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A New Way to Attack Market Data Costs
November 21, 2006
Proposals in recent months on opposite sides of the Atlantic make it clear that the securities industry is focusing more intently on the cost of market data and is strongly signaling a desire to rein it in.
In September, nine investment banks announced the formation of a consortium to create a trade reporting and market data dissemination platform that would compete with the London Stock Exchange (LSE). The following month, NYSE Group said it had begun negotiating with the National Association of Securities Dealers to create a trade reporting facility for off-exchange trades in all U.S.-listed stocks.
The backers of the London effort--ABN Amro, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs & Co., HSBC, Merrill Lynch & Co., Morgan Stanley and UBS--said they undertook it in anticipation of the best-execution and data-reporting requirements of the European Union's Markets in Financial Instruments Directive (MiFID). The banks said they expected their facility--which was informally dubbed Project Boat--"to yield significant cost benefits with respect to both trade reporting and market data dissemination." The banks said they expect it to be live by next August and plan to roll out the service across Europe and, as opportunities present themselves, to asset classes besides equities.
Some market participants in the U.K. see the effort as a natural step, given the growing concerns about the effects of MiFID on data costs. "There's been a lot of discussion for quite some time," said P.J. Di Giammarino, chief executive of JWG-IT, a London-based capital markets think tank focused on MiFID preparations. "There has been a realization that by collaborating they can take home a piece of the margin. MiFID has proved to be the catalyst that spurred them into action." Di Giammarino added, "What's more important is that it will create a common point of leverage for some of the major firms to have more focused discussions with the market data vendors."
A spokesperson for the LSE said that the exchange had no problem with the investment banks exploring their options. Reuters Group, according to a spokesperson there, viewed the changes under MiFID and electronic trading as "an opportunity for us to help enable and support" the securities industry.
The benefits of lower market data costs would presumably be passed on to securities firms' customers. Glenn Bedwin, director of institutional research for Thomson Financial in London, told Securities Industry News shortly after the London banks made their announcement, that if the consortium "drives down the cost of market data, that helps reduce our costs, and it helps us improve the value proposition to our clients."
The impact of NYSE Group's initiative may be felt quicker than that of the London consortium. Expected to be operational early in 2007, NYSE's facility "is a competitive response to what is presently occurring," said Robert McSweeney, the exchange company's SVP of competitive position. The NYSE facility and a rival operated by the Nasdaq Stock Market will be fighting over reporting for the 15 percent of NYSE volume and the 30 percent of Nasdaq volume that now occurs off-exchange.
Trades executed on broker-dealers' internal crossing engines are reported to the Nasdaq trade reporting facility, but as more trades occur on alternative off-exchange venues, the revenues associated with trade reporting are increasingly sought-after. As McSweeney noted, the National Stock Exchange in Chicago and the Boston Stock Exchange have proposed their own trade reporting facilities.
