EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/14.III.1:14.III.1 Production and dissemination costs

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/14.III.1

14.III.1 Production and dissemination costs

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The production and dissemination costs1 of equity pre- and post-trade data are complex to determine. ESMA noted in this context that ‘(t)he identification of the type of production process is highly subjective (e.g. which criteria to use, how to weight the different criteria) and might not be stable over time’.2 Three main elements of the discussion are the following:

1.

A main point of discussion is whether equity pre- and post-trade data is a joint product or a by-product of the trade execution production process and in some cases, listing services (when an instrument is listed in the particular venue selling the market data). Products in a joint production process can either be produced simultaneously (i.e. joint products) or incidentally (i.e. by-products).3 It is debatable whether or not equity pre- and post-trade data is a joint product or by-product. In a nutshell, one perspective is that trade execution and market data services are joint products because the trade and data are inherently linked (a trade generates data and vice versa).4 Another perspective is that as orders are placed in the market and trades are executed, market data is automatically produced. According to this view, equity pre- and post-trade data is a by-product.5 The difference between joint products and by-products is important for the allocation of costs to the production of equity pre- and post-trade data (see below).

2.

Different methods are used to allocate the production costs, if allocated at all.6 Under the by-product approach costs should be allocated to the production of trading services and/or listing services, since data is considered to be an incidental result of the primary function of trading platforms (considered to be trading and listing).7 Under a joint product approach the foregoing allocation view is flawed. Under a joint product approach joint operating expenses can ‘only be allocated on an arbitrary basis, given that information and trading services are joint products’.8

3.

Another complexity in the discussion of production and dissemination costs is that data suppliers only marginally publish the costs involved with producing and disseminating equity pre- and post-trade data. The lack of information makes it difficult to establish a data-driven approach towards the production and dissemination costs of equity data.9 This makes it difficult to provide a ‘one-size-fits-all’ solution to constitute a ‘reasonable’ compensation for production and dissemination costs.

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