Exchanges advance post-trade consolidation while seeking new revenues

The Federation of European Securities Exchanges has teamed up with data vendors Thomson Reuters and Bloomberg to facilitate post-trade data consolidation by harmonising trade flags.
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The Federation of European Securities Exchanges (FESE) has teamed up with data vendors Thomson Reuters and Bloomberg to facilitate post-trade data consolidation by harmonising trade flags.

The latest initiative by the European exchanges trade body makes good one of three commitments made by its members in July 2010 to improve data quality and reduce the cost of consolidating the data for vendors and other firms. It will focus on establishing a common set of identifiers that can be used across domestic exchanges, multilateral trading facilities and over-the-counter (OTC) trades in Europe. FESE says that the exchanges involved in the initiative account for over 90% of European order book trading.

Given the requirements of different market participants in each country, the flags used to identify different types of trades in post-trade reports can vary widely among different European jurisdictions and make the consolidation of post-trade data challenging.

“Our standards will ensure easier consolidation of transparency of trading data and promote greater competition in the technical delivery solutions available for different needs for consolidated data,” said FESE president Hans-Ole Jochumsen. “Greater access to consolidated data will allow investors to perform transaction cost analysis and accurately calculate benchmarks so they can monitor best execution. Our goal is to unleash the competitive forces that will keep the costs of consolidation as low as possible, as we are decreasing the level of complexity of market data and hence the cost of consolidated data.”

FESE's other two commitments, which were completed in Q4 2010, required exchanges to unbundle their pre- and post-trade data feeds and offer 15-minute-delayed data for free to the public.

According to FESE, the unbundling of pre- and post-trade data by its members and the London Stock Exchange (LSE) has reduced the cost of creating a pan-European post-trade consolidated tape based on level one data by 59%, from €437.60 per month, to €181.20 per month.

FESE's plan comes after three proposals made by the European Commission (EC) in its recent MiFID consultation paper to create a consolidated tape, all of which would create approved publication arrangements (APAs), entities that are required to bring data up to common standards for consolidation. APAs would be responsible for data security, quality and dissemination, and would complement efforts to harmonise trade reports, according to the EC's consultation.

One option – which is generally preferred among FESE's members – would require the EC to create the standards for creating a consolidated tape via APAs, before allowing multiple commercial solutions to emerge within a defined period of time. The others involve the selection of a single consolidator, either by a tender process or legal act. The EC is expected to make a decision on which of the options to implement in June this year.

Revenue pressures

A number of exchanges have sought new ways to charge for their data, such as for firms that use data to power algorithms or for price reference purposes. Some believe this is a ploy to recover lost income that has come as a result of increasing pressure on data revenues.

“Incumbent exchanges that derive revenues from selling data are having to grapple with the consequences of a consolidated tape and advances in technology that enable the delivery of data at almost no cost,” said Peter Randall, CEO of retail-focused market Equiduct. “As a result, they now ensure that they charge for their data in every way it is used.”

In January this year, the LSE introduced a new tariff for firms that use its data on a non-displayed basis, which captures firms that use data as part of automated calculations such as in smart order routing to facilitate algorithmic trading and for dark pools that use data for reference purposes. They also cover the use of real-time data to conduct risk management, quantitative analysis and portfolio management.

The charges are based on membership of the exchange and annual terminal spend.

Nasdaq OMX Nordic, which operates domestic exchanges in Sweden, Finland and Denmark, launched a similar tariff on 1 February, which charges a flat fee for real-time use of data for automated applications.

At the end of 2010, SIX Swiss Exchange also introduced a charge for dark pools that use its data for reference purposes.

But exchanges refute the claim that they are trying to squeeze extra revenue from data services in anticipation of lost revenues stemming from the consolidated tape.

“Our charges for non-displayed data usage are due to a shift in trading behaviour, specifically, the growth of algorithmic trading,” said Suzanne Dahl, head of European product management and strategy at Nasdaq OMX. “We are trying to create a level playing field between our traditional members who pay for data through displayed terminals, and high-frequency trading firms that previously did not pay us for their data use.”

The LSE added that its charges are part of an overall re-evaluation of the way it charges for data.

“The LSE non-display policy is not a broad policy to grow revenues, but recognises those participants who source high value from a very specific use of real-time feeds,” explained Jarod Hilman, head of real-time data at the LSE. “Our clients are broadly supportive of our policy as we have chosen to introduce it within an overall set of enterprise initiatives that gives clients the ability to also have a direct relationship with us, and net their display usage of LSE data, where it is derived from multiple vendors and sources.”

According to its latest annual report, the LSE derived 34% – or £216.6 million (€247.1 million) – of total revenue from information services in 2010, with £103.7 million (€118.3 million) coming from real-time data products.