How Rising Costs of Stock Exchange Data Fees Affect Online Equity Trading

There is a lot of talk about the data access fees that the various stock exchanges are imposing upon brokers, traders and online equity trading firms, and for very good reason.   All US Stock Exchanges, including the two largest in the world, the New York Stock Exchange (NYSE) and Nasdaq, provide market data through the Securities Information Processor (SIP), as is required by the Securities Exchange Act, for consolidation of displaying current pricing and securities activity.

stock numbersExchanges also provide data through co-location of equipment, allowing firms to purchase, at an ever-increasing price, connectivity to their Premium Data Products.  These premium data fees are raising eyebrows in disbelief as connectivity fees continue to skyrocket with average annual increases over the last five years of 20% per year!

How a Stock Exchange Makes Money

Bringing Together Buyers and Sellers

To understand what these fees are, it is important to realize that exchanges make money in one of two ways. The traditional revenue stream is charging fees for their services of bringing together buyers and sellers.   Exchanges typically made a decent earning on revenue earned from trading.  The market structure has changed dramatically since those days, prior to the advent of online equity trading with electronic trading venues and the emergence of several dark pools.  

This introduction of computer algorithms combined with the speed that only a computer can provide, created a very competitive marketplace like nothing that we had seen before.  The increase in options available for buying or selling equity securities created a very competitive marketplace with much tighter bid-ask spreads.  

The new fragmented market meant lost market share and liquidity for exchanges that once dominated the US stock market.  For example, prior to the late 90’s and early into the millennium, the NYSE executed approximately 80% of all market trades.  After the introduction of several Alternative Trading Systems (ATS) and dark pools, the NYSE executed less than 20% of all market trades.

Market and Access Data Fees

Another way that exchanges make money is to charge brokers to access their data, through a line of communication other than the SIP.   These proprietary feeds are set up from the broker directly to the exchange with colocation of computer servers connected directly to the exchange’s servers, providing a slightly different view of the market with what they call “depth -of-book” data or “premium data products”.   The NYSE acquired Arca in 2006, and began charging for depth-of-book data that prior to that had been free of charge.  

Any broker or trader who is trying to execute their online equity trading strategy realizes that while the information may be the same, the way it is delivered, or more specifically, the speed in which it is delivered, is the competitive factor.   It’s more than a competitive factor – purchasing the data feed is necessary to conduct trades competitively, thus stay in business and provide value to your investors.  It’s a matter of necessity.   

Traders are at the mercy of the stock exchanges today that are charging for premium connectivity, since there really is no other choice.  The information flow that these data products provide over the SIP is more than advantageous; traders simply cannot compete without it.  The direct data feeds will always outperform the SIP, always.  

Not only are direct data fees increasing at an alarming rate, so are trader fees for professionals.  At the start of 2017, EDGX/EDGA started charging $50/month for their direct feeds, and BATS/BATY did the same.  So monthly costs for the individual trader have gone up by $100 this year, from about $189-$254 to $289-$354 / month, depending on the package of data feeds.  These fees make it much more difficult for the beginning prop trader, as he has to cover $300 in fees before making any profits.

Within this highly competitive marketplace of 13 US Stock Exchanges and over 40 dark pools, there has emerged a way for exchanges to replace the revenue stream lost with this diversification of the US markets.  

The US Stock Market may be the only industry where increased competition brought on by a widening array of suppliers – the Exchanges, the various ATSs and dark pools –  has actually caused an increase in prices rather than driving costs down.   Larry Tabb published an article for Bloomberg View in early 2016 titled “Stock Exchanges are Eating Your Returns” in which he reveals that the total quarterly revenue of the exchanges in all major US equity markets (Intercontinental Exchange which owns NYSE among other markets, Nasdaq, and BATS) increased close to 16% from 2010 to 2015.  During this same time-period, data and technology revenue increased by 62%!

Add to that the fact that also during this same time-period, revenues of the market makers trading on the exchanges and providing liquidity, basically the customers to the exchanges, declined sharply by 75%.  

Advent of Online Equity Trading

What is an Alternative Trading System

The SEC introduced Reg ATS in 1998, which brought about intense competition from the various off-exchange venues by allowing them to operate as an exchange while maintaining exemption from registering as one.   Reg ATS also instituted record keeping and reporting requirements for these ATSs, although they are not subject to the stringent requirements of an exchange.

Some objectives of Reg ATS were to provide some rules and address concerns of this type of trading, although if increasing competition was the goal, mission accomplished.  The result is the current fragmented market providing more options to investors while the once dominant exchanges have drastically lost liquidity.  

In 2005 the SEC responded to the drastic jump in trades happening in off-exchange venues, and sought to improve fairness and best price execution through the National Market System (NMS). Reg NMS required exchanges to route orders to the trading venue that is displaying the best price, regardless of where that order originated.  

All market participants have the same access to the Securities Information Processor (SIP) which is the consolidated vehicle collecting all market data for securities.  The SIP consolidates the data collected from all trading venues, then sends the information out in what is supposed to be ‘real-time’ data, providing transparency. Exchanges must not provide data to customers before providing data to the SIP.  Reg NMS goes further to obligate the transaction to occur at the NBBO, the National Best Bid Offer.

The role of the SIP is an important one in consideration of stock exchange data fees.  If everyone received the SIP information at the same time, there would be no need for proprietary connectivity streams costing tens of thousands of dollars per month, simply to provide access to the Exchange’s “Premium Data”.  

While the SIP provides a necessary and valuable function of consolidating securities data, there is a latency issue since all of this information is required to be consolidated, as opposed to a direct feed co-located server receiving instant market data with less latency than the SIP.  Direct data feeds are still faster that the SIP, and the exchanges and brokers trading online equity securities realize just how valuable that time is.  There is no choice but to have it.

The SIP provides a valuable service, although it’s information is always a little ‘late’.  While it’s necessary, so is a direct feed if you want to be able to conduct competitive trading for your clients.  The SIP and Direct Feeds represent a two-tiered market.  Unlike the SIP, however, revenues from proprietary data products go directly to the exchanges selling them.

stock exchangeExchanges Defend Their Position in Spite of Opposition

Opposition Requests Sent to the SEC

IEX, the newest US Stock Exchange, has written letters to the SEC urging them to review requests for cost increases by NYSE and Nasdaq.  Brad Katsuyama, CEO of IEX Group, stated to Business Insider that “Exchanges don’t create any unique content — market data is generated by their members and other market participants including real investors — so it’s very hard to believe that exchanges can perpetually charge their members more every year to look at the members’ own data.”

IEX does not charge for connectivity or data feeds.   For more information on IEX, see our blog on How IEX Will Change Markets for Day Traders.  Big trading firms are getting more vocal with their dissatisfaction of rising costs from what is viewed to be abusive practices with monopolistic power.   

Exchanges Argue Back Against Critics

NYSE argued their point to the SEC on raising their fees for premium products, stating that it was not increasing fees for market data, but rather their own proprietary feed, which users are not obligated to purchase.  The elephant in the room here is that while users may not be obligated to purchase the direct feed, they will not be able to perform their job functions if they do not.

Exchanges argue that alternatives do exist, and just because not every user will find the alternatives equally attractive, does not mean that they don’t exist.   They state that firms can terminate their colocation agreements anytime they want to, they are optional.

One recent court ruling in mid-2016 added fuel to the fire for the quick rise in stock exchange data fees as SEC Judge Brenda Murray rejected a petition to put off fee increases for data connections by Nasdaq and NYSE Arca, citing the force of competition as the reason behind the increase in fees.    

Our View on Rising Data Fees

Competition among exchanges including rising data connectivity fees may be here to stay with this recent court ruling setting a precedent.  The SEC should realize that exchanges acting as data centers is counter-productive to trading ownership and futures of corporations based on supply and demand.  Exchanges selling their end users’ data does not enhance this crucial aspect of that relationship nor does it promote liquidity for market investors.

Great Point Capital is headquartered in Chicago with a second location in Austin, TX, and has been serving the trading community since 2001.  Our 100+ prop traders actively trade the firm’s capital, specializing in equities and equity options.  Contact Great Point Capital LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.  We are one of the few firms able to offer access to Takion Software Platform, enhancing your online equity trading performance.