The allocation of market data revenue impacts how equity trades are allocated and reported, according to new research published Monday by the U.S. Federal Reserve Board.
The paper published by the Fed’s Divisions of Research & Statistics and Monetary Affairs purports to be the first comprehensive academic study of the influence of market data revenue allocation models on trading activity. And, by examining the trading activity surrounding various events that changed the marginal data revenue per trade, it finds that these revenue models do indeed impact trading practices.
The research confirms that “the incentives created by allocation formulas are large enough to have a significant impact on average trade size”, and “that revenue-sharing/rebate programs are a key mechanism used by the exchanges to align the incentives of order-flow providers with the exchange,” it notes.
The paper also argues that market data revenue “is an impetus contributing to the practices of payment for order flow, internalization, order preferencing, and make-or-take fees, but has largely been ignored in the literature investigating those practices.”
“The results should be of interest to exchanges and regulators around the world, as they consider approaches to market data, and broader questions such as the extent to which market data should be considered a public good, whether and to what extent the distribution of market data should be consolidated across exchanges, and how property rights to market data should be assigned,” it notes.
Indeed, in Canada, market data was one of the key issues raised in regulators deliberations over whether to allow the proposed restructuring on the trading and clearing landscape. And, the cost of market data has been a source of industry concern for some time.