Stock exchange data fees imposed upon brokers and traders are receiving a lot of attention these day, with very good reason. All of the stock exchanges in the United States which include the two largest exchanges in the world, the New York Stock Exchange (NYSE) and Nasdaq, are required to provide all market data through the Securities Information Processor, also referred to as the SIP. All securities data must flow through the SIP for consolidation in order to display the current pricing and provide an environment allowing traders to perform their obligatory duty of best execution.
Exchanges provide data in another way, through colocation of equipment, allowing outside firms to purchase connection to their own computer servers to access the exchange’s Premium Data Products. The rising costs of these connectivity fees are causing disbelief among those dependent upon that information, as they continue to skyrocket with an average annual increase of 20% per over for the last five years!
Two Revenue Streams for Stock Exchanges
Bringing Buyers and Sellers Together
It is important to realize that exchanges make money two different ways. The fees charged for bringing together buyers and sellers is the traditional revenue stream for a stock exchange. Exchanges used to earn decent revenue stream strictly from trading. The market structure has changed drastically since those days, before the onset of electronic trading venues and the emergence of several dark pools.
The combination of the speed that only a computer can provide carrying out strategically written algorithms, created a highly competitive marketplace like absolutely nothing anyone had ever seen before. This new environment opened up many more options available for buying and selling securities, creating a might tighter big-ask spread.
Within the newly fragmented market place, exchanges that once dominated the market began to lose market share, and liquidity. Prior to the onset of electronic algorithms, for example, the NYSE dominated the marketplace by trading approximately 80% of all market trades. Since the late 90’s and the introduction of the various Alternative Trading Systems (ATS), and the more than 40 dark pools, the NYSE now trades less than 20% of all market trades.
Premium Data Access Fees
US Stock Exchanges have developed a second revenue stream, charging for access to their “Premium Data” with a proprietary line of communication other than the SIP. These direct feeds are installed right to the exchanges servers, connecting the broker or trader to the servers of the exchanges through collocated equipment. These direct connections provides a slightly different view of the market with what the exchanges call “Premium Data Products” or “Depth-of-Book” data. For example, in 2006 the NYSE acquired Arca, and began to charge for depth-of-book data that had been free of charge prior to the acquisition.
These direct feeds may be providing the same information, although the way it is delivered, or more specifically the speed with which information is delivered, is the main competitive factor. In fact, these direct feeds are viewed as more than just a competitive factor, they are absolutely necessary for traders to conduct competitive trades.
Market Makers are forced to pay the premium data connection feeds as there is no other choice if they want to conduct trades competitively. The premium data products provide information that is not only advantageous over the SIP, it is a matter of necessity. Market makers cannot compete without this premium data from direct feeds. The direct feeds will outperform the SIP, every time.
Early in 2016, Larry Tabb published an article in the Bloomberg View entitled “Stock Exchanges are Eating Your Returns”, where he reveals the total quarterly revenue of exchanges in US equity markets increased by 16% from 2010 to 2015, while their data and technology revenues increased by 62%. In addition to this, the revenues of their customers, the market makers providing liquidity and trading on the exchanges, decreased by 75%.
Great Point Capital, headquartered in Chicago, with offices in Austin, offers traders support and tools necessary to make the most of their trading careers. We are one of the few firms authorized to utilize the Takion Software platform for trading, giving full access and support to our traders in house as well as remotely located.
Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high perf
No comments:
Post a Comment