Data Speed Arms Race Puts Strain on Markets, Tabb Study Says

  • Some pay exchanges $816,000 a year for complete set of feeds
  • Exchange revenue from data and related fees up 62% in 5 years

Surging costs for super-fast data feeds that traders rely on to buy and sell stocks are straining the country’s $22 trillion equity market and could ultimately hurt liquidity, according to a report from Tabb Group LLC.

Firms seeking to buy a full set of feeds from U.S. exchanges so they can trade stocks for clients, make markets and run an alternative trading system pay $816,000 per year for data, the research firm and consultant said.

A firm that doesn’t have the most up-to-date information is at a disadvantage to its competitors and may feel pressure to upgrade, helping to boost exchanges’ revenue from data, market access and technology by 62 percent over the past five years, outpacing the 5 percent growth in trading volume, according to the report, which will be released Wednesday.

Traders depend on these data sources to know what’s happening on the 12 exchanges and dozens of other platforms that together make up the U.S. stock market. The increase in prices could drive firms out of the market, Tabb Group argued.

“We have a data cost challenge,” according to the report, written by Tabb Group founder Larry Tabb. “Are brokers and market makers right? Are exchanges right? I am not sure it matters. While it is easy to blame greedy exchanges, brokers, or market makers for those challenges, if this trend does not change this conflict will not end well.”

Tabb Group is joining others in criticizing how exchanges set fees for data feeds. The Securities Industry and Financial Markets Association, a trade group for banks and brokers, has filed a lawsuit on market-data costs. (Bloomberg LP, the parent company of this news organization, is an associate member of Sifma.)

The most sophisticated traders buy feeds directly from exchanges rather than relying on the industry’s slower central feed, the “securities information processor,” or SIP. Many of Tabb Group’s customers are purchasers of those faster, direct feeds.

The report comes as high-speed trading firms have pushed for changes to the way market data is distributed. One proposed change, mentioned in a KCG Holdings Inc. report earlier this week, would be to allow independent firms to compete on bundling and selling direct feeds, reducing the importance of the SIP. Sifma has promoted a similar idea.

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