Are Market Data Fees Too High? Should We Care?

• Author: Brannon, Ike
• Position: BRIEFLY NOTED

When ordinary investors buy stock, they usually do so through a brokerage. The brokerage executes the trade on one of a dozen different stock exchanges in the United States.

Most people have heard of the New York Stock Exchange and Nasdaq, but there are several other U.S. exchanges, including the Investors Exchange (or IEX, referenced in Michael Lewis's 2014 book Flash Boys) and the Better Alternative Trading System (BATS, now part of Cboe Global Markets). There also are trading venues that are not formally stock exchanges--the so-called "dark pools" run by Wall Street firms. And a significant amount of order flow simply gets "internalized" in a brokerage's own system for matching orders.

When a brokerage buys or sells stock on behalf of a client, the brokerage is legally obligated to try to obtain the best execution possible. This requires it to have access to a wide variety of data on prices and quantities traded on an exchange, as well as the various bids and asks that are current. The exchanges charge for that information and their prices have risen dramatically over the last decade, a trend that was helped along by a provision in the 2010 Dodd-Frank Act. The question is whether those price increases can be justified under normal standards employed by the Securities and Exchange Commission. The SEC seems to have some concerns about that; it recently pushed back--at least temporarily--on the increases by overturning prior fee increase approvals given to Nasdaq and the NYSE. That has given brokerages some hope for more price relief in the future.

This is more than just a fight between exchanges and brokerages. If the price of these data keeps increasing, it may lead to a reconsideration of the present execution standards. The more brokerages and hedge funds have to pay to execute trades, the higher they will set their fees for ordinary investors who have retirement funds invested with such entities. And thanks to the magic of compound interest, even small reductions in net returns can result in a significant reduction in the ultimate size of an investor's nest egg.

Making data more available / The Securities Acts Amendments of 1975 charged the SEC to develop a "national market system" that would link the numerous financial markets. The SEC concluded that this law required the exchanges (and other non-exchange execution venues as well) to publish current bid and offer prices--and their quantities--as well as the price and quantities of...