Mifid II fallout EU securities regulator probes pricing of stock data

Should stock exchanges profit from securities data? The European securities watchdog, ESMA, is examining the matter after exchange operators raised fees charged to banks, brokers and high-frequency traders.

Stock exchange operators increasingly see their securities data trove as a growth sector, feeding hungry automatic trading programs with the raw material to produce profit. They want their cut and consider the information on prices and trading volume a profit center in its own right.

But now European authorities are investigating just how much profit these exchanges should be making on their data, Handelsblatt has learned. The probe comes after increases in some data prices at Deutsche Börse and other exchanges prompted banks and other traders to complain that the exchanges were exploiting their quasi-monopolistic position. Moreover, they complained, the exchanges often used pricing in an anti-competitive manner to discourage rivals.

The European Securities and Markets Authority, or ESMA, responded by circulating a questionnaire among stock exchange users asking them whether prices seemed fair, or comparable to the value received. An EU financial market directive that went into effect at the beginning of this year, MiFID II, mandates that data be priced on a “reasonable commercial basis.”

The deadline for the questionnaire was Friday. ESMA, which is to some extent comparable to the US Securities and Exchange Commission, will now analyze the information and determine if these guidelines are being exceeded or not and whether it needs to impose restrictions. The European Commission, which also serves as the EU’s anti-trust watchdog, is also monitoring the situation but has not launched a formal investigation. “ESMA has been in touch with the European anti-trust authority, which has also received complaints,” an ESMA spokesman told Handelsblatt.

The ESMA inquiry poses a serious threat to exchanges because it would dampen their plans for growing this business. Worldwide, the sale of securities data and related services generated $6 billion in revenue last year, up 9 percent from 2016. It was the fastest-growing business in the stock exchange sector.

Stock exchanges defend rates

The stock exchanges have their own side of the story. Prices have risen the most for professional traders who have the data directly input into their automated trading platforms. The price model for this so-called “non-display usage” is 10 years old, explained Hartmut Graf, director of data services at Deutsche Börse. “An adjustment was overdue, especially against the background of a sharp increase in the automated use of data,” he said.

Data prices for retail investors were actually lowered, Mr. Graf said, and any increases were only in the single digits. It costs institutional traders only €50 a month for data on their screens, Mr. Graf said, making it hard to understand what they are complaining about. “For the big trading houses, it’s a relatively small cost item,” he said.

Besides, Mr. Graf added, it wouldn’t make sense for Deutsche Börse to make the data prohibitively expensive. “Because when financial firms use our data and trade more on that basis, it works out positively for us,” he said.

The Madrid stock exchange raised its data prices so much at the turn of the year that UBS decided not to trade Spanish shares on its internal platform, the Financial Times reported. When asked by Handelsblatt, however, BME, operator of the exchange, said UBS simply hadn't understood the rates. Its data rates were similar to those of other exchanges and complied with regulatory requirements, a BME spokesperson said. “We don’t expect that ESMA or the European Commission will issue more regulations.”

Data users complain nonetheless that exchanges have crossed a line into price-gouging. “We believe that it is time for an honest dialog about the rapidly increasing costs imposed by trading venues,” the market-making firm Virtu wrote recently to ESMA. “Escalating costs are having immediate and profoundly negative effects on the availability of liquidity and on price formation in the European Union.”

Andreas Kröner covers financial markets for Handelsblatt. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the author: [email protected].