The World Federation of Exchanges Paper Analyses who Benefits from Exchange Data
London, June 1 – The World Federation of Exchanges (“The WFE”), the global industry group for exchanges and CCPs, today published a paper to advance thinking on fairness and transparency in equity market data. Titled ‘Not what, but who’, the WFE paper identifies the different types of user demand; and what are in effect distinct data products manufactured by exchanges.
Even though this use-case phenomenon is key to the policy and practice of licensing data in the interests of an effective capital market, it has only just begun to figure in the public policy discussions on the topic; is ignored in the academic literature; and is sometimes misrepresented by those who profit most from that market data. The WFE paper sets this in context against the background of the key principles that should be considered in the debate on market data.
While market makers quote two-way prices in order to profit from order flow, it is exchanges that create the market place in the first place, bringing order to an otherwise fragmented process that would inherently be less fair and transparent to end customers. The exchange does this by offering two complementary product sets: data and execution.
Exchanges license data in a way that recognises the various use cases and the trading-business model that each adopts, including how those distinct types of user interact with each other. It does so in the interests of maintaining order flow, which benefits intermediaries and end-users and, only as a by-product of that, the exchange itself.
Market prices can change at a speed which the human eye cannot see and the brain cannot process. But, by specialising the way in which they consume data, trading intermediaries can. The paper reminds readers that this is a much more profitable activity than licensing data to them, as exchanges do. Fast data helps them reduce their capital needs and improve their turnover. They can execute more trades in a day – because there are more points in the day when there are prices to trade off. And they can do so more with less risk and more profit, because they do not need to hold ‘warehouse’ (hold) risk for so long.
Exchanges’ creation of markets enhances social welfare. In the process, it also promotes an important alternative to the banking-credit channel, whose vulnerability to economic conditions has been highlighted again by the Covid pandemic.
Nandini Sukumar, Chief Executive Officer of the WFE said: “Streamed data is a human artefact but it is traders’ machines that convert it into an opportunity to profitably intermediate transactions. This is no more and no less than the classic marketplace ecosystem updated for the digital age. Data is licensed by exchanges at a price that is fully conscious of this and indeed all aspects of market microstructure. The WFE will continue to champion approaches data which are fair to the marketplace as a whole.”
Please click here to read the paper in full.
About the World Federation of Exchanges (WFE):
Established in 1961, the WFE is the global industry association for exchanges and clearing houses. Headquartered in London, it represents over 250 market infrastructure providers, including standalone CCPs that are not part of exchange groups. Of our members, 35% are in Asia-Pacific, 45% in EMEA and 20% in the Americas. WFE’s 57 member CCPs collectively ensure that risk takers post some $1 trillion (equivalent) of resources to back their positions, in the form of initial margin and default fund requirements. WFE exchanges are home to 47,919 listed companies, and the market capitalisation of these entities is over $109 trillion; around $137 trillion (EOB) in trading annually passes through WFE members (at end 2020).
The WFE is the definitive source for exchange-traded statistics and publishes over 350 market data indicators. Its free statistics database stretches back more than 40 years and provides information and insight into developments on global exchanges. The WFE works with standard-setters, policy makers, regulators and government organisations around the world to support and promote the development of fair, transparent, stable and efficient markets. The WFE shares regulatory authorities’ goals of ensuring the safety and soundness of the global financial system.
With extensive experience of developing and enforcing high standards of conduct, the WFE and its members support an orderly, secure, fair and transparent environment for investors; for companies that raise capital; and for all who deal with financial risk. We seek outcomes that maximise the common good, consumer confidence and economic growth. And we engage with policy makers and regulators in an open, collaborative way, reflecting the central, public role that exchanges and CCPs play in a globally integrated financial system.