Every now and again, I enjoy watching the Discovery Channel’s 'MythBusters.' On the show, two movie special effects veterans tackle persistent myths, oftentimes with a flair for the dramatic. The hosts and their brave assistants conduct the daring experiments, so curious viewers won’t have to. They have tested whether igniting enough bug spray can blow up a house (it can) or if an RFID chip will explode inside an MRI machine (it won’t).
That series comes to mind when reading some of the latest commentary in the market data "debate." I put "debate" in quotations because too often we find ourselves retreading the same ground without enough progress, because exchanges that provide market data to the public have to first chop through a forest of misinformation.
We can bust some of these myths that surround market data, and we can do it safely without blowing up anyone’s house. The only thing we need to set aflame are a few talking points trotted out with regularity, designed to gin up some headlines. The myths are perpetuated by the usual suspects: an aspiring competitor posing as a crusader, or voices from well-financed special interests. Their voices are loud and their pockets are deep, but we think the facts deserve more attention.
To dispel these myths, we looked over the last decade at our own U.S. equity exchange revenue to see how much was earned from new products, new clients, share of wallet changes, and price changes. Nasdaq is citing some revenue data not previously disclosed, as this issue is too important not to use data straight from the source. This data is specifically from Nasdaq; we can only control our own initiatives and pricing. Perhaps our disclosures will encourage others to step forward with similar transparency.
And let’s also not forget to look at our business in the right context. Stock exchanges are one of the smallest expense factors in the financial ecosystem. As pointed out by Nasdaq Chief Economist Phil Mackintosh in his article, The Big Picture on the Data Debate, total exchange costs to the industry and investors is collectively about $1.5 billion per year, a tiny fraction compared to the $50 billion each year generated in investment advisory fees and management fees, and the $31.8 billion the top five investment banks make annually in equity trading revenues, according to a Trefis study highlighted in Forbes this summer. Overall, exchange fees amount to approximately 1.18% of total investor costs.
Myth: Market data fees on exchanges data products have increased by as much as 14% annually over the last decade.
Reality: The above is unequivocally false for Nasdaq. For U.S. equity market data products offered by Nasdaq, the compound annual growth rate (CAGR) of revenue associated with price changes from 2009 through 2018 is 2.4%, or 1.8% when adjusted for inflation. That’s a far cry from 14% claimed by some.
Overall revenue growth (CAGR) across all of Nasdaq’s U.S. equity market data products, from 2009 through 2018 was 6.6%. That growth includes the addition of new users within existing clients and the addition of net new clients. Additionally, if we examine a subset of our U.S. equity data products—our depth data products that provide information on awaiting stock orders and are the products mostly discussed in this debate—Nasdaq recorded 3.3% CAGR revenue growth over the last decade. Adjusted for inflation, the CAGR on the depth products during this period is 1.7%.
Focusing on one of our most successful U.S. equity data products, Nasdaq Basic, we are extremely proud of the impact we have had in saving our clients money, while also vastly increasing the availability of our U.S. equity data to hundreds of millions of investors around the world. We have increased BASIC user fees just once since its inception in 2008, which is calculated into the revenue increases described above. In fact, Nasdaq Basic has saved clients nearly $300 million over the past decade, compared to government-mandated consolidated industry data feeds.
Much of the growth through Nasdaq Basic comes from outside of the U.S., and overall, Nasdaq Basic has contributed 11% of our information services business revenue growth. Disinformation campaigns from dogmatic exchange critics shouldn’t take away the good that Nasdaq Basic has contributed to the investing public.
Myth: Data fees paid to exchanges in 2018 were increased by nearly 3,000% from what users paid for the same data in 2010.
Reality: We can’t speak for other exchanges, but the average annual price change for Nasdaq U.S. equity exchange data fees since 2009, is, again, 2.4%. That basically mirrors the rate of inflation during the same period.
It’s also worth noting that most price changes at Nasdaq for U.S. equity market data products over the last decade are attributable to technology upgrades, alternate uses of data, and the related, essential enhancements needed to assure a resilient delivery method. In many cases, fees were unchanged for more than 10 years prior to a price change, which was precipitated by actions we took to increase the overall value of these product to our clients. Exchanges must maintain high standards of security, accuracy, and reliability, which means continual upgrades to technology infrastructure. We meet not only our own stringent requirements but those of regulators as well, and rightly so, as the world depends on exchanges to provide secure and reliable data that serves the public interest.
Myth: The majority of broker dealers and other financial institutions are forced to buy proprietary data products and colocation services from exchanges.
Reality: Our data shows the following rates of traction on the part of Nasdaq proprietary data products:
Only nine percent of our clients take data from Nasdaq directly; most recipients of Nasdaq data pay an intermediary to receive it. Just one third—33%—of our U.S. equity data clients take depth-of-book data. And the percentage of our equity data clients who use colocation services in the U.S. tops out at 27%. These are hardly majorities.
Myth: Record growth on the part of public exchange companies stems from price increases of equity market data products.
Reality: The truth is Nasdaq has seen strong and sustained organic growth across its businesses. Some of that growth has come from our non-regulated index licensing business, which also falls within Nasdaq’s Global Information Services group, and from Nasdaq’s our Market Technology business, where we provide critical market infrastructure technology to more than 250 clients around the world. Some intentionally conflate these sources of revenue, most notably our non-regulated data and index revenue growth, to confuse and influence policy makers and the public. The non-regulated business has grown almost 353% since 2009, generating a CAGR of 18% over the period.
Additional growth has been achieved through mergers and acquisitions, with several strategic purchases between 2014 and 2018. For example, Nasdaq’s purchase of eVestment in 2017, another non-regulated data business, was a milestone for our business, not only in terms of revenue and headcount, but in our strategy of expanding our data business farther beyond traditional market feeds. This was mentioned in a recent report by Burton-Taylor, and noted in an article on Tabb Forum that, “most of the gains in the [exchange data] segment have come from sources other than proprietary market data.”
In their efforts to paint the exchanges as exploitative, the pundits and lobbyists include massive acquisitions by some of our peer exchanges, as well as modest acquisitions (e.g., eVestment) Nasdaq has made over the same period, in their depictions of prop data revenue growth. Those acquired businesses generate primarily unregulated data revenue that have nothing to do with this debate raging on today.
Our competitors and critics are certainly entitled to their opinions, but let’s agree to use only factual information. As a market steward, our aim is to continue a constructive dialogue with anyone who is passionate about these issues, while continuing to put clients first.
Let’s set the myths aside and move forward.
This article originally appeared in Tabb FORUM.
Jeff Kimsey is Vice President and Head of Data Products for Nasdaq’s Global Information Services.