Market data fees in regulators’ sights

However, the CSA doesn’t take a position on whether market data fees are excessive in Canada, whether it should intervene to keep a lid on these costs and, if so, just how should it do that. Instead, the CSA paper surveys the issue and sets out a range of possible regulatory responses, including various approaches to restricting the amount of the fees, setting up a market utility to provide the data at cost and enhancing the transparency of the fee-setting process. But the paper doesn’t propose any particular regulatory prescription.

Still, although the CSA paper is noncommittal on whether there is a problem, the fact that regulators are exploring the issue nevertheless indicates that the industry’s grumbling has been heard.

“The costs of market data have been escalating over the past number of years,” says Tracey Stern, manager, market regulation, with the Ontario Securities Commission (OSC). “As a result, we are looking at market data, and the costs associated with accessing this data, to ensure that there is fair access to the data and to demonstrate our commitment to fair and efficient markets, and to confidence in those markets.”

The rising cost of market data has emerged as a growing concern for the securities industry over the past few years, particularly as market structure has evolved. The sprouting of multiple marketplaces in Canada has brought its share of benefits — competition for trading volume has produced both greater efficiencies and more trading innovation — but this development has its downsides, not least of which is the increase in market data costs.

As a result, the industry has found itself in the unfamiliar position of calling for more regulation by demanding that regulators intervene to restrain the rising cost of market data. In the summer of 2011, the Investment Industry Association of Canada (IIAC) published a report produced by U.S.-based consulting firm Securities Litigation & Consulting Group Inc. that helped provide a theoretical basis for the industry’s gripes.

That report concluded the Canadian firms pay excessive fees for market data and that regulators should intervene because market forces could not be expected to address the cost of data.

So, although the securities industry does not typically welcome new regulation, in the case of market data fees, it has demanded it. The IIAC report found that not only do market data fees represent a large and growing expense to firms, those fees make trading more expensive, thereby harming clients. The IIAC report concluded: “The negative consequences of high securities market data fees should be addressed by regulation that establishes limits to the fees.”

These concerns intensified with the run-up to the consolidation of TMX Group Inc. and its primary rival, Alpha Trading Systems LP, as part of the Maple Group Acquisition Corp. transaction. During the regulatory approval process for that transaction, which was finally consummated earlier this year, various industry players worried that the deal would increase TMX’s market power. As a result, they called on regulators to take steps to control data costs as a condition for approving the deal.

Suggestions included blocking the combined TMX/Alpha from charging for market data from both venues; using Alpha’s pricing model rather than the TMX’s as a basis for the combined firm’s fees; and setting out a plan for regulating market data in general.

Yet, the regulators did not place any specific conditions on the TMX/Alpha deal with respect to market data. Instead, the regulators indicated that they see this as a marketwide issue, not just a TMX issue, and promised to examine market data costs.

The new CSA paper indicates that these sorts of costs do represent a regulatory concern: “Too high or excessive costs are a form of friction in the market. We would be concerned that such an outcome would be inconsistent with our mandate to foster fair and efficient capital markets. By not addressing these issues, we risk negatively impacting confidence in the Canadian capital markets.”

Whether these costs are excessive remains a matter of debate. Although some in the industry clearly believe costs are excessive, it’s not yet clear that regulators are convinced. Having waded through the data, the CSA paper concludes that the market data fees charged by TMX “do not appear [to be] unreasonable in relation to their share of trading activity” on its exchanges.

However, the paper concedes that the fees charged by smaller markets are high, given their share of trading volume; and it does admit that the cost of consolidated data in Canada is significantly higher than it is in the U.S.

Specifically, the paper says that although the total cost of accessing top-of-book data in Canada is less than in the U.S. in absolute dollar terms ($118.85 a month in Canada vs $173.99 in the U.S.), when scaled for trading volume, Canadian data is approximately seven times more expensive than equivalent U.S. data. (Top-of-book data generally include the best bid and offer prices on listed stocks, last sale prices and aggregate volume available to trade.)

The CSA paper also says that the total cost of accessing depth-of-book data is about 10 times more expensive in Canada than in the U.S. when scaled to the trading volume, albeit it still is cheaper in Canada in absolute terms. (Depth-of-book data provide information on all visible orders [price and volume] and on all trades.)

Although Canadian data appear much pricier than the equivalent data in the U.S., the CSA paper also says that a price differential is not unexpected, given the much greater scale of trading and the number of professional data users in the U.S. The U.S. markets boast approximately seven times the volume and 10 times the number of professional data buyers, the paper says, which obviously allows for much greater economies of scale. And, the paper suggests, due to the higher volume of trading, markets aren’t as dependent on data revenue in the U.S.

Although, in an ideal world, the costs between Canada and the U.S. would be closer, the CSA paper suggests this may not be realistic, given the fundamental differences between the markets.

The CSA paper also compared Canadian data costs with costs in other jurisdictions (including Europe, Hong Kong, Brazil and Australia), and found that a verdict on whether Canadian costs are high isn’t as clear. In general, the paper reports, TMX data fees are comparable with those charged by European exchanges, are a bit pricier than in Australia and are higher than in Brazil and Hong Kong. Ultimately, the CSA paper concludes: “There is no conclusive evidence that the fees charged by [TMX] are unreasonable.”

Incidentally, the IIAC paper found much the same thing. Its efforts to compare both the cost of market data and the value of that data in Canada and various other countries found that Canada generally ranked in the middle of the pack — more expensive than some, but not all other markets.

However, the IIAC paper also found, in a comparison of 10 international exchange companies, that TMX had the greatest reliance on market data as a revenue source, which the paper pointed to as evidence of excessive fees. Moreover, the IIAC paper warned that rather than being blunted by regulators, the pricing power of all Canadian markets is boosted by the fact dealers are required to buy data from all the various trading venues to ensure compliance with their best execution and best price obligations.

Still, despite drawing somewhat different conclusions from the IIAC paper, the CSA paper does suggest that there might still be a case for regulatory intervention, given that the fees for smaller trading venues, and the cost of consolidated data overall, does appear to be relatively high.

Stern notes that the CSA did consider the IIAC study: “However, [the] IIAC took a different approach than we did. Our focus and approach was on ensuring that the issues relating to data fees were examined in the context of fair access to data and also fair and efficient capital markets and confidence in those markets. It is critical that our analysis leads us to determine the right steps for our market.”

Just what those steps might be is likely to be determined by the outcome of the comment period. Given that the regulators haven’t decided that their intervention is required, they may yet take some persuading by the industry if they are to interfere with fees.

“We need to examine the issue carefully,” stresses Stern, “and determine the right solution for Canada.”  IE