The World Federation of Exchanges (WFE), a global industry group for exchanges and CCPs, has published a paper to advance thinking on fairness and transparency in equity market data.
Titled ‘Not what, but who’, the WFE paper identifies the different types of user demand; and what are in effect distinct data products manufactured by exchanges.
Even though this use-case phenomenon is key to the policy and practice of licensing data in the interests of an effective capital market, it has only just begun to figure in the public policy discussions on the topic; is ignored in the academic literature; and is sometimes misrepresented by those who profit most from that market data. The WFE paper sets this in context against the background of the key principles that should be considered in the debate on market data.
While market makers quote two-way prices in order to profit from order flow, it is exchanges that create the market place in the first place, bringing order to an otherwise fragmented process that would inherently be less fair and transparent to end customers. The exchange does this by offering two complementary product sets: data and execution.
Exchanges license data in a way that recognises the various use cases and the trading-business model that each adopts, including how those distinct types of user interact with each other. It does so in the interests of maintaining order flow, which benefits intermediaries and end-users and, only as a by-product of that, the exchange itself.
Market prices can change at a speed which the human eye cannot see and the brain cannot process. But, by specialising the way in which they consume data, trading intermediaries can. The paper reminds readers that this is a much more profitable activity than licensing data to them, as exchanges do. Fast data helps them reduce their capital needs and improve their turnover. They can execute more trades in a day – because there are more points in the day when there are prices to trade off. And they can do so more with less risk and more profit, because they do not need to hold ‘warehouse’ (hold) risk for so long.
Exchanges’ creation of markets enhances social welfare. In the process, it also promotes an important alternative to the banking-credit channel, whose vulnerability to economic conditions has been highlighted again by the Covid pandemic.
Nandini Sukumar, Chief Executive Officer of the WFE, says: “Streamed data is a human artefact but it is traders’ machines that convert it into an opportunity to profitably intermediate transactions. This is no more and no less than the classic marketplace ecosystem updated for the digital age. Data is licensed by exchanges at a price that is fully conscious of this and indeed all aspects of market microstructure. The WFE will continue to champion approaches data which are fair to the marketplace as a whole.”
