Laura Paglia:
Welcome to Candid Conversations for Financial Markets podcast series. I’m your host Laura Paglia, President and CEO.

Our podcasts are designed to provide insights, transparency and provocative yet achievable proposals for matters that move financial markets in Canada.

We are fortunate to be joined today by R. Tee Williams, Principal and Owner, Tee Williams Associates.

A well-known advisor to various international exchanges, Tee has built industry recognition as an expert on market data operations and strategy, and in creating a capacity planning methodology for the Composite Tape Association for all U.S. listed securities and the Options Pricing Authority for all U.S. options.

His firm has specified the methodology used to allocate revenues among exchanges, contributing data for consolidation by the U.S. SIPs under a mandate from the SEC.

Tee also teaches on market data, market structure, and automated trading. His knowledge, experience, and expertise inform value-driven insights and thought leadership at the CFFIM on market data information, operations, and regulation.

Welcome, Tee.

Let’s set the stage for what we’re talking about today. Tee, what is market data?

R. Tee Williams:
Market data typically refers to real-time data, delayed data, and historical data from the financial markets. It’s the byproduct of exchange trading either on exchanges themselves or in the over-the-counter market. For example, things like the last sale prices, the bid-ask quotes, the volume of trading, the order book are all considered to be market data. But it’s useful to point out that other people use the term market data imprecisely. They may include things like investment research, credit ratings, and various types of information called alternative data that comes from other sources.

So when people talk, as in the studies we’ll discuss in a moment, it’s important to understand exactly what they mean by the term market data. In the context of the research, both firms seem to be using the more limited definition of market data from exchanges. Market data is used by traders and investors in the process of making investment decisions to buy and sell. It’s used by financial institutions for risk management and for market making.  Quantitative analysis uses market data in developing models.

Regulators often use market data as part of their assessment of compliance for various activities. Now it’s also important to know that market data is used separately for creating reports.

Laura Paglia:
So, Tee, who charges for it?

R. Tee Williams:
Exchanges that create market data typically charge for the market data, but also vendors take the data from multiple exchanges, put the data from all exchanges trading the same instrument into a composite format, add identifiers to them so people have a consistent identification methodology, and sell the information from the exchanges, and serve as an intermediary in the distribution process.

Customers can choose a vendor for a service, and as a part of that process they’ll probably enter into two licenses, if not more. They’ll have one license for the vendor and another for the creator of the data, the exchange or wherever the data was produced. Once licensed, the consumers are then subject to all sorts of administrative burdens until they cancel the service. When we say they cancel the service, what they’re most likely doing is stopping getting the data from one vendor and choosing a different vendor. When that occurs, they have to create a new exchange contract for the new vendor as a part of the vendor’s license.

Laura Paglia:
Thank you, Tee. A joint white paper from Substantive Research and Expand Research released in February of this year and a separate report by Market Structure Partners released the previous month. Both highlighted the continued escalation of market data costs, and they concluded that the market data cost outlook is unsustainable.

For example, the average renewal increase for major vendors was 15% in 2024, according to Substantive Research.

Why are market data costs escalating?

R. Tee Williams:

Let’s point out one thing. There was a lot of pushback from the exchanges when these two reports came out, but as far as I can determine, both reports have stood up to investigation. There are quibbles about exactly what was meant by various definitions in the research, but generally, whether it’s 15% or 16% or 14%, it’s a big number. So with that as a caveat, the major problem is the lack of good pricing information, which helps or prevents users from really knowing what a fair price should be. It means that firms are basically having to negotiate in the dark without any useful information about what prices are constructed, how prices are constructed, or what the true prices are. 

The reason for this is essentially that the market for market data is controlled by the vendors and the exchanges, and the users are at their mercy. Now this opacity means you don’t know what other customers’ prices are, and this inconsistency in pricing models means that some firms are now paying as much as 12 times what their peers are paying for essentially the same service, according to substantive research and expanded research.

Exchanges often supplement their dwindling revenues from other types of activities with market data, and that is the reason that market data prices are rising so fast.

Laura Paglia:
Should the firms be negotiating harder for lower costs?

R. Tee Williams:
Well, that’s ironic that you should ask that question because part of the problem is often that firms are actually negotiating very hard. Most firms tend to have data professionals and purchasing specialists who are skilled at extracting concessions when they negotiate a market data contract. One of the tactics that users often employ is to focus on a couple of things that are particularly important to their firm. What they don’t realize is that when they get a better price for one part or one of the items in the contract, the vendors or exchanges simply push the revenue to another place. Providers are generally trying to maintain consistent revenue, and they’re generally indifferent where the revenue is generated within the license.

So if you’re particularly incensed about some particular part of a contract, you can often negotiate that down to a better price, but in the end you’re unwittingly paying for something else more than would have been the case if you hadn’t negotiated so hard. Now this has two effects. First, there’s really no effective price for many if not most exchanges for the data they sell. There are some exchanges that do a pretty good job of holding to a single price list, but they are rare. Most exchanges have multiple prices for the same product for different firms. They are very unwilling to let people know what those prices are, rightfully assuming that if someone found out that firm B was getting the same data that firm A was paying only half as much for, firm B would demand the same price. 

Exchanges try to avoid this competitive price pressure. The one problem with standardizing prices is that firms are very proud of the prices and the discounts they negotiate. You can imagine all the negotiators going out after a negotiating session and celebrating at the local pub for getting a particular deal, but the price for the information in total would be better if consumers, firms, deals would go away and they would have a single consistent price that’s available to everyone.

Laura Paglia:
You mentioned cost. When the cost to produce or deliver a product increases, prices often rise to maintain profit margins.

Is that in part what’s happening with market data? Are there costs that are associated with producing the data that’s at least contributing to these escalating prices?

R. Tee Williams:
Well, that’s a great question. There are no specific costs for producing market data, although there are costs to maintain and distribute it. Data comes from running a trading platform. It’s a necessary byproduct of the trading process. 

I’m glad you asked that question because we often hear from exchanges that they show great creativity in generating new forms of market data. But in reality, what they’re doing is selling the same data for different purposes. So the creativity comes not in generating new data, but in finding new uses and new ways to charge for the same data. We think that’s not fair. 

Consumers, when they buy the data, should have the right to modify the presentation if they choose to do so. The users shouldn’t be charged again for the same data just because the consumer is changing the format. 

Now, if you buy data from a vendor or from an information producer in two different formats and you choose to do that because it’s easier to buy the data in the format that you need it in, that’s one thing. What we’re seeing here is that there are two distinct parts of market data, the data itself and the way the data is presented.

Laura Paglia:
So the importance of distinguishing between the content and the presentation.

On the content portion, the market data, what makes that product different from other products in the market?

R. Tee Williams:
It’s really nothing other than the format that the data is in. So let’s take an example. Suppose you buy market data from the Toronto Stock Exchange for Bloomberg and from Refinitiv. The data, the prices, are exactly the same from most vendors, and each vendor puts the data into a different format using different market identifiers as part of the services they provide. But the data, the prices, don’t change. It’s important to know that data is not sold in the commercial sense of the word. You sign up or get a license for market data, and the license is for specific use. So if the data content has to be licensed again, if you want to use it for a different purpose. Even if the data is only licensed for specific use, the consumer may be charged multiple times for the same data. This happens, for example, when a customer licenses data for a user, like a trader, from two different vendors, as a backup.

Laura Paglia:
You mentioned earlier that firms are currently paying up to 12 times more than their peers for the same product from the same vendor. Have there been efforts to standardize the pricing?

R. Tee Williams:
Over the last 30 years, when I’ve been associated with market data, there have been many attempts, and it has all come to nothing. It’s futile. Standardizing market data terminology and the units for pricing have huge benefits for the customer, but they provide nothing additional for the vendor and the exchange. It would require many expensive changes to contracts with no new revenues for the vendors and exchanges simply to make the terms consistent.

Laura Paglia:
Is there an answer in regulation?

R. Tee Williams:
I believe there is. The Canadian Securities Administrators need to demand and facilitate standards for market data and market data contracts and enforce the use of those standards. However, that is not sufficient. We also need an authority, an enlightened judge that will not only enact the rules, but also serve as an arbiter in contentious situations.

Laura Paglia:
In November of 2022, the Canadian Securities Administrators published for comment a consultation paper entitled Access to Real-Time Market Data.

They describe the purpose of the paper as twofold: to present the results of their fact-finding review regarding the concerns raised by Canadian market participants in relation to access to real-time market data, and second, to seek feedback on initial and longer-term options that could alleviate inefficiencies in the fragmentation and other concerns, namely costs raised by market participants in relation to the data.

Could you summarize your views on that paper?

R. Tee Williams:
The paper that the CSA presented suggested that a regulation that is known as the market data fee methodology that already exists, and the CSA was interested in understanding whether that would be the basis for addressing the industry’s concerns about excessive costs. We spent some time reviewing the data fee methodology, and our conclusion was that that’s not the solution to the problem. The data fee methodology essentially makes sure that each marketplace charges consistently for securities that are multiply listed, that the prices charged by the exchanges are consistent. The problem is not that the prices are inconsistent. The problem is the prices aren’t reasonable.

Laura Paglia:
What would you propose instead to bring those prices down?

R. Tee Williams:
We proposed adopting the same methodology that’s being proposed in Europe, and that is to use something known as cost plus pricing. Cost plus pricing will address not just the relative costs among various sources, the exchanges, but also the price itself. The way cost plus pricing works is you assess the costs that are required to produce market data, mostly maintenance and distribution costs. The methodology allows exchanges to charge a regional profit over those costs as the final price to the customer. The reason behind cost plus pricing is exchanges are de facto monopolies, much like telephone companies and power companies. Where there is one source for a service, it is not fair to let the exchanges charge whatever the market will bear for their services.

Laura Paglia:
Thank you, Tee. Are there additional proposals available to reduce market data costs?

R. Tee Williams:
We propose several modifications to licensing and market data costs to reduce the cost of market data. We’ve already talked about standardizing the language and the units in licenses.

Currently, each market data licensing entity uses its own terminology, and sometimes it’s the case that an entity may even have conflicting terms for the same products in different services. 

For example, one of the things that exchanges charge for is something that may be known as a display device. Some licenses label the equipment on which a user views market data as a display device, but other licenses will call it a terminal, and in still other circumstances, the charge is a user. What we propose is that everybody uses consistent terms, and that exchanges, the vendors, and customers come together and adopt terms that they all agree on. 

These terms are then referred to as the units of count. A unit of count you can think of as the thing that you multiply times the unit cost to figure out what the price is. Ten terminals, the unit of count is ten. Now, the lack of standards has three direct impacts on market data usage. 

First, most users have multiple licenses for the services they use. For a very large firm, think about the big banks in Canada. They have several hundred licenses that all have different terms, and because of that, it’s not possible to standardize. It’s hard to set up in a firm a consistent pricing and management strategy. They have to look at each of the hundreds of licenses individually. 

Second, data licenses typically include the right to have an audit, which is the right for the vendor or the exchange to come in and make sure the way the data is being used is consistent with the licenses. Because there’s so much confusion in the terminology and licenses, users claim that they have a really difficult time making sure that they are complying with the licenses even though they’re trying to. 

Third, complex licenses create the opportunity for licensing entities to move revenues around among the items in the licenses. We talked about before that there is rarely an established or published price for most market data items. Users are constantly sending teams of professionals in to negotiate. 

The result of these negotiations, as we said before, is that the firm may be able to get a very low price for some portion of the data that they purchase, but other prices are not negotiated as actively, and these prices are higher. We think that if Canada standardizes prices, a firm may lose a couple of cherished low fees that they’ve negotiated, but overall the cost will be lower for all the firms in the industry.

Laura Paglia:
R. Tee, consolidated tape has also emerged as a solution in Europe and the United States to address the fragmented nature of market data. Would this make sense for Canada as well?

R. Tee Williams:
Absolutely. A consolidated tape aggregates the data from different trading venues and puts it into a single feed or source of the information that goes out to all customers. It means that you can say with absolute certainty what the price for a single security traded in Canada is for the day. And you can also have a unified feed in a standardized format that provides information that you are looking for and working with. It really adds liquidity and efficiency to the markets.

Laura Paglia:
Thank you very much for joining us today, Tee.