The World Federation of Exchanges (WFE), has published a paper to advance thinking on fairness and transparency in equity market data.
The WFE says its consideration of use cases promises a way forward, because it looks at ‘data in the wild’, as it relates to actual practice in equity trading, rather than according to theoretical dogma.
The paper titled ‘Not what, but who’, identifies the different types of user demand; and what are in effect distinct data products manufactured by exchanges.
According to the paper, while market makers quote two-way prices in order to profit from order flow, it is the exchanges that create the marketplace in the first place, bringing order to an otherwise fragmented process that would inherently be less fair and transparent to end customers.
The exchange does this by offering two complimentary product sets: data and execution.
Exchanges license data in a way that recognises the various use cases and the trading-business model that each adopts including how those distinct types of users interact with each other.
It is argued that it does so in the interests of maintaining order flow, which benefits intermediaries and end-users and, only as a by-product of that, the exchange itself.
The WFE observes that market prices can change at a speed that the human eye cannot see and the brain cannot process. But, by specialising in the way in which they consume data, trading intermediaries can.
The paper suggests that this is a much more profitable activity than licensing data to them, as exchanges do. Fast data helps them reduce their capital needs and improve their turnover.
“They can execute more trades in a day – because there are more points in the day when there are prices to trade off. And they can do so more with less risk and more profit, because they do not need to hold ‘warehouse’ (hold) risk for so long,” the WFE cites.
Additionally, the paper suggests exchanges’ creation of markets enhances social welfare, and in the process, it also promotes an important alternative to the banking-credit channel, whose vulnerability to economic conditions has been highlighted by COVID-19.
The paper concludes that in the end, just because some market participants find utility (benefit) in the data, it does not make data provision a utility service in the sense of public property.
The WFE muses: “The market continues to function – better than ever, in terms of the overall cost to end-customers and it is the exchanges that are there to make sure that continues to be the case. Therefore, before any discussion about interfering with the pricing of exchange equity-market data, it is important to check whether there are truly any market failures or barriers to entry for venues that want to compete.”
As far as the federation can see, this is not currently the case.
Exchanges perform a unique role, balancing the interests of all that participate as well as having regard to the exchange’s own viability as a business operating in a competitive and rapidly evolving environment, the WFE stipulates.
The paper emphasises data is much more than a side issue in this, and the exchange’s role in ensuring that the right data reaches the right people, on the right terms and at the right time and price, is crucial to the capital formation in which public markets perform a central role.
Nandini Sukumar, CEO, of the WFE adds: “Streamed data is a human artefact but it is traders’ machines that convert it into an opportunity to profitably intermediate transactions.”
“This is no more and no less than the classic marketplace ecosystem updated for the digital age. Data is licensed by exchanges at a price that is fully conscious of this and indeed all aspects of market microstructure. The WFE will continue to champion approaches that are fair to the marketplace as a whole.”
