The Financial Conduct Authority is the latest regulator to launch a consultation into the monopoly exchanges have over market data and the fees they charge broker-dealers and asset managers, a contentious issue that shows no sign of resolution anytime soon.

Last week, the UK watchdog announced plans to investigate access to wholesale trading data amid concerns that “limited competition may increase costs” for investors and “could affect the quality of wholesale data.

Sheldon Mills, executive director, consumers and competition at the FCA, added: “Access to wholesale data is really important for those who want to make investment decisions. Without it, they lack the information they need to make properly informed choices.”

The importance of market data cannot be understated. Real-time, historical, summary and reference data that exchanges provide is crucial for activities such as trading, investments, reporting and auditing. As SIX Swiss Exchange said: “Data is the fuel of financial markets.”

With the advent of algorithmic trading in the 1990s, market data has grown to become a key revenue driver for exchanges while their primary business of stock trading has taken a backseat. Highlighting this, stock trading revenues for Nasdaq contributed to 11% of its overall revenues while market data accounted for 23.7%.

The monopoly on data means exchanges can charge excessive fees as the Securities Industry and Financial Markets Association (SIFMA) explained: “Each exchange is a monopoly source of its own depth-of-book data, and broker-dealers rely on that complete set of market data to achieve best execution for their customers…for which exchanges charge excessive fees.

Despite its importance, power lies in the hands of just a handful of players. According to Johannes Petry of Goethe University, six exchanges – the London Stock Exchange, CME Group, ICE, Cboe Global Markets, Nasdaq and the Deutsche Boerse – account for over 50% of the entire industry’s profits even though over 100 exchanges operate worldwide.

The FCA is not the first regulator to investigate the issue. In 2019, the European Securities and Markets Authority (ESMA) launched a consultation in which it found MiFID II has not delivered on its objective to lower the prices of market data while the International Organization of Securities Commissions (IOSCO) highlighted concerns of market participants around market data fees in a consultation paper in 2020.

The European regulator also investigated Nasdaq and Bolsas y Marcados Españoles (BME)’s high data revenues in 2018 while the Securities and Exchange Commission (SEC) blocked fee increases from the New York Stock Exchange and Nasdaq.

With exchanges not likely to give this revenue source up without a fight, this issue is not set to be going away anytime soon. The latest battle can be seen around the EU’s attempt to introduce a consolidated tape to the market to improve transparency, a move exchanges are evidently against.

“Exchanges are now actively creating, regulating and shaping markets around the world,” Petry concluded. “They control the very infrastructure of global finance – data, indices, financial products, trading platforms and clearing, essentially deciding how markets work for companies, investors and states.”

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