Benjamin David delves into the debate over escalating market data prices in the financial industry and examines efforts to address the issue.
In March 2023, the Financial Conduct Authority (FCA) released its much-anticipated report that scrutinised competition in the wholesale data market. The 35-page document confirmed what many in the industry suspected: a handful of firms dominate the trading market, and the current market inefficiencies hinder effective competition and innovation. Moreover, the FCA expressed its concern that this contradicts its strategy to enhance the financial services sector in the UK.
However, the issue of market data costs is not limited to the UK. In recent years, dissension has been documented across Europe between market data providers and investors who demand lower prices. Consequently, European financial organisations are cautioning that stricter regulations are necessary to control the escalating costs of market data. This would enable market participants to access proprietary data fairly and comply with regulatory requirements.
Anti-competitive
Market data refers to the pricing and information about securities traded on exchanges that are crucial for investors to make informed decisions. However, the cost of accessing this data has gradually increased over time.
Many large providers, such as Bloomberg, Refinitiv, S&P Global Market Intelligence and FactSet, are known as the dominant market data players in the industry. These providers offer investors various data services, including real-time prices, historical data, news and analytics.
The market data providers’ offers are often bundled with other services. So, for example, an investor who wants access to real-time prices for a particular stock may be required to purchase a subscription to a broader data package that includes a range of other services they may not need.
Indeed, Cathy Gibson, the global head of trading at asset management company Ninety One, explains that market data is a resource that can potentially be extremely valuable, but its raw form has limited value. Instead, it is in the “refined product or metadata where the value lies”.
She adds that there are costs associated with creating meaningful and timely metadata. Crucially, the associated cost and capability of the end investor to develop and consume metadata make a significant difference in access to market data.
However, with investors increasingly reliant on market data, data providers have been known to increase subscription prices, arguing that the high costs are necessary to cover the expenses of collecting and processing the data. However, investors contend that the fees are becoming excessive and limit competition in the industry.
Data providers justify the rising subscription prices as necessary to cover the expenses of collecting and processing the data, but investors argue that the fees are excessive and limit competition. For example, Rudolf Siebel, the chair of the trading, trade reporting and market infrastructures standing committee at the European Fund and Asset Management Association (Efama), stated in March 2020 that the increasing market data prices are “undeniable” and “very significant.”
Cossiom’s 2019 market data exchange fees survey of buy- and sell-side institutions found that more than 89% of market data users had experienced substantial cost increases. In addition, Siebel pointed out that several data providers are “forcing” data users to obtain the necessary data in bundled packages, inflating the overall cost of transactions without adding value.
Gibson agrees that access to and the relative cost of market data differ among market participants. However, she notes that this dispersion is “not limited” to retail versus institutional investors and that “significant differences” exist among various investment funds themselves.
Regulation
This bundling practice has led to accusations that market data providers are engaging in anti-competitive behaviour, making it difficult for new entrants to compete. As a result, smaller firms may be forced to rely on insufficient data or pay higher prices for the same data.
This topic has been a talking point among market participants and regulators for more than a decade, explains Gibson, and while “numerous” pieces of legislation – such as MiFID II in 2018 – have been implemented to address the gaps in market data distribution, these have achieved only “limited” degrees of success.
“I would agree all investors should have access to fairly priced raw market data; a consolidated tape in Europe would be a step in the right direction; after that, I would argue that it is up to each individual investor to determine where to best to deploy their resources to maximise their returns,” she says.
“I would agree all investors should have access to fairly priced raw market data; a consolidated tape in Europe would be a step in the right direction.”
The controversy resulted in the BVI, the German investment funds association, Efama, the European Forum of Securities Associations and the Nordic Securities Association writing a letter to several EU parliamentarians asking for MiFID II and MiFIR requirements to be strengthened.
Arguing that a consolidated tape is not the solution to rising market data costs, they also stressed that standardised price lists, policies and audit procedures should also be introduced, regardless of the existence of a consolidated tape.
The controversy over market data costs has led to calls for greater transparency. For example, the Cost Transparency Initiative in the UK promulgates a more thorough fee structure and greater transparency by market data providers to enable investors to make more informed decisions about which data package to purchase and would promote competition in the industry.
What next?
Despite current regulatory efforts, the market data industry remains highly concentrated and challenging for new entrants to compete, given accessibility challenges around resources to collect and process vast amounts of data.
As a result, regulatory action, lawsuits, and demands for greater transparency in the industry have ensued. The debate about market data costs continues, and it remains to be seen how market data providers will respond to the demands of investors and regulators.
Greater transparency in the industry, including standardised price lists, policies and audit procedures, could help promote competition and keep market data costs in check. Additionally, investors contend that market data providers should disclose more information about their fee structures and the data they provide.
The increasing complexity of financial markets and the rise of high-frequency trading could make it even more difficult for investors to navigate the market data landscape, making data exposure more indispensable.
Another concern is that some market data providers may continue to resist efforts to lower costs, which could limit progress in this area.
Ultimately, the future of the market data cost controversy in investment will likely depend on a complex mix of regulatory, technological and market-driven factors.
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