A fight is brewing over how much TMX Group Inc. charges the brokerage industry for market data such as stock prices, costs that securities dealers say get passed on to investors large and small.
The industry has long griped about the prices that TMX Group demands to see share price quotes from the Toronto Stock Exchange and its little sibling, the TSX Venture Exchange. However, it hasn't gone much beyond grumbling.
That's about to change. The brokerages are getting more aggressive. The industry's umbrella group has hired a Washington-based consulting firm to compile evidence of what some brokerage executives say is excessive charging by TMX Group, in hopes of convincing regulators to use their powers to force prices lower.
For TMX, the stakes are high, because data accounts for about one-quarter of its revenue - $146-million last year.
So far, the industry has had no luck in its fight. Securities commissions have listened politely to repeated entreaties, but not done anything.
"If we're going to convince the regulators of our case, it's incumbent on us to do the research," says Ian Russell, chief executive officer of the Investment Industry Association of Canada (IIAC).
That's where the consulting firm, the fearsomely-named Securities Litigation and Consulting Group, comes in. SLCG did the research for the U.S. securities industry in its court challenge of a decision by regulators to approve data fees charged by the NYSE Euronext. The U.S. industry won a split decision earlier this month on the issue.
"We're optimistic it [the study]will confirm our conclusions, then we'll have to decide strategy," Mr. Russell says. The obvious first step is to go back to regulators and ask again.
If that fails, things could get very interesting. It's hard to imagine in the small clubby world of Canada, but some in the brokerage industry, emboldened by the U.S. victory, say they would consider going to court here - or try to get the Competition Bureau interested.
One of the ironies of the case is that the issue it stems from was supposed to be a money saver for investors and brokerages: the profusion of new stock-trading markets. After regulators began to encourage competition, markets such as Pure, Alpha and Chi-X sprang up. Alpha is owned by the banks, which also own the largest securities dealers and as such pay the most in trading and data fees.
The competition drove down the cost of trading: fees for buy and sell orders. But for data, it has backfired, if Mr. Russell and those in the industry are right.
"We have seen this significant escalation in market data prices which has impacted the industry at large," Mr. Russell argues. "That comes at a time when the industry is facing significant increases in costs for technology and regulatory compliance, and at the same time markets are tough so revenues are down."
The problem is different competitive dynamics, Mr. Russell says. To some extent, traders can funnel orders to buy and sell to the market with the lowest fees, forcing price competition.
But for data, regulators push brokerages to connect to the price feeds from every market. That's for a good reason - they want to ensure that brokerages get the best prices for clients in every trade. After all, you don't know if you're getting the best price on oranges unless you check all the fruit stands.
The result is that data is a seller's market - regulators force the brokers to purchase it, no matter the price. With a few players in a protected market, it's an oligopoly. (There you have irony No. 2: The brokerage industry dominated by the big banks complaining about an oligopoly).
So is Mr. Russell right? Is the TMX overcharging investors for stock price data? For any lay person, it's next to impossible to tell. Proving Fermat's last theorem was probably easier, and that took about 350 years. Data pricing is a morass of different packages, with different prices for different users, depending on where they're based and how much they use.
Mr. Russell is relying on figures compiled by his members that show the TMX charges $38 a month for a professional user to access TSX data, and $25 for TSX Venture data. Pure charges $12 and Alpha's price is set at $15.
South of the border, the NYSE and Nasdaq charge some professionals about $20 (U.S.) and non-professionals $1. Figures provided by the IIAC to back up its contentions show the TMX gets a bigger chunk of its revenue from market data than other exchange operators like NYSE Euronext, the Australian Stock Exchange, and Nasdaq OMX.
What's more, for a trade, brokerages pay only the one market where the trade happened. For data, the fees add up as brokers subscribe to them all. The result in Canada is that professional subscribers have to pay at least $88 a month, and public investors would pay at least $36, to get data from every market. In the U.S., the comparable figures are $66 and $3.
Not so fast, the TMX says.
Eric Sinclair, who runs the data operations at TMX, says that for 80 per cent of his users, data costs have been coming down. As for the claim that the TMX's prices are high relative to competitors, Mr. Sinclair says the TMX data packages include more bells and whistles such as index and bond data. When those are added to the base prices at other markets, TMX is more than competitive with global rivals.
"It's hard to get apples to apples numbers," he says. No kidding.
Mr. Russell reckons maybe that's what's behind the regulators' inaction - they are just as confused as everyone else - and his group wants to fix that. With so much money at stake, it's going to be a scrap.
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