A Report by Professor Charles Jones

Robert W. Lear Professor of Finance and Economics and the Senior Vice Dean at Columbia Business School

Summary of Key Findings

Equity Exchange Market Data Overview

  • Exchanges offer a variety of market data products at different price levels to suit the needs of different business models.
  • Market data consumers are not simply buying back their own order data. Equity exchange market data has value because it reflects the price discovery created by exchanges, and because it provides a view of the entire market by aggregating the orders of many market participants and identifies the best prices among them and reports all transactions that result from matching buyers and sellers.
  • Market data's importance is the result of the fragmentation of equity trading, particularly following Regulation NMS. It is also a result of exchange innovation. Modern market data products were established by exchange competitors like Island and Archipelago in the early-2000s.

Categories of Market Data

Consolidated Tape (SIP Data)

  • The Consolidated Tape (or SIP data), contains a great deal of information that characterizes the essential elements of the national market: the most recent transaction prices from all trading venues, and the best displayed bid and offer prices and quantities at each exchange.
  • This real-time information is sufficient for many investors to make trading decisions, and is made available for free to numerous financial websites.

Proprietary Market Data

  • Exchange proprietary data products provide complementary market data that are valuable to active proprietary traders and users of algorithms that may not be necessary or helpful for retail investors or many types of other market participants.
  • In addition to the exchange's best bid and offered prices, proprietary market data products include richer information such as the available liquidity at multiple price levels and/or order-by-order detail.

Market Data Regulation

  • Pricing schedules for both SIP and proprietary market data must be publicly filed with the Securities Exchange Commission (SEC).
  • Prices cannot be negotiated or altered for different market data subscibers, in contrast to the prices charged by third-party vendors who are not regulated or obliged to publish their rates.
  • The Vendor Display Rule (Rule 603(c) of Regulation NMS requires broker-dealers to provide a consolidated display of market data when they are providing equity quotation information to clients. This rule is satisfied by subscribing to SIP data.
  • There is no regulatory requirement for market participants to purchase any proprietary market data products for regulatory purposes.

SIP Market Data Quality

  • Market data products have seen substantial innovation over time. In the last decade, there have been dramatic improvements in the latency for both quotes and trades.
  • In February 2018, the average latency for quotes reported through the SIPs was 0.09 milliseconds for Tape A and Tape B securities and 0.017 milliseconds for Tape C securities. These quote latencies represent a significant reduction since the first quarter of 2010, when the average latency was 4.04 milliseconds for Tape A and Tape B securities and 5.42 milliseconds for Tape C securities.
  • There have been similar improvements in trade-reporting times. The average latency for trades reported through the SIPs fell from 6.46 milliseconds in the first quarter of 2010 to 0.15 milliseconds in February 2018 for Tape A and Tape B securities, and from 6.06 milliseconds to 0.017 milliseconds for Tape C securities over the same period.

Exchange Market Data Revenue Analysis

  • In 2016, the total market data revenue for all U.S. exchanges combined was $1.1 billion (including all asset classes and geographies).
  • Overall market data revenue reported by ICE (and its predecessor NYSE Euronext), which includes market data for equity and non-equity products, both inside and outside the United States, has remained between 8% and 10% of total revenue from 2008 to 2017.
  • Likewise, Nasdaq's market data revenue has remained between 9% and 12% over the same time period. For Bats, market data revenue accounted for 7% to 8% of revenues from 2015 to 2017.

Consolidated Data Feed

  • In March 2018, for the first time CTA and UTP Plans disclosed historical information about the annual revenue distributed to participants going back to 2007, including a decomposition of these distributions for the trade and quote components of the allocation formula.
  • Total consolidated tape revenues distributed in 2017 were $387 million, which is 10% lower than they were in 2007, even without adjusting for inflation. After adjusting for inflation using the CPI-U, consolidated revenues distributed declined by more than 23% over the 10 years ending in 2017.
  • In 2008 equity SIP revenues were 4% of total NYSE Euronext revenues. By 2017 this percentage had declined to 2% of total parent company revenue. For Nasdaq, consolidated data revenues were 4% of total revenues in 2008, declining to 3% of total revenues in 2017.
  • The shares of SIP revenues allocated to the primary listing exchanges have been reduced in large part due to competition from new market entrants.
  • It is not just exchanges that receive SIP revenues; dark pools, ATSs, and internalizers collectively receive tens of millions of dollars annually in SIP market data revenues,

Proprietary Data Feed

  • Bats: Proprietary data accounts for at most $65 million of 2017 revenue at Cboe (formerly Bats), which is 3% of its overall revenue that year. For Bats, it is clear that proprietary data is a significantly smaller source of revenue compared to consolidated data.
  • NYSE: During the 3rd Quarter of 2017, ICE management stated on an earnings call that “the sales of NYSE real-time equity data products (i.e., proprietary market data products) was expected to be less than $90 million in annual revenue with relatively stagnant growth. These products account for approximately 2% of ICE's annual revenue.
  • Nasdaq: For the same quarter, Nasdaq reported that its U.S. equity proprietary products generated $101 million in trailing 12-month revenue, compared to $120 million for its share of consolidated data fees.
  • For all three major U.S. stock exchange groups, it appears proprietary equity market data actually delivers less revenue than consolidated data.

Analysis of Cost to Industry

  • Exchange equity market data fees are a small cost for the industry overall, especially when compared to broker-dealer commissions, investment bank earnings from equity trading, and revenues earned by third-party data vendors.
  • The Reg NMS requirement for broker-dealers to provide a consolidated display of market data when they are providing equity quotation information to customers can be satisfied by paying a minuscule $0.0075 per query to provide a snapshot of the SIP feed.
  • Prices for exchange proprietary data products are publicly available and have generally remained stable over time.
  • Broker-Dealer Commissions: Together, the six firms in the Bloomberg Intelligence U.S. Retail Brokerage Competitive Peers Index reported $10.0 billion in commission and related revenue in 2016. These firms alone take about 10 times as much in commissions from the subset of investors who use them as all market data generates from all market participants.
  • Investment Bank Equity Trading Earnings: In the first nine months of 2015 the nine largest investment banks earned a total of $35.9 billion from their equities trading operations. This amounts to an annualized total of $47.9 billion, assuming that the banks generated revenues at the same rate. In contrast, in 2015 the total market data revenue earned by NYSE, Nasdaq, and Cboe (for all asset classes across the world) was $1.1 billion. Thus, total exchange market data revenues were less than 2.3% of equities trading revenues for just these nine investment banks. Since the numerator includes non-equity and non-U.S. market data revenue, and the denominator includes only nine firms, this 2.3% percentage overstates (and probably substantially so) the fraction of equity trading revenues spent on equity market data by broker-dealers in aggregate.
  • Third-Party Data Vendor Revenues: Burton-Taylor reports that in 2016, the total revenue earned by third-party vendors for market data–related services was over $12 billion. That is 10 times the $1.1 million revenue exchanges earned across all asset classes and geographies (which is more than market data revenue from just U.S. equity markets) during the same period.
  • NYSE's OpenBook is a proprietary data product that provides a case study of pricing. OpenBook provides frequent snapshots of the entire NYSE order book and was initially offered in 2002 at a fixed access fee of $5,000 per month plus a variable fee based on the number of subscribers. The access fee has not changed since inception of the product, and the subscriber fee changed only once, in 2004, from $50 to $60 for professional users; the non-professional subscriber fee ($15/month) has not changed at all. Since its inception in 2002, the OpenBook product has been enhanced significantly in terms of speed and volume of data.

Competitive Analysis

  • Exchange market data is sold in a competitive market.
  • Currently, there are 13 cash equity exchanges and over 30 Alternative Trading Systems (ATSs) in the United States, with many new entrants in the exchange space over the past 20 years. This competition, and the low barriers for entry for new entrants, ensures that prices for market data are set in a competitive market.
  • Competitive pricing also stems from new entrants offering low cost or free market data to secure order flow.
  • Off exchange trading also provides a significant source of competition for consolidated market data. In fact the total dollar amount of consolidated market data revenue distributed to FINRA members who report off-exchange trades to a TRF has increased over time as the off-exchange share of trading has increased.