Once MiFIR is enacted over the coming months, there will no doubt be a lot of concern about one little word that threatens to have a serious impact on the commercial operations of many service providers in Europe. That word is ‘reasonable’.
By itself, the word reasonable seems harmless. But when used as an adjective to describe commercial terms, or the commercial basis for offering a particular service, it will mean ESMA will one day have the power to regulate the commercial policies of many service providers.
Those potentially with the most to lose are vendors of market data – pre-trade, post-trade and benchmark index data. MiFIR includes provisions for ESMA to determine what constitutes ‘reasonable’ commercial terms for providing all of those content sets.
Exactly how ESMA chooses to wield those powers remains to be seen. It is clear that any effort to bring the cost of aggregated European exchange data into line with the US would prove extremely controversial, given the impact it could have on some firms’ revenues and business models. A more amenable approach may be to grandfather in current commercial policies, preserving the status quo, and regulate any future changes to products and policies. Such an environment would mirror similair US policies, where exchanges seeking to launch a new data product or change commercial terms have been required to file for approval from the SEC (a legacy of Reg NMS).
Either way, defining what is ‘reasonable’ will be a subjective debate: what one party considers reasonable, another may not. That’s why the issue is likely to prove a fertile battleground over the coming years.
From the perspective of data vendors, the concept of ‘reasonable’ should no doubt be determined organically. They may well argue that the price of data is self-regulated by market forces. Should an exchange or index data provider charge too much for its data, consumers will simply not license it and look for alternatives.
Data consumers, on the other hand, would counter that certain data sets simply do not have viable alternatives. In that sense, they may contend that some vendors are able to exercise quasi-monopolistic power in setting commercial policies for their data, and should therefore be regulated.
To evidence that point, they could point to differences in the cost of licensing US Level 1 (pre-trade and post-trade data) and European Level 1 data, although a simple cost comparison is a little unfair, given that Europe and the US are very different animals, with many European consumers focused predominantly on their domestic, rather than the pan-European market.
Even so, a 2010 study by a UK-based consultancy (which, although slightly out of date, is still likely to be representative of current market conditions) found that:
- It cost approximately €200 (per user, per month) to view real-time Level 1 data covering approximately 95% of the European (lit) equities market
- A comparable figure for US markets (Tapes A, B and C) would be approximately €70
- Exchange fees account for a relatively small proportion of spend on market data (ranging from 8-15%).
The final bullet point is certainly something that exchanges could use to defend their current commercial policies, potentially deflecting regulatory scrutiny by shifting the focus onto data aggregators, who account for a majority of the industry’s market data spend (estimated by the author of the study at between 65 and 80%).
Adding to the complexity of the debate will be the terms and conditions that creators and aggregators of data place around the usage of their content. Data licensing is not a straightforward exercise.
Professional trading and investment firms need to navigate a complex maze of data policies and contract terms that determine fees based on different categories of usage – from simple view charges (for data displayed on screens), through to non-display licences (for algorithmic consumption of data) and derived data policies (for firms that use exchange prices to derive their own prices and analytics). They employ teams of market data professionals to do just that. And the complexity of those contracts is further compounded by a lack of standards, something that JWG guest analysts have highlighted in previous posts, outlining both the risks inherent in non-compliance and the industry efforts to promote standards and clarify contract terms.
Whether regulators fully understand this complexity is unclear. But, as and when they do, it could impact their appetite for how deeply they choose to get involved in regulating market data commercial policies. Whichever approach ESMA opts for, it is clear that all interested parties – vendors and consumers of data alike – should be preparing to argue their case over what constitutes ‘reasonable’ commercial terms for data. Let us know if you’d like to share your views!