Securities and fund associations stand against high market data fees
The International council of securities associations (ICSA), the European fund and asset management association (Efama), and the Managed funds association (MFA) have released a report on market data costs. In this memo, the three bodies highlight a challenge arising from higher data costs to the effective functioning of markets “that is growing in its harmful effect.”
In the associations' view, stock exchanges hold disproportionate market power on market data generated from orders and trades and as a result limit market data access, data distribution and competition. “The consequences of the increasing market data costs force many data consumers to scale back their data purchase to a minimum and sometimes, economically suboptimal level, deselecting certain investments or markets – especially smaller companies and smaller, foreign markets. This results in reduced transparency, decreased levels of cross-border competition and lower market integration. The consequences of these outcomes are less informed markets, weaker competition, and higher costs for investors and potential higher cost of capital for, in particular, smaller companies,” the memo reads.
The report comes timely, a week after the proposed acquisition of data provider Refinitiv by London Stock Exchange Group was placed under review by the European Commission, one of the reasons being concerns around competition shrinkage in financial data access. Among other findings, the memo raises a “huge” disparity between production costs and fees. Hence the cost of producing market data for stock exchanges according to the associations' memo ranges from €1.5m to €10m depending on the exchange. At the same time, the average market data revenue recorded by large US, European and Canadian exchanges exceed by far €100m per exchange. “With profit margins of 10-100 times that of production costs, the empirical evidence shows that fees for market data have a low linkage to market data production costs,” notes the report.
“As a global securities industry body, it is apparent that the rising cost of market data is a matter of significant concern in many jurisdictions,” underlined ICSA chairman David Lynch, recalling that capital markets' efficiency was dependent upon the cost and quality of information available to investors. Therefore, the associations call for market data costs - encompassing market data pricing, licensing practices, definitions, audit procedures, and connectivity fees - to be subject to full regulatory scrutiny. In their opinion, regulatory monitoring would ensure that market data fees and licensing practices are “fair, reasonable, and not a burden on competition.” The representative bodies of securities and fund markets have established three principles in order to address the issue:
The price of market data and connectivity should be based on the costs of producing and distributing the data with a reasonable mark-up and measured against a recognised cost benchmark.
Trading venues should standardise key market data contract definitions, terms, and interpretations. Standardised agreements should be subject to regulatory review.
Market data licensing contracts should be simplified to ease the burden of administration on broker-dealers and avoid unnecessary audits.
“Excessive market data fees harm investors and their beneficiaries, including pension funds who require reliable returns to fund workers' retirement,” commented Bryan Corbett, president and CEO of MFA, for whom market data fees must be closely related to the production costs of the data in the US and around the world.
“The increased cost of data is forcing many asset managers to significantly scale back data purchases. This leads to less informed markets and decreased competition. The high cost of data also negatively affects the net performance of investment funds and, by way of consequence, the return to investors. The recommended principles help remedy this situation and address those concerns,” added Tanguy van de Werve, Efama director general.