competition.
“As far as brokers having a choice as to whether to use the SIP or direct feeds, that doesn’t exist,” Kinak said. “There is no choice there. If a broker is routing using just SIP data they are not routing my flow. They are not eligible to get my flow, it’s not negotiable. Trading is a zero-sum game and if I’m slower than the other person I lose – that’s it. And this is a best execution obligation, we are obligated to try and price best execution with every order that we have.”
Concannon made the case that it is not market data and access fees that are increasing, but client demand for capacity, speed and content. When countering calls for exchanges to reveal the true cost of providing such services to the industry, Concannon said that if the SEC wants full transparency, “everybody has to show their economic rent so that we can compare them”. Referring on several occasions to the controversial maker-taker debate and the fact that exchanges pay brokers millions of dollars in rebates every year, he highlighted that exchanges were then accused of conducting a coordinated effort to distract from the main issue.
An outspoken critic of the alleged monopoly and regulatory advantages exchanges receive, IEX’s Katsuyama co-founded a competing exchange to counter that culture, which receives a portion of the SIP data fees that are generated. He called on the SEC to examine the fees based on full transparency of revenues and costs to manage the SIP, provide direct data feeds and exchange access, and operate such systems.
“Law and regulation gives exchanges a special status. Because of this status and the need for brokers seeking best execution to trade actively on all major exchanges in order to meet obligations to their clients, the exchange families enjoy a regulatory monopoly on the sale of their products,” Katsuyama said.
“The market data they sell is not generated so much as regenerated from the trading activity of their own members. Further, because the exchanges also control the so-called public consolidated data feeds, by design they have ensured those feeds are sub-optimal for sophisticated traders, perpetuating their product monopolies and a multi-tier system of market data.”
A bold claim, but one that underlines just how deep-rooted the debate of market data cost is. The SEC has a tough decision ahead of it in terms of which side it agrees with. If exchanges are forced to disclose their costs of operation, should sell-side institutions be held to the same standard? Are the fees imposed by the exchanges for market data and access justified? And is there enough competition in the market to prevent a monopoly that exchanges supposedly enjoy?
Regardless of its decision, the battle between Wall Street and the regulated exchanges – with the exception of IEX – will likely rage on, with little room for concession on either side.
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