4.1 Dollars & Data Sources: Revenue by Infinite Elasticity

Sitting at my desk I can access the latest price of BP or any other instrument in real time or delayed, as long as I pay for it of course, no matter which vendor I select it should, theoretically, be the same.

At the same time, millions of others can see exactly what I am seeing, and that price can be ingested into multiple applications fulfilling countless individual missions at exactly the same time for a myriad of institutions and individuals anywhere on the face of the planet.

Contrast that to other commodities. Sadly, once a Mars Bar has been eaten it is gone and I need to buy a new one. An Uber driver can only do one trip at a time, where time is itself the finite resource, therefore there is a requirement to have many drivers available to fulfil the needs of many people who wish to travel at the same time.

Michael Caine said (paraphrased) “I know I was wealthy the morning I woke up knowing I was richer than the night before I had gone to bed”. In other words, he was making money without having to work for it.

This is exactly how market data sources make their money, the price is produced only once, albeit on a continuous basis, and that one single item, with a licence to use an electronic price, can be sold, re-sold and re-used for countless missions to any number of subscribers.

It revolutionises the dynamics of elasticity between supply and demand.

What this means is that exchanges, data sources, and the creators of original works, such as Indices can create high value, high margin businesses. For exchanges and inter-dealer brokers this is even a fortunate by-product of their underlying business which is trading. They must invest in the infrastructure to deliver prices no matter what, and being able to licence the output is more than just icing on the cake, it provides additional profit and becomes a ‘sticky’ source of income which can be re-invested in developing better services.

Over-Thought Price Menus

Many exchanges seem to be far to easily tempted into over-complicating their products and fee structure by attempting to maximise incremental revenue at the expense of total returns. One of the best examples of this practice was the LSE, but fortunately the LSE has over the last few years worked hard to simplify their product line up.

Lack of Global Reach

On the downside, exchanges rarely resource their information services business effectively. Few have the global reach of CME, Deutsche Bourse, ICE, London Stock Exchange or NASDAQ OMX, so for many exchanges their focus is inevitably on domestic markets.

What this means, is that these exchanges become overly reliant upon third parties for global access, i.e. the market data vendors. While the overall relationship between vendors and exchanges is usually good, their agendas, goals, relationships with third parties are not the same, creating the potential for contractual disputes. As the market place becomes more multi-dimensional this is already beginning to create new frictions.

Smaller exchanges run into issues where they do not communicate their policies and fee structures properly to their vendors, which in turn means the subscribers may not be paying what they should be.

Worse in many local markets, protectionism keeps out the global institutions and investors, the largest spenders on market data. Subsequent lack of liquidity and an over-reliance on local retail markets combine to stifle the development of a strong stand alone exchange market data business.

Should exchanges charge for their data services?

This is one of the most contentious issues when discussing the exchanges’ market data business. It produces strong feelings, but it must be remembered removing 15% of any business’ revenue will have a detrimental effect on the ability to support themselves and their rather demanding clientele.

Here I must refer to a Business Insider Article published on 3 November 2016 which takes a deep dive look at the issue, though it is decidedly US-centric, but well worth a read. www.businessinsider.com/stock-exchanges-market-data-cost-becoming-big-issue-2016-10

The very first paragraph in the article encapsulates the debate succinctly.

“Information wants to be free,” the technology activist Stewart Brand once said. “Information also wants to be expensive.”

There needs to be a balance between fair charges for mission critical market data and the recognition that exchanges are business that must pay costs to provide that service. There is a certain irony that the financial institutions that most loudly complain about exchange costs are at the same time shareholders in the exchanges demanding ever higher returns.

On the other side of the coin, certain exchanges do themselves no favours by poorly presenting their business cases, occasional naked money grabbing through monopolistic behaviour, and conducting compliance audits that might make even a hardened Mafia Protection Racketeer blush.

Fortunately, the majority of exchanges do try hard to balance the needs of the market within the framework of running a revenue generating business.

In 2000, I wrote a report for 2Cube Securities in Hong Kong arguing strongly against exchanges charging fees for their market data.

I was wrong! Though with a caveat, greedy exchanges do exist seeking to maximise revenue through either over pricing their monopoly or abusing compliance, but the reality is it is a business and there is a cost to service.

The current system maximises revenue generation through spreading the costs over a wider range of institutions.

If there were to be an elimination of exchange fees it would place pressure on the exchanges to raise the fees of the main sources of income, transaction commissions and IPOs which would affect the primary market players the most.

What are the key arguments for and against exchanges charging for market data?

We must also consider the financial institutions themselves, they are in the game to make money, try asking them to provide services for free and see what the answer is.