Typically, when an industry is characterized by robust competition, friction costs for consumers are low. For example, it’s hard to “extract rents” from consumers for an average car when there are twelve automakers making similar vehicles; consumers have choice, and vote with their dollars. This is why one part of our industry is quite curious – stock exchanges.

We have twelve of them, including upstart IEX. One would think that having twelve stock exchanges would keep costs down for investors, but this is not the case. You might recall an article written by Larry Tabb a year ago, where he lamented the ever-rising data costs that the Big Three stock exchanges are imposing on investors (Stock Exchanges Are Eating Your Returns), where he points out that:

• Between 2010 and 2015 stock exchange quarterly revenues increased 16%.
• Digging deeper, stock exchange data and technology revenue increased 62%!
• Exchange client trading revenue during the same period fell 75%.

That doesn’t sound like the outcome that should happen in an industry with lots of competition and declining trading activity, where data costs have declined around the world, and where free market forces are truly at work. The SEC might agree; they are seeking comment on a NYSE rule filing made in July, where NYSE is looking to increase connectivity/data fees. The SEC is concerned that there are not viable alternatives, and that trading participants are being held ransom:

“The Commission is concerned that the Exchange has not supported its argument that there are viable alternatives for Users inside the data center in lieu of obtaining such information from the Exchange. The Commission seeks comment on whether Users do have viable alternatives to paying the Exchange a connectivity fee for the NYSE Premium Data Products.”

Virtu’s Doug Cifu agrees:

“We are pleased that the Commission will be subjecting this incremental fee application to review,”  Doug Cifu, the CEO of electronic trading firm Virtu told Business Insider.” As we have repeatedly said we think exchange market data and connectivity fees have ‘jumped the shark’ as an excessive cost burden on the industry.”

So does IEX. IEX, in this September comment letter,  actually urged the SEC to ask NYSE more questions about their colocation and data fees (IEX does not charge for data or connectivity).

(As an aside, this November Business Insider article is good background on this issue: There’s a new ‘hot-button’ issue on Wall Street, and battle lines are being drawn)

While the SEC is questioning the rising costs of data in our industry, this does not mean that they are about to wreak havoc and holy hell on public exchange stock prices, which are highly related to the substantial colocation, technology, and data feed revenue at the major stock exchanges. After all, the SEC approved the for-profit stock exchange business models, the selling of unequal access. Besides, there are big changes occurring at the SEC post-election, including many senior SEC employees tripping over themselves to leave the agency.

Our Opinion

The stock exchange business model in totality today is oligopolistic, and not reflective of true competition, and it is keeping participant costs artificially high. Secondary market liquidity is being harmed as a result..

A robust stock market is one that promotes secondary market liquidity. That liquidity should be tied to underlying trading supply and demand for what’s being traded – ownership in corporations, and their future earnings ability. Stock Exchanges trying to re-brand themselves as “data companies” – selling end user’s data – does little to reinforce this crucial relationship. Going forward, we believe the SEC should do everything in its power to reinforce that relationship. They need to let stock exchanges know that creating new fees and frictions run counter to the promotion of liquid secondary markets for investors.

It’s just that simple.