The sensitivity of trading to the cost of information

• Date: 01 October 2020
• DOI: http://doi.org/10.1002/fut.22152
• Published date: 01 October 2020

J Futures Markets. 2020;40:1631–1644. wileyonlinelibrary.com/journal/fut © 2020 Wiley Periodicals LLC

|

1631

Received: 26 May 2020

|

Accepted: 4 July 2020

DOI: 10.1002/fut.22152

RESEARCH ARTICLE

The sensitivity of trading to the cost of information

Alex Frino

1

|Ognjen Kovačević

2

|Vito Mollica

2

|Robert I. Webb

3

1

Faculty of Business, School of Accounting, Economics and Finance, University of Wollongong, Wollongong, New South Wales, Australia

2

Department of Applied Finance, Macquarie Business School, Macquarie University, North Ryde, Sydney, New South Wales, Australia

3

McIntire School of Commerce, University of Virginia, Charlottesville, Virginia

Correspondence

Ognjen Kovačević, Department of Applied

Finance, Macquarie Business School,

Macquarie University, 99 Talavera Road,

North Ryde, Sydney, NSW 2113, Australia.

Email: ognjen.kovacevic@hdr.mq.edu.au

Funding information

Derivative Markets Research Centre

Abstract

We examine the impact of changes in real‐time data access fees on price

discovery in the crude oil futures market. Specifically, we examine differences

in price discovery in the West Texas Intermediate crude oil futures contracts

traded on two exchanges around three events corresponding to changes in real‐

time data access fees. We document a decrease in price discovery following two

events that increase data access costs. These findings are consistent with the

theoretical predictions of Cespa and Foucault that increases in data access

costs reduce the number of market participants trading on real‐time data and

adversely impact price discovery.

KEYWORDS

market data fees, market efficiency, price discovery

1|INTRODUCTION

In an era of nanosecond latency trading and information transfer, the value of new information fades quickly. Having

direct access to an exchange's real‐time price feed is regarded as both beneficial and necessary as it gives traders “… an

ability to see the market with more clarity …” (O'Hara, 2015).

Exchanges own the trade and quote information generated on their platforms.IntheUnitedStates,these

property rights were established in the early 20th century and give exchanges the right to set the selling price for

access to their data feeds.

1

The subscription costs to these direct data feeds are substantial, and exchanges, on

average, earn around one‐fifth of their revenue from data sales (Stafford, 2019). The US Department of the

Treasury report (Mnuchin & Phillips, 2017)notes“… the market for proprietary data feeds is not fully competitive

…, data from one exchange's feed cannot substitute for data f rom another exchange's feed.”However, market

participants are sensitive to the cost of real‐time access and increases in the price of data feeds have recently been

met with a backlash from trading firms petitioning the SEC to impose stricter controls in the setting of data feed

schedules.

2

1

See Board of Trade v. Christie Grain & Stock Co., 198 U.S. 236 (1905) and Hunt v. New York Cotton Exchange, 205 U.S. 322 (1907).

2

For instance, over 400 petitions challenging market data and access fees were filed with the SEC in the 2‐year period during which Petition for

Rulemaking Regarding Market Data Fees (2018) was pending (Clayton, 2018). The Securities and Exchange Comission (2018a, 2018b) responded with

decisions blocking proposed changes to data fees.