18.III.2.4.4 Characteristics and a growing demand for pre- and post-trade data

The EU opinion of the optimal degree of equity transparency also depends on what amount and type of equity pre- and post-trade data market participants prefer. To understand the data preferences of market participants, it is useful to take one step back and to examine the characteristics of equity pre- and post-trade data. The data characteristics can be divided in supply- and demand-driven features. Supply-driven features are (1) content (pre- and/or post-trade data); (2) depth (e.g. depth of book); (3) latency (speed); (4) product coverage (e.g. all shares on a given venue); and (5) market coverage of the transparency data (e.g. consolidated across multiple venues).1 The supply-driven data can relate to information on (6) one or multiple venues (consolidation). Demand-driven features are (a) use restrictions;2 and (b) head count of the data.3 Another characteristic of transparency data are its costs (data prices). Data prices differ depending on the supply- and/or demand-driven features.

Market participants have different needs when it comes to data characteristics. For example, short-term trading strategies, such as high-frequency trading, rely on low latency (i.e. high-speed) data.4 Long-term strategies can use delayed data for making analyses, but will still need speedily data when making the trade.5 Depending on the market participant and trading situation, different data characteristics are preferred.6 This notion makes it hard to provide a clear-cut answer as to what the ‘optimal degree’ of equity transparency constitutes when it comes to data characteristics.

Nonetheless, there is a clear-cut answer as to whether equity pre- and post-trade data has become more or less important from the ISD to MiFID II. The answer is that demand for equity pre- and post-trade data has grown in the past decades.7 The growth in demand is the result of multiple factors, with the accepted factors being (a) fragmentation and (b) technological innovation.8 MiFID I opened up competition, which resulted in a fragmented equity market. The fragmentation of equity is still in place under MiFID II, although somewhat limited through the share trading obligation.9 Technological innovation made it easier to set up new venues for trading (see also paragraph 3 below). The fragmentation of the EU equity market required market participants to gather more and a wider variety of equity pre- and post-trade data. Otherwise, a ‘snapshot’ of trading in a given financial instrument would not be available. Another example of technological innovation that resulted in growing demand for data is the shift towards electronic trading, and more recently algorithmic trading.10 The result is more demand for equity pre- and post-trade data.11

The growth in demand has resulted in stronger emphasis of the EU on access to equity pre- and post-trade data, with ‘access’ referring to ‘reasonable’ equity pre- and post-trade data prices, as well as transparency for data users what they are paying for. The EU mildly addressed equity pre- and post-trade data prices under MiFID I (i.e. principle-based rules as complemented by CESR guidance),12 whilst the emphasis seriously gained momentum under MiFID II (i.e. an extensive set of rules, although not (yet) in the form of pricing regulation).13 The effect is that the EU perception of the ‘optimal degree’ of equity pre- and post-trade transparency has expanded under MiFID I, and in particular under MiFID II. The result is that, not only the amount, speed, publication and consolidation of equity pre- and post-trade data, but also equity pre- and post-trade data prices have become part of what forms the ‘optimal degree’ of equity pre- and post-trade transparency in view of the EU.14

The question then is what the EU perceives to be the ‘optimal degree’ of equity pre- and post-trade transparency in terms of equity pre- and post-trade data prices. Part IV of the research showed that the answer to this question is ambiguous. Whilst there is consensus that a high degree of access to equity pre- and post-trade data is necessary (i.e. demand in data increased),15 there are divergent views whether such access is available in practice. Data suppliers (in particular RMs, but also MTFs and APAs) have had strongly opposing views compared to data users ever since MiFID I.16 The controversial nature of equity pre- and post-trade data prices is also apparent in academic studies. Two well-known institutes (Oxera and Copenhagen Economics) draw opposing conclusions when it comes to equity pre- and post-trade data prices.17

In short, data suppliers and Oxera argue that data prices and terms and conditions for usage are reasonable. Main arguments include that there is (a) competition among data suppliers, (b) it is costly to generate high quality and low-latency data, and (c) prices have not increased, but the use and value has changed (more demand for data).18 In addition, the data suppliers and Oxera state that (d) data is a joint product with trade execution (i.e. trade execution costs need to be allocated in data prices) and (e) terms and conditions are difficult to compare mainly due to the fragmentation of market data (i.e. many different terms and conditions).19 Data users and Copenhagen Economics disagree. In their view, the price of equity pre- and post-trade data is not reasonable. Main arguments include that (i) there is no real competition among data suppliers, since the products are not comparable (i.e. data vendors are oligopolies), (ii) regulatory requirements require investors to consume data (i.e. market power for data vendors), and (iii) new data fees have been introduced under MiFID II (e.g. for non-display data or SIs using data).20 The data users and Copenhagen Economics also argue that (iv) data is a by-product of trade execution (i.e. trade execution costs cannot be allocated in data prices) and (v) data terms and policies are too long, too complex, too opaque (unclear what users are paying for), and change frequently.21 Last, but not least, it is argued that data suppliers do not have the intellectual property rights of equity pre- and post-trade data.22

The perspective of the data vendors and Oxera can be characterized as a market-led philosophy. The belief is that market has already established the ‘optimal degree’ of equity pre- and post-trade transparency, among other things, through competition among data vendors. The belief is that the market changed over time (fragmentation and technological innovation), which resulted in an increase in data demand. The market-led philosophy argues that changes in market data access (e.g. new fees or terms and conditions) are only a logical consequence of changes in demand. By contrast, the philosophy of the data consumers and Copenhagen Economics is market-shaping in nature. A main belief of the market-shaping philosophy is that the ‘optimal degree’ of equity pre- and post-trade transparency concerning data access is not available. In their view, the market has failed to deliver accessible equity pre- and post-trade data. The market-shaping philosophy gives several examples why this is the case, including a lack of actual competition, limited negotiation possibilities for data consumers, and related market power for data vendors. The market-shaping philosophy believes that these market failures need to be corrected (shaped).

A trend is visible from the ISD to MiFID II from a market-led towards a market-shaping philosophy concerning data access. Initially, under the ISD, the EU opinion was market-led. This was the result of the concentrated market setting of the ISD. The EU provided no or only limited guidance on data access.23 The situation started to change during MiFID I. The Commission stressed that EU prices for market data under MiFID I were too high, in particular in comparison with the United States, and needed to be brought down to a reasonable level (market-shaping philosophy).24 Some stakeholders agreed (data consumers and Copenhagen Economics), but supporters of the market-led philosophy (data vendors and Oxera) argued that existing charging schemes were reasonable and disputed the evidence of high prices for EU market data in the EU.25

The final EU opinion apparent in MiFID II text reflects the market-shaping philosophy. The MiFID II regime mirrors the idea that data prices under MiFID I were too high and that market failures need to be corrected (albeit in a relatively mild manner).26 The current discussion under MiFID II on data access once again presents conflicting views between market-led and market-shaping perspectives. Most trading venues (data suppliers) stress that data prices have been overall stable (market-led perspective), while data users and data vendors complain about excessive fees, complex market data policies and overall higher costs for market data (market-shaping perspective).27 In the MiFID II Review, ESMA takes somewhat of a middle position, although more supportive of the market-shaping perspective. ESMA acknowledges that equity pre- and post-trade data plays an increasingly important role in the financial market and that market participants are consuming an increased amount and variety of data, which requires innovations by data suppliers (market-led perspective).28 However, overall ESMA considers that so far MiFID II has not delivered on its objective to reduce market data prices.29 For this reason, ESMA proposes a mix of legislative changes and supervisory guidance to ensure equity pre- and post-trade data is accessible on a reasonable commercial basis (market-shaping perspective).30 If the ESMA recommendations are accepted, the EU will take a more market-shaping philosophy when it comes to ‘reasonable’ equity pre- and post-trade data prices.31