Wholesale market data

After some delay, the FCA has published the findings of its trade data review and launched an all-encompassing wholesale data market study.

The FCA has been investigating the cost and access to market data since early 2020, when it launched a Call for Input on the subject. Feedback and views on whether competition was working for the supply of wholesale data were mixed, largely reflecting respondents' positions in the market. In its Feedback Statement, the FCA highlighted its concern that competition issues in these markets may be leading to high pricing and therefore increase costs to end investors. The FCA signalled then it would continue to review the market in trading data and would launch market studies into benchmarks and credit rating agencies where it also had concerns around competition.

• Some trading markets are concentrated among a few firms so there is little choice for users when buying this data and switching supplier is not an easy option.

• MiFIR-based requirements on pricing trade data on a reasonable commercial basis don't appear to be a significant constraint on pricing.

• The way data is sold can be complex, making it harder for data users to compare costs and to make informed choices.

• Complexity and limited choice result in additional costs to data users such as asset managers. These are likely to be passed on to UK retail investors and savers.

• Despite rules in place requiring delayed data to be distributed for free, many users end up with little choice but to pay for data.

• Evidence suggests that trade data is a highly profitable business line and contributes considerably to the high margins earned by some firms.

The FCA wholesale data market study will now consolidate the market studies for benchmarks, credit ratings data and market data vendor services. FCA market studies are in-depth, evidence-driven investigations. If the FCA finds problems in a market, it could introduce regulations or other policy interventions in the future, and in the extreme, could introduce more restrictive forms of price regulation. For this particular study, the FCA will decide whether to make a market investigation reference to the Competition and Markets Authority after six months and the final report is due in a year.

The market study is particularly broad in scope covering regulated and unregulated markets which contributes to the complexity of the study. The FCA is looking to review six themes:

1. Barriers to entry and expansion
2.  Network effects
3.  Vertical integration
4.  Suppliers' commercial practices
5. Behaviour of data users
6. Incentives for innovation

Providers in the market will likely be asked to provide detailed submissions to the FCA on the functioning of the markets in question and respond to information and data requests containing confidential information about their activities. 

Consolidated tape

The FCA is also working with the Government on developing the regulatory framework (introduced by MiFIR / MiFID II) to facilitate a consolidated tape for the UK. Similar developments are happening in the EU as part of the MiFIR review.

A consolidated tape collects market data, such as prices and volumes, from on-venue and OTC trading across the market and disseminates them in a standardised, single feed. It can include reports of pre-trade and/or post-trade data.

Reviews have found that a consolidated tape has not emerged in Europe as, amongst other reasons, the current structure of the market and legislative framework does not offer strong commercial incentives for a consolidated tape provider (CTP). Both jurisdictions are now looking to put place frameworks that would enable, for each asset class, a single private sector operated tape, that would be authorised and regulated.

The ongoing debate on the correct amendments to the framework includes discussion around:

• Fee schedules, licensing and revenue sharing between data providers and the CTP.
• How the rules and tender process can be designed to ensure a chosen CTP behaves, from a competition point of view, in a manner consistent with having multiple CTPs per asset class.

The FCA will use the findings of the trade data review to inform the design of the consolidated tapes and is planning to consult on the design in summer 2023. ESMA will consult on the model for the EU once the MiFIR review is agreed.

Consolidated tapes should improve the overall cost, quality and accessibility of wholesale data. Therefore, they are likely to have an impact on pricing and business models for wholesale market data.

Many of the firms likely to be reviewed by the FCA wholesale market data study will also be selling ESG data and ratings. This market is currently unregulated but is rapidly growing. Regulators are concerned about the lack of alignment of definitions, lack of transparency on methodologies used, uneven coverage and management of conflicts of interest and are likely to bring within the regulatory perimeter. A recent FCA review of ESG benchmarks found the overall quality to be poor. Please see article for more details.

The KPMG Competition Economics team can assist firms facing competition and pricing investigations of this nature. It has substantial experience of representing firms in front of the FCA, CMA and other regulators as well as experience of working within regulators. The KPMG team has worked on many cases involving allegations of unreasonable or excessive pricing and weak competition and has an understanding of how regulators approach these questions. Please contact us below to find out more about the services KPMG firms offer.