New research finds some buy-side firms paying 26 times more than others for index data as FCA investigation continues

Disparity in pricing doubles since last Substantive Research review in October; follows FCA’s conclusion last week that competition in wholesale data markets is not working.

Some providers are charging certain buy-side firms 26 times more than others for similar index products and services, a Substantive Research report has found.

Substantive last reviewed the space in October, finding that some institutions were paying up to 13 times more than others for the same index data. But updated data following a survey of 60 asset managers from January this year has instead found it is actually double that figure.

In the ratings data market, the new data set has found that instead of some buy-side institutions paying over three times more than others, they are in fact paying more than five and a half times more. 

“It’s quite remarkably inconsistent. The first study we did found it was 13 times more and that was incredible,” Substantive chief executive officer, Mike Carrodus, told the TRADE.

“What that says to me is that this is quite an opportunistic market. There are lots reasons it could be challenging to be consistent as a provider as all your clients are different and there will be other elements bundled in such as additional licensing. You need to get to apples to apples. We do a lot of normalising work which is extremely complex across venues, locations, user bands, distribution licenses etc.”

“There’s a lot of bilateral negotiations going on. There’s no real transparency here and that’s how these extremes flourish. If there’s only three ratings agencies that doesn’t put me in a very strong position to negotiate because everyone knows I need all three.”

The FCA’s recent findings

The data follows the UK FCA’s conclusion last week that competition in the wholesale data markets was not working, finding that some markets are concentrated among just a few firms, leaving little choice for institutions and making it difficult to switch providers, while the data selling process is too complex. 

The extensive ongoing study is exploring various areas across the data markets, including pricing levels and the potential for discriminatory pricing. And, whether or not dominant firms within this market practising it are damaging competition in a way that is ultimately harming end-investors. One specific area the regulator has said it will examine is whether prices are different because of a willingness from consumers to pay.

Read more – Competition in wholesale data market is not working, first phase of FCA investigation finds

In terms of next steps, the FCA has now launched a new wholesale data market study under the Enterprise Act, inviting any persons wishing to make representations on the subject – most importantly on whether the subject should be submitted as a market investigation reference under the Act to the Competition Markets Authority – by 30 March. The regulator is then expected to publish the findings and its chosen action by 1 March next year.

“That suggests a more active approach. This study has been launched under the Enterprise Act so that’s really significant because you’re immediately in a framework looking at the functioning competition of the market,” said Carrodus. “They’re linking the impact on competition to the practices of the suppliers, the contractual terms and the potential what they call price discrimination and we would call inconsistencies.”

However, it is unlikely that the UK watchdog will make any sweeping changes to the way in which it enforces pricing, a decision that would likely be protested in the markets as anti-competitive. For Carrodus the focus of the FCA will more likely be around specific dysfunctionalities in the data market.

“Who is a regulator to decide how a market is priced? It will have to tread carefully because the reality is these market data providers and vendors have done well. The regulator probably won’t want to discriminate against a successful business model, they’ll just be looking for very specific dysfunctionalities in the market,” Carrodus explained.

“Opacity is a real thing and the lack of standardisation. There are market data providers that publish their rates but most don’t and publishing them doesn’t mean you stick to them. The other thing is confidentiality clauses preventing you from discussing what you’re paying and that stops anyone knowing if they’re getting a good deal or not. The discussed pricing is something that regulators will be interested in. I don’t know if its something they’ll enforce but I think it’s something they’ll look at. I’d be very surprised if they don’t take further action.”

A global issue

Rising costs associated with market data has become a key divisive issue in markets across the globe in recent years. Mifid II in Europe – and formerly the UK – sought to address this by requiring trading venues and data providers to publish market data on a ‘reasonable commercial basis’ 15 minutes after publication and free of charge.

However, many argue real-time and depth of book data that is now vital to trading is sold for increasingly high prices that are dictated by the vendors and venues that aggregate it. Five years on from Mifid II and many argue the issue around data is worse than ever.

In the US, amendments to securities information processor (SIP) data fees as part of the Securities and Exchange Commission’s (SEC) changes to its National Market System (NMS) plan have also proved divisive. The regulator had proposed to include depth of book data, in a bid to bring more competition to the space and decrease rising data costs for investors. However, it later faced legal action from incumbent exchanges Nasdaq, Cboe and NYSE.

A consolidated tape

Participants have subsequently been lobbying for a consolidated tape for several years now in the UK and Europe and recent regulatory milestones achieved in the last quarter suggest one could be on the cards in both regions in the next 24 months.

Last week, the European Parliament’s Economic and Monetary Affairs Committee (ECON) voted in favour of MEP Danuta Hübner’s draft report on Mifid/Mifid which includes a pre- and post-trade tape. In the UK, the FCA also confirmed on 2 March that it would be moving forward with a single consolidated tape after HM Treasury announced in December that it was committed to delivering a regulatory regime by 2024 to support a consolidated tape.