Exchange market data and trading services function as a two-sided platform

December 4, 2019

Exchanges can earn revenue from two related services: per-share transaction fees and monthly subscription fees for market data and technology. Because trading activity on an exchange and the market data produced by this activity are a single “platform,” these exchange services must be analyzed holistically. This principle motivates our all-in cost to trade analysis, showing that in total these different, but related, types of fees can yield a lower per-share overall fee than some other venues that, for example, only charge transaction fees.

Earlier this year, the Staff of the SEC’s Division of Trading and Markets issued “Staff Guidance on SRO Rule Filings Relating to Fees.” This guidance acknowledges that platform competition provides a basis to demonstrate a competitive environment when analyzing potential fee changes. However, the SEC staff has advised that in order to rely on platform competition in a fee filing, an exchange must provide data and analysis demonstrating that its aggregate return is constrained by competition on the platform level.

The NYSE retained a third-party expert on industrial organization and competition, Marc Rysman, Professor of Economics at Boston University, to analyze how platform economics applies to stock exchanges’ sale of market data products and trading services, and to explain how this impacts the assessment of competitive forces affecting the exchanges’ data fees. Professor Rysman was able to analyze exchange data that is not otherwise publicly available in a manner that is consistent with the exchanges’ confidentiality obligations to its customers. A copy of Professor Rysman’s paper is available here (“Rysman Paper”): http://sites.bu.edu/mrysman/research/.

Professor Rysman concluded that empirical evidence confirms that stock exchanges are platforms for data and trading.

  • Professor Rysman first surveyed the existing economic literature analyzing stock exchanges as platforms. He then undertook an empirical analysis of customers’ trading activities within the NYSE group of exchanges in reaction to the 2015 introduction of the NYSE Integrated Feed, finding that:
    • Firms that purchased the NYSE Integrated Feed market data product after its introduction were more likely to route orders to the NYSE as opposed to one of the other NYSE-affiliated exchanges, such as NYSE Arca or NYSE American.
    • The introduction of the NYSE Integrated Feed also led to more trading on the NYSE (as opposed to other NYSE-affiliated exchanges) by firms that did not subscribe to the NYSE Integrated Feed, which is the sort of externality that is a key characteristic of a platform market

Based on this empirical evidence, Professor Rysman concluded that data fees, data use, trading fees, and order flow are all interrelated, and that the platform nature of stock exchanges means that data fees cannot be analyzed in isolation, without accounting for the competitive dynamics in trading services.

“[D]ata is more valuable when it reflects more trading activity and more liquidity-providing orders. These linkages alone are enough to make platform economics necessary for understanding the pricing of market data.” (Rysman Paper ¶ 95)

“The platform nature of stock exchanges means that data fees cannot be analyzed in isolation, without accounting for the competitive dynamics in trading services.” (Rysman Paper ¶ 98)

We have observed a similar correlation among trading and data with respect to the NYSE National exchange. Since launching in May 2018, NYSE National has grown to nearly 2% market share and captured a meaningful share of “taker/maker” order flow. Over this same period, NYSE National has had more than a four-fold increase in the number of subscribers to the NYSE National Integrated Feed.

Consistent with the SEC staff’s recent fee-filing guidance, NYSE is submitting Professor Rysman’s paper in connection with market data fee filings that would both lower fees (for data recipients that pay an access fee for display-only use of the BBO and Trades products of NYSE, NYSE Arca, and NYSE American) and introduce new fees for the NYSE National Integrated Feed market data product. These fee filings were filed with the SEC on December 4, 2019 and are available here:

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