Secondly, we believe the high price of real-time market data in Europe is the single-most significant factor to the lack of progress on a European consolidated tape. Market participants want pre- and post-trade market data and the ability for commercial entities to create a tape is there. However, the fee at which customers would be charged for the tape would be cost-prohibitive at today’s pricing levels. Ultimately we are trying to set a price level that is more compatible with the commercial delivery of a European consolidated tape.
TF: What’s the complaint among market participants about market data pricing today? Is it simply that it’s just too high relative to its value?
MH: We hear from our participants that whilst the exchanges’ market share has declined, they continue to charge monopolistic rates for market data and, in some cases, have actually increased charges for market data or other services in which there is little opportunity for competition. Indeed there is also genuine frustration with the way in which exchange market data policies are applied and audited.
Without a fundamental change to the level at which market data is charged and the fragmentation of market data policies, competitive forces alone are insufficient; otherwise the cost of exchange data would have fallen.
TF: How will the BATS Chi-X Europe pricing model serve as a reference point?
We’ve designed our pricing model to serve as a reference both in the level charged and the way in which the charges are applied. In most cases, we are very competitive to the individual incumbent exchanges and our data is pan-European rather than domestic. The comparison becomes even more dramatic when you look at the price of pan-European data. We represent approximately 25 percent of the overall European equities market and we will charge up to a tenth of what it would cost a broker to aggregate real-time market data from the major exchanges for a pan-European view of the markets.
This certainly provides the industry with a benchmark to compare the exchanges and we hope it will also catch the attention of regulators. We’ve also taken a more customer-friendly approach to our policy, such as exempting users of market data for compliance or IT support functions, simplifying auditing and billing processes, and keeping data free for retail end users.
TF: In the news release announcing the new pricing, you mention that this reference point will focus debate on what are ‘reasonable commercial terms’ for pan-European data. How do you see that debate playing out?
MH: We will continue to advise clients, regulators and the press of our commercial reasonable pricing and challenge the incumbent exchanges to lower the cost of their market data offerings. We will also continue to encourage customers of the incumbent exchanges to vociferously challenge the level of market data charges they are forced to pay. Ultimately customers will reduce their usage of incumbent exchange data unless they see a decrease in data prices.
TF: Isn’t this all theoretical? If what you’re offering delivers what market participants need and want, won’t they simply pay what you’re charging? Right now, they don’t have much choice so they have to pay what the exchanges charge. And given the complexity of the data – inconsistencies across Europe, etc… are the fees that exchanges charge justified on some level?
MH: The exchanges say that their charges are justified, but I would ask why they will not further unbundle their data, for example, intraday from auctions, or blue chips from small and mid-caps? The way in which the exchanges bundle their market data makes it not only more expensive but also denies customer choice and imposes convoluted policies and audit processes that just create headaches for their customers. We believe this is a defensive strategy and we do not agree that customers should be required to take data that they may not want.
TF: Other than hampering the development of a consolidated tape, what other effects on the marketplace have the market data fees that exchanges charge had?
MH: The high price of market data in Europe creates unnecessary friction for trading participants and thus creates a disincentive for the distribution of market information and the development of new market data products and services.
Whilst we recognise that BATS Chi-X Europe market data charges will be an additive cost initially, we believe that it will drive competition in a similar fashion to when we first launched as MTFs. Since then, the incumbent exchanges have responded to competitive pressures by lowering their execution fees and we have reinvested revenues in the form of pricing promotions and industry initiatives that benefit participants, such as interoperable clearing, which we will continue to do.
TF: Under this new model, what are the effects you expect to see in the marketplace? (e.g., more competition, more trading, etc…)
MH: We look at what both BATS Europe and Chi-X Europe have done, and continue to do as the combined entity BATS Chi-X Europe, for the market in terms of fostering competition. This includes reducing trading fees and improving market structure in areas such as clearing, harmonizing tick sizes and standardizing symbology. These were all initiatives that took some time to progress but we were able to use competitive forces to produce the desired changes.
Market data is one area that has yet to be tackled head on and in the long term, we expect overall market data prices to decrease. In the short term, we want to provide a competitive benchmark and keep the issue at the forefront of industry debate.
TF: What if you’re already getting data from another provider, say a Bloomberg?
MH: We have taken into account that some trading participants receive our market data both directly and via a third-party such as Bloomberg or Reuters, in which case we will net the fees so they will not be charged twice.
TF: Is this effort really geared toward retail investors vs. institutional investors?
MH: We don’t view this as a retail vs. institutional issue but rather one of addressing the issue of high market data prices for all types of investors as well as helping to make European markets more accessible to retail investors. We understand that for many retail investors in Europe, investing is expensive outside of their own national market. Investing in companies based in Europe should be more affordable and attractive for the retail market. Therefore we feel the right thing to do is to keep data that is provided to retail investors through their brokers free of charge.
TF: How do you guarantee the robustness of your data?
MH: With a 25 percent pan-European equities market share, our data is part and parcel of the market. We provide a quality proxy for customers and we are considering ways that we can expand our data set and exploring opportunities to add additional small- and mid-caps and incorporate OTC data.
For the instruments that we currently offer, the likelihood of execution and price improvement is good. For example, our quote is at or better than the quote on the primary exchange more than 95 percent of the time in majority of the securities we cover, which means that customers can begin to look for areas in which they can substitute primary exchange data with our data.
TF: Do you expect this effort to eventually lead to development of a consolidated tape?
MH: Ultimately, we want to see lower overall charges for market data, which will make the creation of one or more commercially viable consolidated tapes more feasible. We recognize that simply setting a price for BATS Chi-X Europe market data does not in itself pressure the exchanges to adjust their pricing but we hope our effort will galvanize the industry to challenge the incumbent exchanges to justify their pricing levels and policies.
TF: What has been the reaction from the industry (from clients to competitors) thus far?
MH: When we began consulting with the industry a few months ago, we quickly understood the appetite for competition in market data charges. Customer feedback has been that it is fair that we charge for our market data, that we have priced it at a reasonable level and that we have addressed many of the problems that exist in current market data policies of the incumbent exchanges.
TF: Thanks Mark.