Opening Cross: Data Fragmentation Rears its Ugly Head Again


The financial industry has long dealt with fragmented markets and data sources, consolidating market data from multiple trading venues, vendors and regions. Not only is this expensive, but it can also be a complex process to capture, map and store all relevant data.

The more complex the marketplace, the more complex the process of capturing data, making it more likely that multiple, fragmented instances of data emerge, and the harder it will be for regulators and traders alike to obtain a single, accurate view of the markets in which they operate.

The systematic risks inherent in over-the-counter derivatives have prompted regulators to begin the process of shifting these instruments onto centrally-cleared, exchange-like swap execution facilities. These SEFs create a standardized—and arguably inherently safer (though perhaps lower-return) trading environment. But on their own, a plethora of new venues churning out exchange-like volumes of trade data would create new burdens on firms and regulators alike—not only heavier volumes of higher-frequency derivatives data, requiring infrastructure capacity upgrades, but also the need to connect to every venue to obtain data to assemble a workable view of the marketplace to support trading and market oversight functions, respectively.

Hence, Dodd-Frank includes a provision for the creation of Swap Data Repositories, to which all swaps trades—cleared or un-cleared—must be reported. At present, four SDR applications are pending in the US, with CME Group, the Depository Trust and Clearing Corp., and IntercontinentalExchange’s ICE Trade Vault all already provisionally approved.

But some worry that competition among repositories and indemnification provisions around data-sharing may lead to more national and regional repositories, increasing data fragmentation and the burden on those needing to collect data. Larry Thompson, general counsel for DTCC—which received approval earlier this month to operate a Japanese repository—argued this point to the US House Committee on Agriculture last week, while speakers on a panel organized by Risk magazine in Johannesburg warned that multiple repositories increase the burden on regulators, and that market participants prefer a simpler scenario with fewer repositories. Other authorities—including the Australian Securities and Investments Commission, which last week began a consultation process for establishing its own trade data repository regime—will also have to tackle these issues.

In the US equities markets, fragmentation is addressed by the Securities and Exchange Commission’s Regulation NMS, which ensures best execution by routing orders to the market with the best available price, regardless of where the order was originally placed. And to ease the burden of aggregating data on these markets, the Consolidated Tape Association creates a consolidated tape of quote and trade data from US equities exchanges, fees for which are voted on by its members among exchanges, and must be approved by the SEC. (In contrast, for example, the European Commission mandates best execution but stops short of mandating a tape of pan-European quote data to support it.)

In this role, the SEC may shortly face the dilemma of whether to rubber-stamp new fees being introduced by the CTA and the UTP Plan, as disgruntled end-users threaten to push back on new fee increases that have the benefit of simplifying administration, but which also increase many fees—some by significant percentages. So will the SEC rule that fee increases to support its mandated trading system are effectively a tax on participants, and suggest more reasonable rises, potentially accompanied by the adoption of best practices for introducing new fees? Or will it approve the higher rates, knowing they may drive subscribers to other proprietary data products, such as Nasdaq OMX’s Nasdaq Basic product, which is specifically positioned as a cheapert alternative to the CTA feeds, and away from the CTA feeds entirely?

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