Even though the mood in 2013 is more positive than recent years, the industry hasn’t loosened up entirely. The Dow Jones Industrial Average may have returned to pre-crisis levels, but industry spend overall is still under pressure, as evidenced by lower data revenues at many exchanges. And firms aren’t yet ready to raid the piggy bank to support big new data initiatives—at least, not unless they can save money elsewhere to pay for any new expenditure. For example, Credit Suisse has cut costs across its data operations by more than one-third as a result of its “One Bank” initiative to restructure data sourcing, management and distribution infrastructure.
Exchange revenues are sliding largely as a result of changes in how firms consume data—using more enterprise feeds and fewer terminals, and replacing premium terminals with lower-cost alternatives, and coming up with novel ways to minimize cost increases, in addition to ongoing staff cuts, resulting in fewer potential consumers—rather than lower fees, which continue to rise, while exchanges continue to invent new fee-liable products and services.
Certainly, exchanges need to support their operations, and—since moving from being member-owned to for-profit (which, let’s not forget, those members voted for)—make profits for shareholders. For example, CBOE Holdings spends more than 80 percent of what it makes from market data fees on data processing.
Nevertheless, fees are never popular. User groups constantly butt heads with exchanges over new fees, while exchanges find new ways to increase revenues without impacting trading fees, which most firms use to determine their cost of execution, whereas a more accurate measure of transaction cost also takes into account clearing and settlement fees, as well as the cost of data required to facilitate the trade.
At Bloomberg’s recent Enterprise Technology Summit, Lightspeed Financial chief executive Stephen Ehrlich described how the cost of consolidating datafeeds from the market as a whole is making life more expensive for traders, and suggested that more regulation is needed around marketplaces’ abilities to introduce and raise new fees. In the US, every new exchange data fee has to be approved by the Securities and Exchange Commission, though this is largely a rubber-stamp—leading web advocacy group Netcoalition to bring a lawsuit against exchanges in 2006, which a US Court of Appeals decision last week appears to have finally put to rest by ruling in favor of the exchanges—with most fees now “effective on filing.”
Currently, the SEC regulates fees, while groups like SIFMA and Ipug advocate for their members, and industry forums like FISD bring all participants together and can be instrumental in the drafting and implementation of best practices. In an ideal world, these different groups would be able to reach consensus on everything from the wording of policies to acceptable levels for fee increases. Unfortunately, we live in a world all-too-often motivated by greed and self-interest, so key to any meaningful change will be the ability of all involved to put aside self-interest in favor of the bigger picture. Trying to penny-pinch exchanges downwards on fees is counter-productive if the exchange is forced to compromise service to keep costs low, while an exchange introducing unreasonable fee hikes is counter-productive if it drives away potential consumers, impacts customer loyalty and goodwill, or results in hostile standoffs over fees.
And if that can’t be achieved, there needs to be a safety net. Just as cities with rent control and stabilization laws also offer public housing options, a regulator may need to offer some kind of utility data alternative (like the Consolidated Tape Association, but run without oversight of competing exchanges, to eliminate any conflicts of interest) as a “carrot” to keep fees low through competition, in addition to the “stick” of fee approval. Perhaps the SEC’s upcoming Consolidated Audit Trail will provide this, or go some way towards it.
Dan DeFrancesco makes his return to the podcast to talk about bitcoin futures and why he wanted to start this podcast in the first place.Subscribe to Weekly Wrap emails