- Trading firms have long complained about the mounting cost of data charged by US exchanges like the New York Stock Exchange and Nasdaq.
- The Securities and Exchange Commission’s appointment of Brett Redfearn, a trading veteran and critic of the way exchanges sell data, may signal change is on the way.
Wall Street has been embroiled in a civil war between traders and exchanges over the rising cost of market data, and a recent hire by the Securities and Exchange Commission is being viewed as a win by one side of the war.
The SEC on Wednesday announced Brett Redfearn, a trading exec at JPMorgan, will join the regulatory watchdog as director of its division of trading and markets, overseeing exchanges, high-frequency trading and other market makers.
Big traders have long accused exchanges such as the NYSE and Nasdaq for unfairly spiking the cost of their proprietary market data, which market makers claim is essential to competing in the trading business.
The exchanges, in contrast, argue that these feeds are optional, that there is competition, and that trading firms can terminate feeds and other service arrangements if they get too pricey.
They also say market makers can use more affordable SIP data, which provide an aggregated feed of all the exchanges data, to get a picture of the markets. When Redfearn was global head of equity market structure at JPMorgan, he sided against the exchanges in a letter to the SEC, saying SIP data is effectively useless (emphasis ours):
“Unlike SIPs, 100% of the revenues from competing, proprietary market data products go to the exchanges selling that data. These proprietary data products are far superior to the product produced by the SIPs, such that broker-dealers — including my firm — must purchase these proprietary data feeds from exchanges to provide competitive trading products for our clients.
“The latency issues associated with the SIP are today so well known that, for broker-dealers providing electronic trading products, ‘using the SIP’ is considered uncompetitive. In client meetings, it is imperative that we reiterate that we use direct feeds.”
The logic is: Without the exchanges’ proprietary data traders don’t have clients. That gives exchanges the upper hand, some critics say, to increase the costs of proprietary data.
Rising costs have become a pain point for traders, many of whom are also facing historically low volatility, which has sapped the markets of profit opportunities.
Redfearn’s appointment, which came as a surprise to many people on Wall Street, is being viewed as a signal that the tide may turn.
“Now you have someone with some influence that really cares about this issue who is in a position to push things in that direction,” Michael Friedman, general counsel and chief compliance officer at Trillium, a trading technology firm, told Business Insider.
Friedman said that a shift could be good for exchanges because their current business model is “unsustainable.”
“When you have all of your customers unhappy, that’s not going to last very long,” Friedman said. “ICE is the biggest culprit here, CME and Bats are the least bad, and Nasdaq is somewhere in between.”
Vlad Khandros, head of market structure at UBS, told Business Insider in an emailed statement that data fees are “substantial” and changes are welcome.
“We are hopeful that enhanced governance would introduce greater transparency and lead to more rational fee structures,” Khandros said.
Kirsten Wegner, the recently appointed chief executive officer of Modern Markets Initiative, an advocacy organisation founded by four quantitative trading firms, told Business Insider that Redfearn’s appointment indicates that the SEC will be more motivated to prioritise the issue of market data costs.
“On one hand, exchanges are expensive to run and are for-profit entities with a duty to maximise revenue for shareholders,” Wegner said. “On the other hand, there is a lot of growing industry attention from the brokerage community, SIFMA, Bloomberg, and also the Treasury report, for the SEC to take a look at the question of how the exchange fees are assessed.”
Earlier this month the Treasury Department released a report outlining a number of recommendations for the SEC to consider on the issue of market data.
“Treasury suggests that the SEC consider whether proposed selfregulatory organisation (SRO) rules establishing data fees are ‘fair and reasonable,’ ‘not unreasonably discriminatory,’ and an ‘equitable allocation’ of reasonable fees among persons who use the data,” the report said.
Richard Repetto, an analyst at Sandler O’Neill + Partners who covers a number of exchanges and trading firms, told Business Insider that he expects Redfearn to act without bias in his new position.
“He is a knowledgeable professional who will take a balanced approach taking everyone’s position into account,” Repetto said.
Some exchange employees told Business Insider there’s a chance that Redfearn might have to recuse himself on any rulings related to market data because of his past comments.
“As a matter of policy we don’t comment on regulatory appointments,” Ed Canaday, a spokesperson for ICE, the parent company of the New York Stock Exchange, said in an email to Business Insider.
Nasdaq declined comment. The SEC did not respond to this reporter.