MiFID II has yet to have any significantly positive impact on the contentious issue of market data fees according to a review of the regulation from the European Securities and Markets Authority (ESMA).
Nearly two years after the landmark regulatory regime came into force, the European watchdog published its first review into the progress of MiFID II and concluded that it had “not delivered on its objective to reduce the cost of market data charged by trading and Approved Publication Arrangements (APAs).”
The rising cost of market data has become a key and significantly divisive issue among participants both in Europe and North America, with banks and asset managers becoming increasingly vocal about charges associated with market data imposed by trading venues.
ESMA’s review found that trading venues consider the changes in cost of market data “as a natural consequence of the structural changes in the market”, citing the move from terminal use to increased levels of electronic and algorithmic trading, reflecting the ongoing trend of market data being used within automated trading processes.
“Trading venues stressed that those changes require as well constant investment in hardware and software by trading venues and other data providers. Furthermore, trading venues and APAs consider that MiFID II/MiFIR created a need for adaptation to regulatory requirements that had an impact on data provision,” said ESMA’s report.
However, market participants and stakeholders presented a very different view of the issue, as “data users and vendors complained about excessive fees, complex market data policies and overall higher costs for market data,” particularly since the introduction of MiFID II.
Some market data users also highlighted the “introduction of fees for services which were previously provided free of charge” and changes in the way in which definitions included in price lists have changed.
Under MiFID II, trading venues and data providers are required to publish market data on a ‘reasonable commercial basis’, to provide market data in a disaggregated format, and to make market data available, free of charge, 15 minutes after publication.
Following its review, ESMA stated that it intends to “start working on supervisory guidance on the application of the provision to provide market data on a reasonable commercial basis and towards improving the quality of OTC data.”
The market data fee conflict was also evident in the North American markets earlier this year, when a roundtable discussion hosted by the Securities and Exchange Commission (SEC) resulted in a heated debate between a group of high-profile industry representatives.
Later that month, Investors Exchange (IEX) became the first exchange to publicly disclose its costs related to producing market data and connectivity, suggesting that incumbent exchanges could be marking up charges for such services by as much as 4,000%.
While the European markets have not seen a similar level of public displeasure directed at the cost of market data fees compared to its North American counterpart, ESMA has recommended the introduction of a real-time consolidated tape for equity instruments as a solution.
“Transparency is important to ensure that markets are fair, sound and efficient. However, after nearly two years of operating under MIFID II, we are still lacking a reliable view of liquidity across the EU,” said Steven Maijoor, chair of ESMA.
“We need to establish a real-time consolidated tape for equity instruments to remedy the fragmentation of EU markets, create a real single market and so contribute to the establishment of the Capital Markets Union.”
While ESMA was realistic enough to note that such an undertaking would present a “technically demanding task” requiring “substantial investment of both time and resources by all parties involved”, as well as changes to the current legal framework.
MiFID II laid out the requirements for voluntarily consolidated tape providers to come to the fore, however ESMA recognised within its review that “it appears unlikely that within the current legal framework a CTP (consolidated tape provider) will emerge in the future.”
ESMA identified three primary reasons as to why such a provider has yet to materialise – a lack of a business case and limited rewards for an equity tape provider, the strict legal requirements stipulated by MiFID II on such an entity, and competition from non-regulated entities that would hold a significant advantage by not being subject to the same regulatory framework.
Market data users also highlighted issues relating to data quality, timing, consistency and completeness, alongside the “significant cost and complexity” of market data agreements, as key reasons why a consolidated tape has yet to be implemented.
ESMA stated that despite these challenges it will recommend the establishment of a consolidated tape for European equities to the European Commission and will continue to publish reviews on the impact of MiFID II in consultation with the industry.