The launch of new member-owned stock exchange, MEMX, is a concrete example of the collective power market participants can wield in the face of opaque pricing and a lack of transparency – and a cautionary tale to incumbents that refuse to listen to their customers.
Shares of the biggest exchanges in the US fell early in the trading day on 7 January as news rippled through the stock market that nine major Wall Street firms, disillusioned with complex and opaque fees incurred for market data and other services, had taken matters into their own hands.
MEMX, which promises to drive simplicity, efficiency and competition in the equities space, is yet another example of a burgeoning revolution in financial markets. Market participants are stepping up and telling the technology and data providers they once relied upon: if you dont work with us to resolve the issues we care about, we will resolve them ourselves.
Skyrocketing market data fees have topped the list of these issues for some time. More recently, this has been exacerbated by some exchanges and trading venues unbundling existing data packages and selling them separately to improve profit margins.
A leading hedge fund trade association likened the practice to ordering a hamburger which used to cost $20 but now costs $7 for the bun, $15 for the patty and $11 for the condiments. Hamburgers aside, this has further increased the divide between firms that can afford to pay for market data and those that cannot.
Last year, frustration levels reached new heights and the distribution, cost and – most importantly – the transparency of market data packages were placed under more scrutiny than ever before. End-user investors made their views clear, and the regulators started listening closely.
Market operators – those charging trading and market data fees in other sectors – need to show that they too are listening to these concerns and adapt their approach to market data accordingly, or they risk losing business to an MEMX-style competitor.
There is nothing wrong with charging for market data, but there needs to be greater transparency in the pricing and availability of market data packages so counterparties know what they are paying for, how that compares against their peers and whether they are getting value for money.
This is not an issue unique to US equities – we have been raising awareness of similar practices in FX for some time – but it is in the US equities market where the feud between market participants and exchange giants Nasdaq, ICE/NYSE and Cboe has reached fever pitch.
The trend is common across asset classes. Institutions are being forced to purchase expensive data packages to match their competitors. If they do not, they risk losing out to those competitors – who effectively gain a competitive advantage.
The solution is straightforward on the surface – and just happens to be in line with the rules and principles that underpin MiFID II, the Securities Exchange Act of 1934 and, in our market, the FX Global Code – be transparent about the cost of data packages and price it in a way that is reasonable and offers value for money.
But perhaps more importantly, treat everyone equally so all of your customers operate on a level playing field. That means no special deals based on the size of the institution or volumes traded. For some incumbent providers, this means unwinding years of pricing structures that have become the foundation of very profitable business lines.
Time and time again the member-owned cooperative model has provided the vehicle for market participants to overcome the issues they have in common. Just as we have seen in FX, as well as equities in the previous decade, MEMX will represent the interests of its founders’ collective client base – with its success and its customers success intrinsically linked.
The launch of MEMX marks the start of a new chapter following years of what some banks and financial institutions perceive to be unfair and opaque market data pricing by market operators. The equities market has spoken out, and the message is loud and clear: enough is enough.
Incumbent players in other markets take note: ignore your customers for long enough, and they might just become your competitors.
Roger Rutherford is Chief Operating Officer at ParFX.
