High market data fees have brokerages seeing red

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Brokerage firm clients aren't the only ones grumbling about paying high fees these days. The firms themselves have raised a ruckus with Canada's securities regulators about the costs they must pay to buy trading data from stock exchanges and alternative trading systems.

There was once a time when firms simply bought Toronto Stock Exchange and Toronto Venture Exchange data, giving them live feeds about pricing and trading volume for stocks as they traded throughout the day. But those simple days are long gone, and now brokerage firms must pay for data from a large variety of alternative trading systems such as Chi-X, Omega, Alpha, CNSX and Pure, even if they rarely trade on the exchanges, just to ensure they can exercise orders at the best possible price.

Brokerages complain they are a captive audience, compelled to buy trading data to operate, and say the exchanges are taking advantage of that to charge high fees for basic information. And they complain U.S. data is comparatively cheaper when measured against the volume of trading on those exchanges, so Canada needs to amend its pricing to get in line.

Unsurprisingly, the trading systems don't see it the same way. Small firms argue they face the same infrastructure costs to supply trading data as a big player, and must recover their costs. Even big firms like the TSX must operate in an environment with lower volumes and fewer players than are found in U.S., so users cannot necessarily expect the same pricing.

A new fee analysis released Thursday by the Canadian Securities Administrators, an umbrella group for provincial securities commissions, offers a sympathetic ear to those arguments.

The consultation paper compares Canada's real-time market data fees against to those charged by other exchanges around the world, and concludes the TSX's data fees are more expensive than the U.S. but comparable to exchanges in Europe. "This seems to support the view that TSX fees are not unreasonable, as they fall between the fees charged in Europe and the fees charged in the U.S.," the paper concludes.

Tracey Stern, manager of market regulation at the Ontario Securities Commission, said some market participants want Canada to duplicate U.S. fee levels, but the option appears unrealistic.

"Based on the U.S. size and scale and structure of the market, we really don't think that outcome is achievable," she said in an interview. "From our perspective we really need to look at the issue of data fees from a Canadian perspective and a Canadian lens to ensure we have the right solution for Canada and its unique structure."

The CSA paper concludes there is evidence that some of the smaller marketplaces are charging fees that are high in relation to their market share of trading activity. It also notes those higher fees may not be unfair, however, and may reflect the fact that their cost of providing data per user is higher.

"In addition, higher 'per-volume' fees may reflect the fact that these markets are in a start-up phase of operation and have not yet reached their expected outcomes," the report says.

However sympathetic, the report also illustrates that trading data doesn't come cheap, especially when measured against their trading volume on the exchanges. Firms pay $82 per user per month for a full "depth of book" data feed from the Toronto Stock Exchange, and $268 for a professional use feed from all consolidated Canadian marketplaces.

The TSX charges the most for its data – between 1.5 to 13 times more than other marketplaces for a basic "top of book" data feed. But that price level starts to seem like a bargain when compared to the volume of trading it handles. Against that measure, the TSX had among the lowest fees, while CNSX's fees were 30 times greater per million shares traded, and 2,000 times greater per $100-million of value traded. Other exchanges like Pure, Alpha and Chi-X were also more expensive, but less so than CNSX, due to their different volumes of trading.

The TSX and TSXV accounted for 67.5 per cent of trading activity by volume on transparent marketplaces last year, while Alpha had 20 per cent of the market, Chi-X accounted for 6 per cent and CNSX had just 0.3 per cent by volume.

The CSA has asked for comment by Feb. 8 on eight alternatives it has proposed to address high market data fees. They include possibly capping fees for a new subset of "core" data and capping fees for all marketplaces at different levels depending on their sizes.

One of the boldest proposals is to create a "public utility" provider of consolidated market data in Canada that operates on a simple cost-recovery basis. The new utility provider would be either created by industry or by regulators, and would allocate its fee revenue among trading systems.

Such a development would require legislative amendments across Canada and an overhaul of transparency rules, making it a complicated option to put in place on a national basis. Some form of a cap may be the most straightforward option, although still unlikely to find easy agreement between two sides with highly different perspectives.

RBC Capital Markets analyst Geoffrey Kwan predicted the CSA review could be "neutral to negative" for TMX Group Inc., the parent of the TSX, because it could result in a reduction of the exchange's fees or limits on its ability to raise prices further in the future. He estimated about $100-million or 15 per cent of TMX's total revenue in 2011 came from equity market data users.

In a research note Thursday, Mr. Kwan said it is "slightly comforting" that the CSA report suggested TSX fees were not unreasonable relative to their market share, but said "the potential for a negative outcome to any degree remains a possibility."