Don’t blame exchanges for “expensive” market data says Deutsche Börse

It is often said that market data in Europe is too expensive, but it would be unfair to blame that solely on the exchanges, according to Christiane Baumgarten, vice president, market data and services at Deutsche Börse (right). With the consolidated tape mandated by MiFID II due by 2016, market data is at the centre of the European Commission’s plans for a better trading environment in Europe.

“Banks seem to refer to overall market data as a cost when they speak about significant market data cost increases,” Baumgarten told Banking Technology. “The costs are actually divided between exchange fees, market data vendors, third party providers, licences costs for employees, data cleansing, access to multiple sources of data, connections and feed handlers and other. The image of exchanges being the source for all costs and charging too much for market data is not based on the facts.”

The cost of market data in Europe has been a contentious issue for a long time. Earlier this year, Jerry Avenell, co-head of sales at BATS Chi-X Europe, called for regulatory action to force prices down, a call that was echoed by buy-side body the Investment Management Association, which asked for a cap on the total level of revenues that stock exchanges can make on market data. The IMA further called for the EC’s Directorate General for Competition to investigate the case as a possible example of “market failure”.

However, according to Deutsche Börse, these calls fail to take into account the way the data is distributed. For example, it is widely known that the US has cheaper market data than Europe, but the exchange insists this is not a fair comparison – it estimates that there are 13 venues in the US that receive a fee for market data, compared to 66 companies in Europe.

The same point was recently made by Miroslav Budimir, senior vice president at Deutsche Börse during a public debate at the TradeTech conference in April, but he was shouted down by fellow panellists and taunted by members of the audience. Baumgarten explains that the figure 66 refers not to trading venues (as was incorrectly assumed by some participants at TradeTech) but to all companies that receive money for market data, including OTC data providers. The figure is based on research by the MMT working group.

“Market data for derivatives is actually considerably cheaper in the EU than the US,” she added. “That is never mentioned. Furthermore, consumption and payment of Consolidated Tape data is mandatory in the US before you trade, and that market has significant economies of scale. It’s much easier to recover the cost of providing market data as an exchange in the US than it is in Europe even at lower data fees.”

Regulation will soon change the way market data is distributed in Europe. Under MiFID II, there will be a consolidated tape of post-trade market data, although the European Commission stopped short of appointing a single provider, leaving it up to the market to decide. The consolidated tape is needed because while trading venues have fragmented since  MiFID coming into force in 2007, there is still no consolidated record of post-trade data, making it difficult for regulators and market participants to gain a full picture of market activity at any moment in time.

Deutsche Börse acknowledges the positive aspects of the tape –  the potential to ensure best execution for the buy-side, provide issuers with more information about the turnover of a particular share,  increased transparency for the OTC market, and more insight for transaction cost analysis – but several issues remain unresolved. Most of these relate to the level two text, which sets out the technical standards for the consolidated tape and has yet to be decided. The uncertainty has also contributed to the reluctance of any company to step forward and volunteer itself as a consolidated tape provider, since it remains unclear exactly what the final terms will be. “You wouldn’t know the conditions you are agreeing to if you became a consolidated tape provider right now,” said Baumgarten. “If I was a vendor, I would want to know, and that has probably held people back so far.”

She added that there are still unsolved issues with the data quality as well. “If you have exchange data and MTF data on one side being delivered in real time, and you have OTC data which may be delayed by hours or even two days on the other, then you have an issue,” she said. “Imagine how much prices can move in two days, and imagine what effect that would have if you are trying to plot a graph. With the consolidated tape that delay will still exist.”

In parallel to regulatory requirements, industry initiatives to improve the quality of data being collected and to ensure that it can be universally applied and understood are afoot. The Market Model Typology initiative, originally launched by the Federation of European Securities Exchanges with the aim of standardising post-trade data and providing greater transparency,  was adopted by the FIX Trading Community in February. Supporters of the standard, including BATS, argue that its adoption will result in clean and consistent post-trade data that is represented consistently regardless of trading venue or OTC reporting venue, and that MMT will make it easier to consolidate data from multiple venues for the consolidated post-trade tape.