Market data is one of the most fundamental components of financial markets today, as it enables everything from trading and investment strategies to regulation and reporting. As trading venues and data providers generate significant revenues from selling access to market data, it is no surprise that there is growing debate surrounding its cost, accessibility, and transparency. The report by Market Structure Partners (MSP) titled “There’s No Market in Market Data” has sparked considerable discussion across the industry, especially considering the broad impact it has on stakeholders ranging from innovators and academics to exchanges and regulatory bodies.
This article seeks to provide a comprehensive commentary on the MSP report, focusing on its findings, the response from key stakeholders, and the implications for market participants and policymakers. Through an analysis of the feedback, including responses from exchanges like Euronext and Turquoise, and MSP’s critique of the Oxera reports, we will explore how these differing perspectives shape the future of market data and its associated costs.
The Central Claims of MSP’s Report
MSP’s “There’s No Market in Market Data” report challenges the prevailing structure of market data distribution, particularly focusing on the significant revenue generated by exchanges and data service providers. At the heart of MSP’s argument is the claim that the current model for pricing and distributing market data is flawed and inefficient. They argue that market data has evolved into a highly profitable product for exchanges and data providers, but one that is not governed by competitive market forces.
One of the main issues identified by MSP is that market data is not treated like a typical market product. Unlike many other services, market data is often non-negotiable and subject to little competition, making it an essential cost burden for market participants. MSP contends that this lack of a true market for data leads to inefficiencies and inflated costs, which ultimately hinder growth in the equity markets. Their analysis suggests that the price of market data is often disconnected from the actual value it provides to market participants, including trading firms, investors, and regulatory bodies.
Moreover, MSP’s report emphasizes that there is little transparency in the way exchanges report the costs and revenues associated with market data. This opacity has led to significant concerns about the pricing structures, with many participants believing that the prices for market data are inflated and lack a clear justification. Without better disclosure and oversight, MSP believes that the current system is ripe for exploitation, limiting innovation and contributing to an inequitable market structure.
Industry Response to MSP’s Findings
As expected, the release of MSP’s report generated significant commentary from various stakeholders in the financial markets. Some of the most notable responses have come from exchanges such as Euronext and Turquoise, which have refuted several of MSP’s claims. These exchanges, along with the Federation of European Securities Exchanges (FESE), have issued statements that challenge MSP’s findings on a variety of fronts.
In their critiques, exchanges like Euronext and Turquoise argue that MSP’s analysis oversimplifies the complexities of the market data business. For example, they highlight that trading venues incur significant operational costs to collect, process, and distribute market data. According to these exchanges, it is not simply a by-product of the trading process but a crucial element that supports the entire infrastructure of financial markets. They argue that the revenues generated from market data are essential for maintaining the high level of service and reliability that financial markets demand.
Euronext and Turquoise also pointed to the Oxera reports, which were commissioned by FESE to provide an economic analysis of market data pricing. These reports are frequently cited by exchanges as a defense of their pricing models, as they offer a comprehensive examination of the costs associated with market data and justify the pricing structure adopted by exchanges. However, MSP has expressed significant concerns about these reports, claiming that they contain errors and methodological flaws that undermine their conclusions.
MSP’s Critique of the Oxera Reports
A key aspect of MSP’s response to the criticism from exchanges was their detailed critique of the Oxera reports. MSP believes that the Oxera reports, which are often used to justify the pricing of market data by exchanges, rely on flawed assumptions and contain several potential errors. MSP’s analysis of the Oxera reports highlights several key areas of concern, including issues with the methodology used to calculate the costs of market data provision, the potential for biased assumptions regarding the profitability of exchanges, and the lack of consideration given to the wider implications of high market data costs on market participants.
In particular, MSP takes issue with the Oxera reports’ assertion that market data is an essential and irreplaceable service that justifies high prices. MSP argues that the real market dynamics of data provision are not being accurately captured in the reports, and they believe that exchanges are using the Oxera findings as a shield to defend their current pricing models. By challenging the validity of these reports, MSP aims to shed light on the underlying flaws in the justification for market data pricing and call for a more honest and transparent approach.
The MSP Response and Updated Report
In response to the feedback from exchanges and other stakeholders, MSP has published an updated version of their original report. This updated report includes several amendments based on new information provided by exchanges, particularly in relation to the disclosures from the London Stock Exchange (LSE) and Euronext’s reporting methodology in 2020.
Despite these clarifications, MSP maintains that the fundamental conclusions of their original report remain unchanged. The updated report emphasizes that while certain technical issues related to disclosures have been addressed, the broader issues surrounding market data pricing, transparency, and competition still need urgent attention. According to MSP, these technical corrections only serve to reinforce the need for immediate reform in the market data sector.
Key Recommendations from MSP’s Updated Report
MSP’s updated report also introduces new recommendations aimed at improving the structure and transparency of the market data industry. These recommendations reflect MSP’s ongoing belief that significant reforms are needed to address the inefficiencies and high costs associated with market data provision. Among the key recommendations are the following:
Improving Transparency and Oversight:
MSP calls for better transparency in how trading venues and data service providers disclose their market data pricing and costs. Specifically, they recommend that exchanges provide more detailed and accessible reports on the costs of producing and distributing market data, including information on their profit margins and any subsidies or cross-subsidization within their business models. Enhanced transparency would allow market participants to better assess the true cost of market data and would provide regulators with the information they need to ensure fair pricing.
Clarifying the Definition of “Reasonable Commercial Basis”:
MSP recommends that the definition of “Reasonable Commercial Basis” be redefined to ensure that trading venues cannot tie their data charges to their customers’ costs of production. This would eliminate a pricing model that is often seen as unjust, where the cost of data is disproportionately linked to the operational expenses of trading venues. MSP argues that market data should be viewed as a by-product of the trading process, and once this is recognized, data charges should become more aligned with the actual value provided to market participants.
Encouraging Competition and Reducing Friction:
MSP advocates for a more competitive market for market data, which would help to reduce the frictional costs currently impeding growth in equity markets. By eliminating the monopolistic pricing models that have become prevalent, MSP believes that market data could become more affordable and accessible, which would foster greater innovation and investment in financial markets.
Frequently Asked Questions
What is market data in financial markets?
Market data refers to real-time and historical information about trading activities, such as prices, volumes, and order book depth, provided by exchanges and trading venues.
Why is market data so important?
Market data is essential for trading, investment decisions, market analysis, compliance, and transparency. It supports everything from algorithmic trading to academic research.
What is the main issue in the market data debate?
The core issue is that market data is often expensive, lacks pricing transparency, and is provided in a non-competitive environment, leading to concerns about fairness and efficiency.
Who are the key stakeholders in this debate?
Key stakeholders include stock exchanges (like Euronext, LSE/Turquoise), data providers, regulatory bodies, investors, trading firms, fintech companies, and academics.
What is the MSP report “There’s No Market in Market Data”?
It’s a report by Market Structure Partners arguing that market data pricing is opaque, anti-competitive, and needs regulatory reform.
How did exchanges respond to the MSP report?
Exchanges like Euronext and Turquoise disputed the report’s findings, defending their pricing models and citing commissioned research from firms like Oxera.
What are the Oxera reports?
The Oxera reports are economic analyses commissioned by exchanges to justify market data pricing. MSP has criticized these reports for possible errors and bias.
What changes does MSP recommend?
MSP calls for greater transparency in pricing, redefinition of “Reasonable Commercial Basis,” and more competition to reduce data costs.
Conclusion
The debate surrounding market data pricing is complex and multifaceted, with a range of stakeholders offering differing perspectives on the best way forward. While exchanges like Euronext and Turquoise defend their pricing models as necessary to cover the costs of market infrastructure, MSP’s report raises important questions about the transparency, fairness, and competitiveness of the current system.
