Content Is King


Content is king.  Companies like Netflix know this and have built business models which pay huge sums of money for the best content to redistribute to their customers.   The  WSJ stated :

Netflix spends over $2 billion on content annually in the hopes of luring in subscribers who pay $7.99 a month for its service. Much of the cash is going to TV programming rights and production of original shows like “House of Cards” and “Orange is the New Black.”

No doubt many investors love the Netflix business model.  But could you imagine how much more they would love the business model if Netflix did not have to pay for its content.  You’re probably thinking that is impossible.  What kind of company can sell content that they did not create themselves or buy from someone else?

The answer is the stock exchanges which operate on this exact business model and make a large percentage of their revenue by selling data they did not create.  They have two primary sales channels: 1) Selling quote and trade data to vendors who then redistribute to their clients and 2) proprietary data feeds sold directly to high volume clients.

1) The sale of quote and trade data is a mulit-million dollar per year business.  Bloomberg recently had an article which quantified this revenue: “Over the years, the public data had been a lucrative source of revenue. They generated $463.9 million in 2008, according to the SEC. After deducting $14.8 million for expenses associated with collecting the data, the exchanges divvied up $449.1 million.”

2) We have often referred to proprietary data feeds as the fuel for the HFT race car.  Without the high speed data, many HFT programs would be useless.  That is why exchanges can charge a huge amount of money for these feeds.  According to that same Bloomberg article, “From 2006 to 2012, Nasdaq’s proprietary market data revenue more than doubled, to $150 million from $69.6 million, while its public data revenue fell to $117 million last year from $149 million in 2007.”

We believe that one of the main reasons there are so many stock exchanges is because they have all been chasing these market data revenues.  Just read this answer by the BATS CEO to a Traders Magazine question about market data revenue:

Traders: I gather you see possibilities in market data. How does a larger market share help you deliver more data products and/or become more competitive in market data? Because you have more data to deliver?

RattermanMarket data is an exciting opportunity for us and our customers. As standalone organizations, it has been difficult for us to compete seriously in the realm of market data, but by combining two innovative organizations we will now have the depth and breadth of market data that will be comparable to our major competitors. We believe we can create market data offerings that will be more attractive and cost effective than what our competitors currently offer.

The  main problem that we have with these market data revenue streams is that the exchanges have been using OUR trading data to generate revenue for themselves.  For example, every time a bid or offer is changed by an institutional investor or every time a trade is executed by a retail investor, a stock exchange is selling that information.  To go back to our Netflix example, exchanges are getting the content for free and most investors do not even realize they are giving it away.

While we take issue with the sale of market data to vendors, the sale of proprietary data feeds is even more troubling.  These proprietary data feeds are so valuable because they track every keystroke by all of the exchanges clients.  Every revision is being tracked, every child order from an algo is being recorded, every cancellation is being monitored.  All of this tracking gives purchasers of the proprietary data feeds the ability to model trading behavior.  Do most investors realize they have given the exchanges the right to monitor and sell their content?  We doubt it.  That is why we think institutional and retail investors should have the right to OPT OUT of the proprietary data feeds. Why should the exchanges have the right to sell your content?