Information Explosion: Growing Potential of Market Data
The boon in high-frequency and algorithmic trading strategies have provided a shot in the arm for exchanges’ market data revenues.
They are launching new products and services designed to enable traders to get the data they want quickly, so it can be fed into a machine-based trading system without sacrificing precious round-trip latency hops.
Nasdaq OMX’s UltraFeed, for example, is a highly-efficient data feed that aggregates North American equity, options, futures and index data feeds.
“UltraFeed is a customizable data feed that will initially carry normalized message formats by asset class, including equities, options, futures, indexes and mutual funds,” said Brian Hyndman, head of global data products at Nasdaq OMX.
Nasdaq reported $34 million in revenue from U.S. market data products in the first quarter ended March 31, 2012, up from $32 million in the year-earlier period, driven by higher customer demand for proprietary data products.
Hyndman was senior vice-president of Nasdaq’s U.S. transaction business for six years before assuming the helm of global data products in 2011.
Nasdaq is pursuing a three-pronged strategy for growing revenue from data products by 8%-10% over the next three years.
“The first is to maximize revenue from existing products, the second is to launch new products, such as Ultrafeed, and the third is to focus on acquisitions and partnerships,” Hyndman said.
With its acquisition last year of RapiData, Nasdaq got into the business of offering machine-readable news, which is being consumed by a greater variety of users.
“We are actively focused on how we can leverage our brand, our technology—which we believe to be the best—and our distribution network,” said Hyndman.
TMX Datalinx, the information services division of the Toronto exchange, continues to grow through product diversification, as well as through increased use globally of TMX data and related services.
TMX Datalinx provides equity and derivative data feeds, historical reference and corporate actions data products, which are delivered according to pre-defined data/functional specifications.
“Market data services continue to remain a core component of TMX business and the business of its clients,” said Andre Craig, vice-president at TMX Datalinx.
In 2011, TMX Datalinx launched a new equity data feed product, TSX QuantumFeed for Level 1 and Level 2 data. TMX Datalinx has developed new protocols such as the Extreme Message Transfer Protocol (XMTP) to more efficiently deliver structured market data to clients.
“Without data, TMX’s clients cannot invest and trade in our equity, derivative, energy and fixed income markets,” Craig said.
Three important trends are at work in driving exchange revenue from data: fragmentation, increasing regulatory requirements and real-time/low-latency requirements, said Patrick Lastennet, director of marketing and business development, financial services, at data center provider Interxion.
“Market data services have always been important for exchanges and their customers,” said Lastennet. “An important function of carrier-neutral data centers like Interxion has been to bring together the various market data sources, creating an environment for arbitrage trading and consolidating data center investments, which is more easily achieved by connecting to multiple markets from a single venue.”
Exchanges view data as a value-added service that can be monetized in terms of tradable products and associated information.
“We believe there are significant opportunities to derive revenue from new and expanded service offerings,” said Tom Knorring, vice-president of market data sales at Chicago Board Options Exchange (CBOE).
For example, CBOE’s Market Data Express subsidiary sells historical options data, value-added proprietary information and a real-time data feed of certain S&P and CBOE index values to market data users.
A new service, CBOE Streaming Markets, provides three separate direct data feeds of real-time quotations and trade information from CBOE, the C2 Options Exchange and CBOE Stock Exchange.
“CBOE Streaming Markets was created in response to demand from trading firms looking for more streamlined access to market data from liquidity providers than is currently available and, additionally, provides the added benefits of furnishing quotes with reduced latency and enhanced information not available elsewhere,” Knorring said.
CBOE is also providing data on complex trades from its new Flex System that was not in wide distribution previously.
“Our market data for the CBOE Futures Exchange includes low-latency quotes and trades plus spread information and book depth,” said Knorring.
With forthcoming regulatory change both in Europe and the U.S. likely to force more OTC derivatives products moving to an exchange-like environment, there will be further opportunities for exchanges to monetize new data sets.
“Market data, or information services, as it is increasingly known, is viewed as a growing area away from just plain vanilla vendor of record and terminal based fees,” said Hirander Misra, chairman of Forum Trading Solutions, which offers security matching and surveillance services. “This is the reason why the London Stock Exchange Group acquired 100% of indices provider FTSE Internal in December 2011.”
Other exchanges like Bats Global Markets in Europe have recently announced the introduction of market data fees to supplement transaction based revenues, Misra noted.
RapiData, meanwhile, enables Nasdaq to deliver U.S. government and other economic news directly from the source to customers interested in receiving information in an electronic feed, giving them instant access to events that are incorporated into algorithmic trading systems.
“Some customers that trade algorithmically are looking for machine-readable products which their models can trade off,” said Hyndman at Nasdaq OMX. “We’re going to leverage our network engineering to create a low-latency product with rich content, with the possibility of expanding it later on to include social media or other content.”
Potential beneficiaries include trading firms that incorporate macroeconomic news into their trading algorithms, conventional traders who use machine-readable news to manage risk and institutional investors who seek long-range strategies, liquidity opportunities and target investments.