Big: Wall St. Moves on Exchange Fees with Members Exchange

In a nod to the past when Exchanges were owned by the members who traded on them, a consortium of Wall St. firms have announced plans for a low cost members exchange to challenge the equity market oligopoly in U.S. equities: 

Named MEMX, the exchange will be controlled by the nine banks, brokerages and high-frequency trading firms funding it, according to a news release.

The founding members are Bank of America Merrill Lynch, Fidelity Investments, Morgan Stanley, UBS, Charles Schwab, TD Ameritrade, Virtu Financial, E*TRADE, and Citadel Securities.

Wall St. has been whingeing over market data fees for some time, of course, a battle most recently (October 2018) highlighted by the SEC’s recent decision to overturn previous fee approvals for NYSE and Nasdaq, and to institute new procedures for how exchanges should file proposals for fee-liable data services.

This will take a while to play out – wouldn’t launch until 2020 at the earliest, and attracting liquidity will be a significant challenge, but this might help put some fees pressure on the 3 firms – ICE, NASD and CBOE – that dominate us equities trading.

Press Round-up

WSJ: Wall Street Firms Plan New Exchange to Challenge NYSE, Nasdaq
Traders: Members Exchange Set to Open But is it Needed?
Bloomberg: Traders Want Their Own Exchange Too
Business Insider: Big Wall Street names are teaming up to launch a stock exchange

- Kevan Huston

Trade the News: Wall Street goes to war over market data and access

Great post from Trade the News summarizing the market data access and fees battle underway on Wall Street: 

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.

...

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 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.

Excellent summary of the battle lines and stakes in this all important market data conflict.

https://www.thetradenews.com/wall-street-goes-war-market-data-access/

SEC: Market Data Fees are Too Damn High(?)

On October 16, 2018, the SEC took two actions with respect to the fees that exchanges such as the New York Stock Exchange and NASDAQ charge market participants like broker dealers. 

The SEC ruled that the exchanges failed to justify fee increases for market data, and set aside 400 contested fee increases.

The Commission also remanded over 400 other fee challenges for consideration by the exchanges before resubmitting the their fee increase requests. 

https://www.sec.gov/news/public-statement/statement-chairman-clayton-2018-10-16

Among other things: the ruling will likely make it harder for the exchanges to raise fees for their data and related charges for connectivity to their systems.

Exchanges have been battling trading firms over market-data fees in lawsuits dating back to 2009 and Tuesday’s decision is unlikely to end the wrangling. (Bloomberg)

My take: increased scrutiny of exchange fees is a welcome development. It's unsurprising that the appointment of former J.P. Morgan executive Brett Redfearn caused concern from the exchanges; Mr. Redfearn knows well the pricing power exchanges have and their ability to extract monopoly rents from market participants. Adding a little transparency to a traditionally overlooked and opaque corner of the industry can only be a good thing. And when you're a monopoly provider, you ought to justify the fees you're charging. It's not like customers can get your product from another provider.

As Max Bowie at Waters put it (subscription required):

"Both sides know market data is essential, but differ on its inherent worth. The SEC’s new processes will force exchanges to justify that worth—which, by the way, doesn’t automatically assume that current prices are inflated or that we’ll see lower prices; it just means that the price will have to be carefully justified, using the costs and investments behind it."

Hard to find any fault in that.

At the end of the day, it seems likely that the exchanges, as they diversify their revenue streams into analytics, AI and indexes, will end up offering basic exchange data for free. But in the meantime, we should expect them to fight tooth and nail to get full value for their listings data. This battle is just beginning.

Press Round-up:

SEC rules NYSE and Nasdaq did not justify data fee increases (FT)

SEC sends Nasdaq, NYSE fees back for more justification (P&I)

Wall Street Fractures Over Stock Exchanges’ Data Sales (WSJ)

The Exchange Data Fee Debate: Trick or Treat? (Waters)

- Kevan Huston