The Financial Conduct Authority (FCA) has published a report relating to a lack of effective competition in the market for trade data and has launched a wholesale data market study using its competition powers to consider potential competition concerns relating to specific types of financial data and distribution channels used in wholesale financial markets.
Trade data is produced by trading venues (such as stock markets) on trade activity, including prices and trading volumes.
Trade data is fundamental to a wide variety of financial firms, including firms serving retail end-consumers, such as asset managers, and firms acting in the wider financial services arena, such as banks and brokers. They heavily utilise data analytics to develop investment strategies, assess credit risks and calculate benchmarks and indices.
In 2020, the FCA raised concerns that the actions of suppliers of data for wholesale financial markets may be leading to poor outcomes for users and end-consumers, including increased charges or limited availability. In January 2022, the FCA announced its intention to conduct an information-gathering exercise on competition in the market for trade data, before undertaking a market study of the wholesale data market.
FCA Report Findings
Following its information-gathering exercise, the FCA published a report on 2 March 2023 finding that in some respects the market for trade data is working well, as most trade users are generally able to access the data that they need.
However, in its report the FCA also raised several concerns about the operation of competition in the market:
- Limited choice of providers leading to higher prices – the report notes that many users have little choice but to pay the prices set by certain venues for data due to the concentration of some trade data markets. The limited choice of providers means users could be paying higher prices, as well as having limited buying power and reduced options for switching
- Complex pricing and licensing – the FCA found that the way data is priced and licensed can be complicated, which makes it difficult for users to monitor costs and make effective choices. This complexity also leads to higher compliance costs, which are likely to be passed onto retail investors and savers.
- Delayed data – delayed trade data is not always easily accessible, despite rules requiring it to be distributed for free. Many users end up paying for delayed data, meaning it does not act as an effective competitive constraint on the pricing of real time trade data.
The FCA is now working with the government on developing consolidated tapes, which will collect wholesale data across certain markets and distribute them in single feeds. The FCA hopes that consolidated tapes will improve the cost, quality and accessibility of trade data. The FCA plans to consult on these consolidate tapes in the summer.
FCA Market study
The FCA’s wholesale data market study will be of interest to asset and investment managers, as it will consider whether adverse effects for consumers are being caused by the way in which the following services are currently delivered:
- Benchmarks and indices – these operate as a consolidated view of the performance of financial instruments, financial contracts, investment funds or asset managers. Lack of accurate data here can lead to higher costs to investors, ensuing from poor performance.
- Credit ratings – these help investment managers and others assess financial risk and influence their investment decisions. Inaccessible data will result in the inability to provide an accurate assessment of the risk / potential of investments.
- Market data vendor services – these provide financial firms, traders and investors with wholesale market data. Information is compiled from different venues including stock exchange feeds, brokers / dealer desks and regulatory filings, creating a ‘one stop shop’ for wholesale data users. The FCA is concerned with a lack of transparency and consistency amongst these services, which can lead to undue costs.
The FCA is seeking input on its terms of reference for the market study, by no later than 30 March 2023.
If the FCA finds competition concerns in relation to these markets, it will consider appropriate ways to address them. It may make a market investigation reference to the Competition and Markets Authority for any of the markets it is considering, and if so, it must publish this decision to do so by 1 September 2023. The FCA will publish its market study report by 1 March 2024.
This post was written by James Leeman and Victoria McCarron
"Given the extensive and varied use of wholesale data, including its importance in enabling investment activities and decisions, the potential harm to end consumers if these markets are not working well is very large"