Can the FCA’s recently launched investigation into the wholesale data market achieve its goal of levelling the playing field for the acquisition of data? Ross Henry Law, senior reporter at FStech, reports.

The Financial Conduct Authority (FCA) recently announced the launch of an investigation into the fairness of some areas of the wholesale data market.

The authority said it held concerns that competitiveness in some areas of the wholesale data market, including in the acquisition of benchmarking and pricing ratios, is not working as “well as it should”.

Its study is due to investigate whether the competition concerns could be resulting in higher costs for investors, less effective investment decisions and preventing new firms entering these markets.

In the past 20 or so years, markets in which securities are exchanged have become increasingly fragmented. The same security can nowadays be traded at different financial venues.

The past decades have also seen the advent of high-frequency trading, resulting in the execution of trades swifter than the blink of an eye.

These high frequency traders take advantage of the ability to trade across different stock exchanges, exploiting this market fragmentation to their own advantage. But in order to do this, they need access to market data.

“Exchanges are very aware of this, so they tend to price data at a cost that is probably not competitive,” says Giovanni Cespa, professor in finance at Bayes Business School. “The reason being that the data you can get in a certain venue is not substitutable by the data you can get from another venue, because the liquidity provided by that venue and the price discovery is proper to that venue only.”

“The larger the venue, the more participants want to observe that data,” he adds.

Cespa believes the chief focus of the FCA’s investigation relates to data pricing.

“When data is priced too high, those who can’t pay for it are cut out of the market,” he says. “This may result in a lower market participation or in the payment of higher costs to trade, which may impair market ‘fairness.’”

Pointing out that the issue of fairness is a contentious one, Cespa says: “One thing that is missing in the way in which financial markets work in the UK compared to the US, is that in the UK there is not a structure in place known as the consolidated tape.”

“The consolidated tape is an aggregator of market information across different venues,” he explains. “If a trader wants to know where they can trade a certain security at the best bid and ask spread, they can look at the consolidated tape.”

“Market participants may benefit from the existence of a consolidated tape, because this can offer a competitive (albeit potentially less informative) substitute to subscribing to the feed offered by each venue separately," Cespa explains.

“My sense is that the introduction of a consolidated tape in the UK, would exert a beneficial competitive pressure on exchanges," he says.

He continues: “While the fact exchanges may not be pricing competitively is a concern, it kind of misses the picture that in order to assess whether a certain market works optimally or not, you need a welfare benchmark.”

Cespa adds: “It may be said that prices may be too high or too low, but compared to what? Your 'compared to what' needs to make sense.”

If introducing consolidated tape is on the FCA’s horizon, Cespa believes the authority has two options.

“They may want to go for a monopolistic tape – a regulated intermediary who would aggregate the data and sell it to market participants – or the FCA may alternatively want to open the market for the resale of market data and let entry do the work,” he says.

Speaking to the possibility of a resale market however, Cespa says the prospect is “pretty depressing” since this approach to introducing a consolidated tape in the EU failed.

“The enactment of the Markets in Financial Instruments Directive 2014 (MiFID II) opened the market for data aggregators in the EU, but no one entered,” he says. “This suggests that the power that exchanges have to prevent entry in the resale of market data is very strong.”

Cespa notes that a considerable part of making the wholesale data market fairer would consist in ensuring that exchanges don't take advantage of the dominant position enabled by the fact they own the data that accrues to their own trading venues.

“One way to do that is to ensure that competition is in place,” he says. “Introducing the consolidated tape would put competitive pressure on each venue.”

On the FCA’s introduction of a consolidated tape, Cespa concludes: “I don’t believe it’s a matter of if, but when.”

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