Market Data: Under the Microscope

With access to market data more central to the asset management business than ever before, the costs that managers must pay to obtain the required information is turning into a hot-button issue. Regulators on both sides of the Atlantic are considering ways to make the provision of market data more competitive, or even free in certain cases. Industry associations too have urged policymakers to develop rules and cost benchmarks for the production and distribution of market data to address excessively high market data fees and unfair licensing provisions” that currently exist.  As market data helps drive nearly every facet of global asset management, we explore the key developments and questions occupying the industry as market data comes into focus under the regulatory microscope.    

Regulation NMS: SEC looks to foster greater competition

In the United States, proprietary feeds of equity market data are provided by the big three stock exchanges: CBOE Global Markets, NASDAQ, and the New York Stock Exchange’s parent Intercontinental Exchange to brokers and asset managers at a cost. Illustrating just how lucrative providing market data has become, the Committee on Capital Markets Regulation, a group of banks and asset managers, said annual revenue from the exchanges’ market data services increased 45% between 2014 and 2017 to $2.3 billion. Although, this issue has been relevant for many years now, the rapid growth in the volume of data required to run an asset management business means it once more has come to a head. The volume spike has also resulted in creating a lucrative business for those who currently own and control that data, giving credence to the often-quoted phrase that “data is the new oil.” One of the centralities of American values is equality of opportunity and competition;  as such, it is hardly surprising to see the SEC look to foster greater competition in the market to ultimately benefit the retail investor. 

In March, the Securities and Exchange Commission (SEC) proposed changes to its Regulation NMS, which governs equities trading on US stock exchanges, to increase competition in the provision of market data. In addition, the SEC and the Justice Department announced in June that they had signed a memorandum of understanding to look at the exchanges’ data policies from an antitrust perspective. The goal was to determine whether or not exchanges are abusing their quasi-monopoly status with their fees and reluctance to disclose in a more granular fashion what exactly they are charging clients for.

SEC Chairman Jay Clayton told an industry conference recently that the SEC “has a compelling regulatory responsibility to analyze concerns about the fairness and reasonableness of exchange fees for proprietary data.” The SEC had previously rejected fee increases by the NYSE and NASDAQ in 2018 on provision of market data, but the decision was later overturned in the courts. This shows not only how critical, but also how sensitive the focus on data costs is across the industry at a time when costs and operational efficiency are front and center. Advocates of change such as retail investor advocates, brokers, market makers, and asset managers have all suggested that the current structure discriminates against their access to data required to transact, ultimately adding costs borne by the underlying investor. 

Inherent Paradox: Who Owns the Data?

In the case of the Reg NMS debate, the market data involved is usually the asset managers’ own trading positions and portfolio composition, which is then anonymized, repackaged, and sold back to managers. Third-party data firms want to be able to offer asset managers more tailored data packages that would be less expensive than what the exchanges currently offer. This raises one of the wider strategic industry questions and that is: who exactly owns the data?

When the European Union adopted the General Data Protection Regulation (GDPR) in 2016, it gave EU citizens ownership of their private data and set in train a wider debate around acquisition, use, and reuse rights for personal data. This issue remains  red hot globally. Similarly, in the context of asset management, there is a plethora of data sets available and used on an ongoing basis– details on positions, clients, company information, and research. The full use of all data contained within an asset managers’ business model, however, is often limited or restricted by regulation, licensing permissions, or other contractual terms. The asset management industry still has a way to go before being an open source data ecosystem. 

The EU seems to want to lead the way in changing the nature of how data is used and shared. It is proposing to spend $7 billion to create a single European data space for nine sectors (including financial services),  where publicly collected data could be aggregated and shared for free. For years now, the question of what regulators and governmental agencies do with all this data they collect has never really been adequately answered. The EU suggests creation of a shared open sourced data inventory to allow public data to be accessed and used by anyone including asset managers who wish to derive insights from such data. The initiative suggests drawing up rules and a plan for Common European Data Spaces (CEDS) covering seven sectors[i] including financial data. The EU in a rather egalitarian fashion, is suggesting that such data is to be a public utility used for the common good of  society, rather than to be under the primary control of commercial enterprises who resell and disseminate it for profit, as some social media platforms do for example. It is important to note that there’s a great deal to be done before this idea ultimately comes to fruition, but initial industry reaction has hailed the EU’s move as a positive step in the democratization of data. This step creates access to a wide range of data not currently available and it will increase standardization of data and ultimately will reduce data costs while increasing the safety of broadly sharing data. 

For the Greater Good

Embracing the call to action for free, public access to data held by EU government bodies, six European financial trade associations also recently called for the creation of a centralized electronic register that would keep track of environmental, social, and governance (ESG) data on European companies and make the information publicly available. The industry remains focused on the EU’s ESG agenda and have suggested that access to ESG data be required to prove compliance with the new sustainable finance disclosure regulations (SFDR) coming into effect in March 2021. Compliance with the regulations is proving to be difficult, so much so that the industry has requested a delay to the implementation. 

Some industry constituents argue that the EU’s Green Deal is a political and social ambition that is shared by the financial sector; however, if it is to succeed in mobilizing more capital towards more sustainable investments, it must be underpinned by the general availability of quality, comparable, reliable, and public ESG data to banks and asset managers. The cost of acquiring ESG data to underpin compliance with the EU’s disclosure standards for product providers weighs against the EU’s overall ambitions. While industry suggests it is ready to play, the European Commission  must also consider how it can exert positive change. The creation of an EU ESG electronic data register could provide the market with critical strategic infrastructure to foster greater adoption of sustainability by increasing transparency, reducing costs, and increasing trust in the transition to more sustainable EU capital markets.

What remains crystal clear is that market data remains crucial to all global asset managers. It is also evident that increasing demands to acquire data means that in the future, regulators and other policymakers might be as important in the provision of market data to investors as commercial entities. As these regulations evolve, they might have tangible impacts on business models for better or worse and as such should remain high priority for all asset managers to look out for as data comes under the microscope. 

[i] health, manufacturing, agriculture, finance, mobility, environment, and energy