New economic analysis by Oxera tackles these challenging questions. The results of the analysis question the need for regulation.
In recent years, there has been a debate about market data services provided by trading venues in Europe. The perception is that the fees charged for these services in Europe have increased and are far higher than in the USA. The European Parliament and the European Council agreed with proposals from the European Commission to require trading venues to provide market data services on ‘a reasonable commercial basis’, and allow for delegated acts to be passed by the Commission to clarify what this would mean.  These rules potentially open the way for price regulation by the European Securities and Markets Authority (ESMA).
This Oxera report presents new empirical analysis and provides an economic framework within which the pricing of market data services can be analysed.
The main findings from the analysis include the following.
The debate has mainly focused on market data services. However, trading venues can recover their costs through fees for trade execution services and/or fees for market data services. In economic terms, market data services and trade execution services are joint products and have joint costs. The main implication is that the pricing of market data services cannot be analysed in isolation from the pricing of trade execution services—the two services need to be analysed together.
- Market data services revenues as a proportion of the total core revenues of exchanges (i.e. combined revenues from trade execution and market data services provided by trading venues) range between 19% and 35% in Europe. Interestingly, these ratios have been relatively stable in the past few years.
- It is often argued that market data in Europe is far more expensive than in the USA. Oxera’s analysis shows that, at first sight, Europe does look more expensive than the USA. However, a more detailed analysis shows that this is driven by factors such as the complexity of the European markets, the specifics of the regulatory requirements, and, in particular, by large differences in economies of scale. These are the same economies of scale that explain why trading fees in the USA are generally lower than in Europe. Interestingly, the range of revenue ratios (market data services as a proportion of the total core revenues of exchanges) in Europe is quite similar to that observed in the USA.
- The main policy debate in Europe has focused on the costs of market data services to brokers. However, brokers are intermediaries and pass on the market data costs they incur to end-investors. To fully understand the impact of the pricing of market data services on the functioning of the market for trading, it is important to look at how these costs affect end-investors.
- Oxera’s empirical analysis shows that the costs of market data services to investors are quite small—less than 2% of the total annual costs of trading and holding securities. This is an important finding. If the market data costs are relatively small compared with other trading and holding costs, it would seem unlikely that, at a general level, changes in the fees for market data services would significantly affect the overall level of trading activity.
- Although there is some assessment in the economic literature of the impact of charging for market data services on market efficiency, there is not sufficient evidence from these models to draw a conclusion on the relationship between the efficiency of markets and the pricing of market data. In fact, there are some academic papers that suggest that charging for market data services has a positive impact on market efficiency.
- The Oxera analysis shows that there are variations in how trading venues currently recover their joint costs through fees for trade execution services and/or fees for market data services, but how they actually do this is unlikely to have a significant impact on the functioning of the trading market for end-investors.
These findings lead to the overall conclusion that, from a public policy perspective, there is no justification for regulating trading venues’ pricing of market data services.
Access the full version of this report here.