Pricing of Market Data

1. Pricing of Market Data Kerstin Hermansson 12 July, 2019

2. 2 Pricing of Market Data Background - until 2011 • In 2006/07, negotiations on market data pricing started to become difficult. • In Nov 2007, MiFID I was implemented which included • competition on trading • market data should be provided on reasonable commercial basis • Fees for market data increased and administration became more and more burdensome • In 2011, the Danish and Swedish Securities Dealers Associations asked Copenhagen Economics to investigate and find solutions to the problem with the ever increasing prices and burdensome administration.

3. 2 Pricing of Market Data Background 2012-2018 • CE concluded that (first report from 2013): • the prices had increased considerably • market data pricing is not based on competition – data is unique for each trading venue and cannot be substituted between venues. Market participants have to access market data from the exchange where the liquidity is. Demand is inelastic as you have to buy the data. • the solution could be that raw data is sold at ”a cost basis” in order for competition to be developed. • Delegated Regulation 2017/567, art. 6-11 clarified how market data should be provided on reasonable commercial basis including the price. • The prices for market data continue to increase and not, as expected by the market, decrease. • CE was asked once again to review the developments; the third report was published in November and can be presented as follows. • I use CEs own presentation – but do not cover all the details

4. 29 November 2018 Pricing of market data

5. Agenda Pricing of market data

6. 1 The problem

7. Impact The problem Our solution Trading venues have monopoly on market data This is a European – if not global – issue Pricing of market data

8. Impact The problem Our solution Market data fees are exceeding costs Market data revenue at venues EUR million Note: The figure shows data for 2017. For London Stock Exchange Group plc., market data revenue includes ‘real-time data' and ‘other information’ but excludes ‘FTSE Russell Indexes’ as defined in their annual report. For Deutsche Börse AG, market data consists of ‘data services’ and excludes ‘Infrastructure services’ and ‘index services’ Source: Annual reports from the venues. Average market data revenue Max assessed market data costs EUR Oslo Børs ASA Nasdaq Nordic Ltd Euronext N.V. Deutsche Börse AG London Stock Exchange Group plc. Pricing of market data

9. Impact The problem Our solution Market data fees have increased significantly Note: Numbers are rounded. Terminal fees are fees for accessing the data at terminals, i.e. individual use. On top, venues charge a range of other fees, e.g. a non-display fee, etc. External display is the costs of allowing a client of the security dealer to access data. All fees are outlined in appendix B. Source: Prices lists from Nasdaq Nordic Ltd Increase in market data costs for a small Nordic investment bank from 2008-2018 Decomposition (net of inflation) • 59% • -2% • 44% • 13% • 3% • Terminal fees • Existing fees not linked to individual use • New fees not linked to individual use • External display • Total increase Pricing of market data

10. Impact The problem Our solution Costs reduction are implied by improvements in the underlying technology Prices of data transfer have declined Internet transit price in US Note: Internet transit price is based on minimal internet package available Source: DrPeering.net and U.S. Bureau of Labor Statistics Price index for mobile services in US Pricing of market data

11. Impact The problem Our solution No impact of MiFID II/MiFIR: Market data fees have continued to increase in 2018 Increase in market data revenue at venues from Q1 2017 to Q1 2018 Real growth (net of inflation) Source: ESMA (2018): MiFID II Implementation –Achievements and Current Priorities Note: Data was not available for all trading venues. For London Stock Exchange Group plc., market data revenue includes, ‘real-time data’ and ‘other information’ but excludes ‘FTSE Russell Indexes’. For Deutsche Börse AG, market data consists of ‘data services’ and excludes ‘Infrastructure services’ and ‘index services’. Financial statement for Nasdaq Nordic Ltd for Q1 2018 was not available. Source: Annual reports from the venues. • 14% • Following the application of MiFID II, we were made aware of substantial increases in the costs of market data, reaching at times up to 400% compared to prices charged prior to 3 January 2018 • -Steven Maijoor, chair of ESMA • 7% • 5% • Deutsche Börse AG • London Stock Exchange Group plc. • Euronext N.V. Pricing of market data

12. Impact The problem Our solution Complexity of access has soared Number of different fees in the price list Number of non-display fees in pricing list Number of items in pricing list Note: Data was not available for all trading venues. Different starting year. London Stock Exchange Group Plc. has different prices for different customer groups. The number of non-display fees show the number of fees for Tier 1 customers. Source: Prices lists from venues • 0 • 0 • Nasdaq Nordic Ltd • London Stock Exchange Group plc. • Euronext N.V. • Nasdaq Nordic Ltd • London Stock Exchange Group plc. • 2004/2005/2006 • 2009/2011/2012 • 2018 • 2004/2006 • 2009/2011 • 2018 Pricing of market data

13. Impact The problem Our solution Have we created a vicious circle with no winners? Venues increase market data fees, increase policy complexity and implement tougher auditing Consumers limit the use of market data to mitigate the increasing costs Revenue from data distribution at venues decrease Pricing of market data

14. Impact The problem Our solution A more regulated US market leads to lower fees Market data fees are higher in the EU compared to the US (2018) EUR EU venues US venues 13 11 • 9 • 3 • 1 • 0 • 0 • London Stock Exchange Group plc. • Euronext N.V. • Nasdaq Nordic Ltd • Deutsche Börse AG • CBOE Europe Limited • NYSE Market, Inc. • Nasdaq, Inc. • CBOE Exchange, Inc. (BZX) • CBOE Exchange, Inc. (BYX) • IEX Group, Inc. • Level 1 • Level 2 Pricing of market data

15. Who owns market data? Both venues and security dealers participate in producing market data Security dealers supply the bids and asks, that, in essence, are at the origin of the market data Market data is sent to and from trading venues and trades takes place on their execution platforms Legal analysis by Danowsky: No one can claim intellectual property rights on market data Pricing of market data

16. 2 The solution

17. Impact The problem Our solution MiFIR clearly states that market data should be provided on a reasonable commercial basis Measures in MIFIR Market data should be provided on a “reasonable commercial basis”1 and fees should be set with a “reasonable relationship to the cost of producing and disseminating that data”2, while allowing for a “reasonable margin”2. 1 Venues should disclose their “cost accounting methodologies” to which “the production and dissemination of market data and other services are provided”3). 2 It is made clear that “market data should be provided on a non-discriminatory basis”, “unbundled from other services” 4) 3 The market data should be made available according to “the use by the individual end-users”5), making sure that each cost is only charged once. 4 Security dealers should be able to buy raw market data (due to the unbundling in “3”) based on cost-based fees (due to “1” and “2”) without paying any additional fee (due to user-based pricing in “4”). We suggest three concrete initiatives to implement the intentions in MiFIR Pricing of market data

18. Impact The problem Our solution I: Simplification and standardisation of market data policies Why regulate? Suggestion The increasing complexity and dense auditing procedures are: Implementing standard definitions of market data products and a simplified fee structure • Not what you could expect of a competitive market Regulating the auditing process of venues, e.g. implementing “active user” principle. • A significant cost-driver Implement a standardised and simplified procedure for accessing market data for vendors and other third-parties. 1) Article 6, DELEGATED REGULATION (EU) 2017/567 Pricing of market data

19. Impact The problem Our solution II: Cost-based pricing of raw market data Why regulate? Suggestion As documented, fees are likely exceeding costs of distributing the data. Implement a price cap on market data based on a Long Run Incremental Cost, meaning: • How much the venue would have its costs reduced if the venue were not to distribute market data but continued to conduct all other services Pricing of market data

20. Impact The problem Our solution A price cap based on costs 1 2 Price Cap Fixed Costs: Including reasonable mark-up Operational Costs = + Either on a company or product level Pricing of market data

21. Impact The problem Our solution III: A designated EU supervisor – to provide level playing field across venues • Currently each venue is depending on how the NCA interprets MiFIR in terms of market data. Some might regulate market data pricing actively – others not regulate at all. • This create unlevel playing field among venues. • Harmonized implementation is – we suggest ESMA should take the lead to 1 2 3 Ensure that the fee structure, format and procedure of getting access to data are standardised and consistent across EU. Design and estimate the LRIC+ model Oversee price caps at the venues are implemented consistently across EU Pricing of market data

22. Impact The problem Our solution Implementation of measures • We suggest to implement the initiatives as three consecutive steps Step I Step II Step III Regulate and simplify the fee structure of market data Price cap on market data ESMA assuming its role as single EU regulator • They are derived consequences of providing market data on “reasonable commercial terms”, i.e. to ensure terms of what you can expect from a competitive market. • Define what costs of “production” and “dissemination” entails • Then necessary to estimate costs (LRIC+ model) to ensure “a reasonable relationshipto fees”. • Appoint a supervisor to oversee sufficient and harmonised implementation across the EU. • This will create a level playing field among venues. Pricing of market data

23. Impact The problem Our solution Regulate raw data – the effects will spread to the market for value-added data • Regulation: • Price cap • Easy access Vendors New source of revenue for venues? Raw Data Other data providers Security dealers (Primarily high-frequency) Venues Value-added data Trading activity by market participants Security dealers Investors Pricing of market data

24. 3 Impact 3 Impact

25. Impact The problem Our solution Level playing field among trading venues Venues might currently price trading below costs Trading at venues might currently be subsidised This stipulate trading activity, which will give them valuable market data… …where they hold monopoly, and can charge a monopoly price, which will entail larger overall profits A price cap will prevent large venues from subsidising trading Trading fees will increase More level playing field between large and small venues. This is especially advantageous for larger venues – smaller venues’ market data is not “must have” We expect a price cap on market data will increase trading fees Pricing of market data

26. Impact The problem Our solution It will benefit investors • Through two channels the measures will increase risk-adjusted return on for investors: More informed markets Less volatile Markets Lower market data fees Higher risk – adjusted return for investors Stronger competition among venues Lower net trading costs Pricing of market data

27. Impact The problem Our solution Lower cost of capital – in particular for SME Market transparency will increase Academic research shows this can reduce market volatility and pricing inefficiencies, i.e. risks of assets This will in particular benefit less traded and less liquid assets, e.g. small-cap equity Will eventually lead to lower cost of capital Pricing of market data

28. Impact The problem Our solution Concluding remarks The problem The solution Impact Trading venues have monopoly on market data Regulate the access to market data More transparent and efficient financial markets • This leads to prices above costs of distributing and large complexity • Lower market transparency and efficiency • Ensures access on reasonable commercial terms: • Standardisation and fair auditing • Price cap • One EU supervisor • Level playing field among venues • Higher market transparency • Higher returns for investors and lower cost of capital – in particular for SME Pricing of market data

29. Pricing of market data

30. 3 Pricing of Market Data Discussion points • It is a global problem – the EU, Canada, US and South Korea are examples. • The problem is: • As prices increase, firms scale back their purchase of market data to a minimum, excluding e.g. less significant markets and thereby hampering the development of an efficient Capital Markets Union. • Less information to investors lead to an incomplete picture for investment decisions and best execution control. • Less information creates more volatility and could lead to higher cost of capital for in particular smaller firms. • Difficult for smaller/new venues to compete due to cross-subsidisation (inflated costs and revenue from market data is used to lower trading fees to an artificially low level). • Difficult for smaller/new investment firms to compete(a firm with fewer clients pay much more for each client for market data). • Impossible for SI:s to make quotes public under MiFIR. • High costs to administrate users’ access to market data.