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ESMA and Market Data Fees. We need to talk about Value.

This festive season brought gifts for European data lobbyists and lawyers two weeks ago in the
unlikely form of a MIFID Review Report from ESMA following its recent consultation on market data
fees1. Small wonder the essential daily news round-up for Brussels insiders has been sweetened this
week with sponsored messages from Deutsche Boerse on the essential role and value of market data
from price-forming exchanges.

At the heart of ESMA’s review report, before it moves on to the EU Consolidated Tape (loses its way
and reaches for the too-difficult pending tray) lies the following recommendation:

“ESMA recommends to:

….delete Article 86(2) of CDR 2017/565 and Article 8(2) of CDR 2017/567 allowing trading
venues, APAs, CTPs and SIs to charge for market data proportionate to the value the market
data represents to users.”

At best, this recommendation is very odd indeed. At worst, especially for private investors and data
users outside the vested interest lobbies that dominate responses to ESMA, it’s downright
unreasonable. Hardly the best starting point for a regulator of laws designed to make market data
available to the public on reasonable commercial terms.

ESMA’s explanation doesn’t inspire confidence that the regulator has a firm grip on the subject:

“While ESMA considers that trading venues, APAs, CTPs and SIs may establish different
categories of users as per Article 86(1) of CDR 2017/565 and Article 8(1) of CDR 2017/567, it
appears that the second paragraph of these Articles undermines the main principle that
market data should be priced-based on the costs for producing and disseminating the
information. This is without prejudice to firms setting prices depending on the type of clients
as long as this complies with the general principle of providing the data based on the costs
for producing and disseminating the information.”

To see why, let’s start with the far more precise legal text of the regulations ESMA seeks to amend.

CDR 2017/5652 is the detailed Commission Delegated Regulation (CDR) setting out EU law on market
data fees for exchanges and trading venues. CDR 2017/5673 specifies essentially the same conditions
for market operators operating a trading platform and systematic internalisers (SIs). In both cases
the regulations are as follows:

Cost-based pricing (CDR 2017/565 Art. 85, CDR 2017/567 Art.7):

1. "The price of market data shall be based on the cost of producing and disseminating such data
and may include a reasonable margin.
2. The cost of producing and disseminating market data may include an appropriate share of
joint costs for other services provided

https://www.esma.europa.eu/sites/default/files/library/mifid_ii_mifir_review_report_no_1_on_prices_for_market_data_and_the_equity
_ct.pdf

2 https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32017R0565&from=EN
3 https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32017R0567&from=EN
Non-discrimination between users within categories differentiated by value (CDR 2017/565 Art. 86,
CDR 2017/567 Art.8):
1. “(APAs and CTPs/trading venues and SIs) shall make market data available at the same price
and on the same terms and conditions to all customers falling within the same category in
accordance with published objective criteria.

2. Any differentials in prices charged to different categories of customers shall be


proportionate to the value which the market data represent to those customers, taking into
account:

a) the scope and scale of the market data including the number of financial instruments
covered and trading volume;
b) the use made by the customer of the market data, including whether it is used for the
customer's own trading activities, for resale or for data aggregation.”

Now let’s consider how these regulations be can be enforced and complied with in practice – while
delivering on the MiFIR aim of making market data available to the public on reasonable commercial
terms.

The first hurdle is to reconcile cost-based pricing with the non-discrimination clause. In practice most
users and almost all members of the public access market data via intermediaries (banks, data
vendors, trading websites etc). Once the intermediary has established its contracts and connection
to a market data feed its number of users can grow from one to thousands with little or no
incremental cost to the data source. To maintain transparency and avoid discrimination on fees
charged for users 1 and 35,001 in the same usage category, market data providers need to be able to
specify standard fees for all users in the same data usage category.

New valuable uses of data present long-term challenges for managing market data fees on fair,
reasonable and non-discriminatory (FRAND) terms within an overall income cap of costs plus
reasonable margin. Many of the most commercially valuable data usage rights in today’s markets
(for example real-time index calculation and licensing, market-making or MTF operations) did not
exist thirty years ago. Some have brought extra income at very little cost for the market data
sources. If the added value of new usage categories is to be fairly reflected when overall market data
income is capped and market data income is rising more rapidly than costs, the relative value of
existing/legacy data usage categories (for example non-trading display use) will need to be reduced.

In summary the only way to ensure compliance with a costs plus reasonable margin regulatory
requirement is to compare overall level of total market data income and costs, rather than income
and costs at the incremental level of the market data fees charged to each customer in each usage
category. But there still has to be a reasonable and acceptable way of balancing fees for users in
existing use categories with fees for new users and new categories. This way needs to be
demonstrably fair, defensible if necessary before a court of law. The cost plus reasonable margin
approach cannot deliver reasonable commercial terms to all on a FRAND basis if the vast majority of
existing (largely display) users of market data continue to absorb all the existing costs of the fee
setter and industry leaders/innovators are allowed by regulators to expand into hugely valuable new
non-display uses at no incremental fee, as the basis for their own new, revenue-generating
commercial activities.
The cost-based cap on market data fees does of course have its own obvious failings and difficulties.
As widely predicted (including by the author in Tabbforum4), it has introduced a morass of creative
management accounting and differences in definition of what constitutes market data income. But
ESMA produces no evidence that it has conflicted with or restricted the ability of data sources to
differentiate on a reasonable commercial basis in terms of value between the fees they charge to
users in separate clearly defined data usage categories.

The next hurdle is to find a commercially reasonable basis for differentiating between categories of
fees (as opposed to individual users within the same category) while avoiding accusations of unfair
discrimination. Current EU law focuses on scope and scale of market data plus the value of
customer’s usage rights covered by the fee. ESMA’s report supports the concept of separate
categories but rejects all the current criteria for differentiating between them, without suggesting
any alternative. The bizarre implication appears to be that pricing for customers in separate
categories can differ on any reasonable commercial basis except the basis of what the data usage is
worth to the customer.

In some ways the alternative implication is even worse. ESMA supports differentiation between fee
categories but proposes to abolish the legal framework on which any fee setter can make an
objective case under EU law to defend its differentiation approach. Where the fees concerned are
subject to regulation by securities regulators this leaves fee setters in the position of having to set
them according to the perceived preference or agenda of the securities regulator. It leaves securities
regulators in the highly vulnerable position of being at the mercy of highly organised lobby groups.
In this situation most regulators (not only in Europe….) do not have the time and resources to ensure
they can properly defend the rights of the vast majority of data users that aren’t represented by the
big lobby groups and do not respond to their consultations.

There is little in ESMA’s report to suggest a real understanding of how fee category differentiation
works in practice, or indeed to suggest that ESMA has the resources and knowledge to monitor
whether fee category differentiation is bringing compliance with the overall MiFIR requirement that
real-time market data must be made available to the public on reasonable commercial terms. The
report makes extensive references to the complexity of market data price lists but seems intent on
removing this complexity – largely at the demands of organisations that are migrating away from
legacy display use to a wide range of new non-display data usage categories. For example ESMA cites
statistics from AFME of the amounts its members have “paid for non-display data” – as if “non-
display” was a content category rather than a range of different categories of data usage rights with
highly differentiated fees and economic value to the user.

In practice there is a world of difference between the reasonable commercial value of primary
market data to a small computer company using it to calculate portfolio valuations for use by
independent financial advisors and the same data for use by a global index calculator, trading firm or
MTF to support its worldwide operations. One single non-display use fee would indeed cut through
the complexity. But if it’s set at the level acceptable to the lower end of the spectrum it means, in
any regulated fee structure capped by a cost comparison, that those at the lower end of the value
spectrum are effectively subsidising those at the top.

ESMA’s report quotes extensively, with illustrations, from a fees model supplied by the European
Principal Traders Association which uses a single theoretical client involved in various commercial

4
https://tabbforum.com/opinions/the-road-to-reasonable-commercial-terms-for-the-european-consolidated-tape-part-1/
https://tabbforum.com/opinions/the-road-to-reasonable-commercial-terms-for-the-european-consolidated-tape-part-2/
trading activities. Unfortunately the stated assumptions (para 29 of the report) make clear that this
theoretical client is not involved at all in the core MiFIR transparency function of making real-time
market data available to the public. In my articles five years ago on the Road to Reasonable Terms
for a European Consolidated Tape, I suggested that any direct involvement of securities regulators in
controlling market data fees should be limited to fees for a clearly defined subset of “core data
usage rights” directly associated with the regulatory aim of making market data available to the
public. Fees for all other market data usage rights, including the processing of data to support
commercial activities such as the operation of secondary trading venues, pricing and trading of
derivatives, index creation and licensing etc, should be controlled via the existing legal and
regulatory framework for fair trading, pricing and competition. There is nothing in ESMA’s report,
either on market data fees or on the path to a European Consolidated Tape, to make me change
those views.

For a closer look at how fee category differentiation is working in practice in Europe, and whether it
reflects reasonable commercial terms, let’s take 5 customers A, B, C, D and E, all receiving European
equities market data.

Customer A is a non-professional private investor. He displays Level 2 real-time data at home and
uses it solely to manage his own personal investments, not for redistribution or any commercial use.

Customer B is Customer A’s financial and investment advisor. She is a sole trader receiving and
displaying Level 2 real-time data and using it for the professional purpose of advising her clients.

Customer C is a small computer services and support organisation providing technical support to
Customer B. It receives Level 1 market data as a direct feed into one application it uses solely to
calculate portfolio valuations for Customer B’s clients. It has no need to display the market data and
does not redistribute the underlying market data prices to its subscribers.

Customer D is a spread-betting website serving the retail market in various countries. It currently
has 10,500 personal subscribers worldwide. It needs only Level 1 real-time market data, used solely
to calculate its own equities spread betting prices for distribution to its clients. Its spread betting
prices are updated no more frequently than twice a minute, at least a second after the time-stamp
of the underlying equities data. Customer D does not display or redistribute the underlying equities
market data. It has no white label clients and is not involved in any form of data distribution other
that the betting prices it sends to its subscribers.

Customer E is a pan-European multilateral trading facility (MTF) with a share of total European
equities trading volume greater than most primary listing exchanges. It uses Level 2 price-forming
exchange data to support and validate trading on its own platforms, in direct competition with its
data sources. It has developed and heavily promotes its own real-time feed of European equities
data which competes directly with the feeds from primary listing exchanges.

To an outside observer it would seem reasonable to assume that the value each of these customer
categories derives from its market data usage is substantially different and follows an ascending
scale. At this stage it should also be noted that only customers A and B are “members of the public”
in the usually accepted sense. Customer C represents a rapidly growing segment of possible new
users because of the rapidly falling technological cost for third party facilitators and processors of
providing “non-display use” services that have hitherto been carried out by the internal departments
of major financial institutions. Customer D is widely perceived to be in a business that faces
increased pressure from regulators but is still legal under EU law. Customer E is in a category of data
usage that is perceived to have been encouraged and supported by securities regulators, in order to
bring increased competition for previously dominant primary listing exchanges.

The following table shows RMA’s calculation of the relative value of annual fees specified for 2020
by leading European exchanges and by CBOE Europe for the categories of data usage rights required
by Customers A to E. Fees for each data source are indexed by reference to a base of 100 for
Category B (professional display user fees). The aim of this comparison is purely to illustrate the
extent of differentiation between fee categories, regardless of actual fee levels, since under the
existing regulations the levels of fee income are regulated via the formula of cost-plus reasonable
margin, rather than value differentiation by content and usage category.

Indexed Fee Category Value Comparison

Customer Data level LSE5 Deutsche Euronext7 CBOE Europe8


Fee needed (UK Data Non- Boerse6 (Consolidated (Europe
Category member) (Core Data) Equities) Equities)
A 2 3 25 2 0
B 2 100 100 100 100
C 1 340 1,260 713 1,765
D 1 5,433 7,419 6,668 931
E 2 3,396 5,040 4,245 2,157

In broad terms this table suggests, for example, that LSE’s published fee structure values use of Level
1 data by spread betting firm “D” as the equivalent of roughly 54 Level 2 professional display fees,
MTF “E “at 34, non-professional user “A” at 0.03, etc.

Fee category value comparisons could of course be improved and extended with additional data
sources and data usage rights such as index calculation and various levels of automatic trading, but
even this small initial sample tends to suggest that:

• Members of the public are already charged very low fees – or no fee at all – for access to
real-time market data for their own non-professional use. ESMA’s recommendation to
abolish value as a criterion for market data fee levels is therefore unlikely to bring any
significant fee reductions for these users and could bring substantial fee increases;
• Any single category of “non-display data” fees imposed by securities regulators would
almost inevitably be challenged as commercially unreasonable by data sources and/or
customers in categories C, D and/or E;
• Level 2 fees for display use by professional users and unlimited non-display use by MTFs
seem very reasonable (to put it mildly) in comparison to the Level 1 non-display fees
charged to spread betting firms and small firms involved in limited non-display use such as
portfolio valuation. It should be noted that LSE, Euronext and CBOE Europe charge non-
display use fees to organisations such as Customer C but no additional non-display fee for
uses such as portfolio valuation where the customer is a global trading organisation already
paying a higher non-display fee for uses such as automated trading.

5
https://www.lseg.com/sites/default/files/content/documents/Schedule%20B%20-%202020%20%28003%29.pdf
6
https://www.mds.deutsche-
boerse.com/resource/blob/1334540/e856210fa9d1a823f927629a4a9fff3b/data/MDDA_Price_List_10_13.pdf
7
file:///C:/Users/Reg/Downloads/Information%20Product%20Fee%20Schedule%20(effective%201%20January%202020)%20(1).pdf
8
https://cdn.cboe.com/resources/participant_resources/CboeUK_MDPricing_2020.pdf
• Of these data sources, only CBOE places level 2 fees for MTFs above level 1 fees for a spread
betting (or CFD trading) operation. Over and above the annual license fees shown, all four
data suppliers charge substantial additional fees to spread betting/CFD firms who provide
white label services to third parties.

It’s difficult to escape the conclusions that, under the current European regulatory regime:

• the customers that have been most gently treated by data sources, in relation to the value
of their display and non-display use of market data, are those (such as banks and MTFs) that
individually or through well-organised and funded lobby groups have most influence in
Brussels or Paris and who dominate “user feedback” to ESMA consultations;
• among those hit hardest in recent post MiFID II fee structures appear to be the spread
betting shops and CFD trading firms. These are relatively soft targets. They tend not to
complain or lobby regulators about market data fees. As with previous ESMA consultations,
not one spread betting firm or CFD provider replied to the consultation leading to ESMA’s
fees report. In practice these firms now tend to take their market data where possible from
MTFs. Arguably, an unintended consequence of the sky-high fees price-forming exchanges
have set for CFD/spread betting shops is to drive up the value of the data from these same
exchanges to MTFs.
• Those at greatest risk from any move to exclude data usage value from considerations of
reasonable financial terms, appear to be the private investor members of the public that
MiFIR appears intended to protect.

The comparison also raises deeper questions about the wisdom of deleting a law which apparently
has yet to be properly enforced with equal benefit to all users, on the recommendation of a report
compiled by a regulator with little or no relevant enforcement experience, on the basis of
consultation feedback dominated by self-interested lobby groups.

Looking ahead the market data licensing industry and its regulators will need to engage with efforts
to establish a global framework for the licensing of personal data rights which can accept the widely
varying norms of authorities from different political cultures. The personal data gurus and
authorities could learn a lot from our successes and failures in market data licensing. But this cuts
both ways. Any viable infrastructure for automated, regulated personal data licensing will operate
on a far bigger, lower-cost and more granular scale than anything ESMA, WFE, SEC or SIFMA have
known. Data users everywhere will become vastly more aware of rights, ways and means to access,
protect and/or commercialise data. A market data licensing regime stuck in the 1980s is simply not
sustainable.

ESMA, SEC and other securities regulators can and must reflect the view of those that reply to their
consultations, but we can’t afford them to be bogged down in the age-old trench warfare over
market data fees. The legal framework for delivering market data to the public on fair and
reasonable terms must also protect the interests and changing needs of those that don’t write to
regulators.

Reg Pritchard

Rights Management Associates Ltd

December 20 2019.

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