The Wall Street Journal (www.wsj.com/articles/court-overturns-sec-decision-to-reject-fee-increases-for-exchanges-data-feeds-11591383268)  on 06/06/2020 reported the US exchanges won a small victory in the continuing vexatious and occasionally emotive arguments over exchange fees price controls.

Bank consumers have long been critical of the cost of information and data provided by exchanges to an arguably captive audience. These complaints have grown louder as:

• Exchanges make more money from data

• Find new ways to charge for data usage

The last point is key, it is all about usage, exchanges’ pricing models have evolved to mirror how the Banks themselves take advantage of what I call the ‘Snicker’s Effect’ to use the same item of data to make money from multiple products and services

So what might happen if regulators imposed controls and caps on exchange fees? 

If we look at potential worst case scenarios, financial institutions might find the cure worse than the problem


What the Right Hand giveth, the Left taketh away

Exchanges will try to find more money from other services, especially when they come under pressure from their shareholders, ironically financial institutions who want fees controlled

Equally exchanges will work harder to control costs, which could impact investment in the trading infrastructure the market relies upon to facilitate investor participation

Cost Substitution 

• This could mean hiking IPO and Transaction fees, directly hitting the primary brokers. Who will inevitably pass the costs down the line. Compare this to where market data fees are currently distributed across the market, lowering the average cost for all users

• This could create an unvirtuous circle where increased costs damage liquidity, leading to higher costs

• At the moment, many exchanges distinguish between professional and retail clients. Already this is blurring in the wealth management space and filtering down. Access to data has democratised the investment marketplace over the last 20 years. Paradoxically exchange fee controls could turn back the clock to a time when only those with the requisite financial resources could afford market moving information 

Equally secondary market players might argue exchange members operate cartels offering primary access.

What would happen if exchanges adopted an ‘Over-The-Counter’ model where primary and secondary markets could trade directly from anywhere? For an exchange under price pressure this new source of transaction commissions would help replace exchange fees, while simultaneously forcing the old membership to compete even more aggressively on cost, hitting their already tight margins


It would help if financial institutions controlled their market data spend more effectively, I have averaged 26% real world savings on projects without impacting the business. If Banks applied more effective management this more than outweighs the cost of exchange data

If exchange fees are capped, will financial institutions pass on the savings to their clients? About as likely as a crocodile at a BBQ going vegan.

Regulators once they have smelt blood in the water rarely quit, they look for more blood, like extending fee controls to other venues, inter-dealer brokers, MTFs, the list gets long. The following logical consequence of capping the costs of exchange data is to cap the costs of the products and services financial institutions using that data to make money.

Pot Calling Kettle Black

Banks also need to be careful, they themselves have data businesses, and are looking to ‘sell’ their data (and they are know Data Eldorado is out there, but just can’t find a good map):

• Directly, Barclays and UBS

• Indirectly, via vendors

• Own subsidiary businesses which profit from data, JP Morgan (Pricing Direct), State Street (Global Link)

All Parties Profit From Data

In reality exchanges, vendors, financial institutions, third party facilitators and others are all data businesses, intimately intertwined, as every party makes money from data.

Artificial controls on data pricing will only bring the law of unintended consequences into action.

Keiren Harris 07/06/2020


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