An Economic Study of Securities Market Data Pricing by the Exchanges
This study conducts an economic analysis of the supply and demand of securities market data sold by exchanges in the United States and finds that two exchanges each have dominant positions in distinct portions of the market with the opportunity to exert monopoly pricing power. Quantitative analysis of available economic data, including measured market shares and concentrations well in excess of standards set by the United States Department of Justice (“DOJ”), shows that the New York Stock Exchange (NYSE) enjoys a dominant market in individual NYSE-listed securities and the NASDAQ Stock Market (NASDAQ) enjoys a dominant market in NASDAQ-listed securities, and provides strong empirical support for the assertion that the two dominant exchanges are exploiting the opportunity to exert monopoly pricing power in a manner predicted by economic theory. The presence of strong network externalities, public statements and financial disclosures by the exchanges, and other factors provide additional support. The two dominant exchanges are exercising monopoly pricing power by charging broker dealers and the investing public fees for depth-of-book data that are significantly higher than the relevant costs associated with distributing the data. Therefore, the United States Securities and Exchange Commission (“SEC” or “Commission”), which is required by Congressional statute to assure that securities market data distributed by exchanges is made available on “fair and reasonable terms,” cannot reasonably rely on competitive forces to result in competitive prices for exchange market data sold by the two dominant exchanges.
See related comment letter calling the Securities and Exchange Commission (SEC) proposed order on market data fees “fatally flawed” and unveiled a related study to support that contention. By law, financial firms are required to provide trading data to exchanges at no cost and then buy back the consolidated market data from the exchanges. The Exchange Act requires the SEC to review associated fees to ensure they are “fair” and “reasonable.”
Excerpt
Introduction
The primary objective of this study is to provide an economic analysis of the pricing of securities market data by exchanges in the United States. Broker dealers provide exchanges with market information (e.g., bids, offers, and limit orders) produced in conjunction with their clients, the investing public. Broker dealers are required by law to grant the exchanges a broad license to use this valuable liquidity data and are not permitted to recover any fee in return. Driven by competitive pressures to provide the best possible customer service, broker dealers must have the option to be able to buy this data back at reasonable prices when they so choose. This pressure, when coupled with a lack of comparable substitutes and the other factors set forth below, results in a relatively inelastic demand for the exclusive liquidity data products sold by the dominant exchanges.
The study conducts empirical analyses of available public data within a qualitative and quantitative economic assessment of the supply and demand conditions for securities market data. During the period in which this study was developed, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) published a “Notice of Proposed Order Approving Proposal by NYSE Arca, Inc. to Establish Fees for Certain Market Data and Request for Comment” (“Draft Order”).1 Relevant conclusions in the SEC Draft Order are analyzed and critiqued throughout the study.
The study proceeds as follows. Section II provides an analysis of the supply-side conditions. It explains why the competition for order flow among exchanges does not preclude highly concentrated markets dominated by two exchanges and, therefore, provides no assurance of competitive pricing for market data by those exchanges.