The Looooong Market Data War
The following article first published on Traders Magazine as FLASH FRIDAY, a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet.
It is said that the longest continual war in history was the Iberian Religious War, between the Catholic Spanish Empire and the Moors living in what is today Morocco and Algeria. The ‘Reconquista’ conflict spanned 781 years before ending in 1492.
Could the market data war between exchanges and sell-side brokers break that record? Probably not. But sometimes the notion doesn’t seem entirely far-fetched.
As the U.S. Securities and Exchange Commission mulls a ‘Reg NMS II’ redesign of equity market structure, and the SEC and Department of Justice put their heads together to try to enhance competition in the securities industry, the data wars are front-center in 2020 in terms of what changes may lie ahead.
But when have data wars not been front-center? They were an issue more than 20 years ago, as per Gene Finn, who was then outside director at Ameritrade. From a Finn-penned op-ed that appeared in Traders Magazine around the turn of the century:
The current arrangement for sharing market data subscriber-fee revenues among SROs (exchanges and the NASD) is unfair, placing market makers and ECNs that are not SROs at a competitive disadvantage. It discriminates against small-investor clients, who unlike institutional investors, are dependent upon the ability of retail brokers, market makers and ECNs to achieve the revenue and cost efficiencies derived from the aggregation of small orders into a large flow.
Such discrimination appears to violate the spirit of the NMS 1975 Amendments to the Securities Exchange Act of 1934. Congress was explicit regarding its intention that the SEC apply rigorous utility-type regulation to insure the competitive neutrality of the NMS facilities characterized by exclusive SRO processor control. Through regulatory oversight, the NMS plans have allowed the NASD to retain the market-maker share of subscriber-fee revenues for both Nasdaq and New York Stock Exchange-listed stocks.
Similarly, the discriminatory impacts of subscriber fees and sharing deficiencies on individual investors, investing directly, have been overlooked.
Clearly, the costs of the central processor need to be covered. But subscriber-fee revenues, not required for the receipt and redissemination of the information to vendors, should be apportioned among the generators of the information in relation to their contribution to the value of the information stream. A method is required for non-SRO trade-execution centers to capture their proportionate share of market-data revenues. For one thing, the SEC could require changes in NMS plans that enable non-SRO quotation and last-sale reporting centers to participate on the revenue-sharing side. For another, market makers could explore ways to route their quotation and last-sale information through an SRO that agrees to share revenues, or is set up to accomplish that objective.
Some of Finn’s key points will sound familiar to anyone who follows the market-data debate today — “unfair”, “discriminates against small-investor clients,” “appears to violate the spirit of the NMS,” among others.
So, it’s safe to say that in 20+ years, there has been a lot of talk about the accessibility, cost, and makeup of market data. But has anything really changed? It seems not really, other than an incremental here and there.
Will this time be different and result in a system that most stakeholders can agree is mostly fair? It still seems like a longshot, but there does seem to be as much or more momentum now than there has been in a number of years. So maybe the great market data war will see an armistice sooner rather than later.