Free Site Registration

IEX Is "All-in" on Pricing Transparency

Traders Magazine Online News, February 5, 2019

John Ramsey

Last week, in response to calls for more transparency from exchanges on the topic of market data fees, IEX published a report based on a months-long review of its own costs to produce market data and connectivity products and services. Our report also compared those costs, on a per user basis, to the fees charged by NYSE (ICE), Nasdaq, and Cboe (owner of the Bats markets). Because IEX, in order to run its own exchange, is required to pay for market data and connectivity at levels that are similar to what other industry firms must pay, we compared our per user cost to the fees we pay to the other exchanges. We concluded that these entrenched exchange groups are overcharging for market data at estimated markup levels up to 1,800%, and overcharging for connectivity with estimated markups exceeding 4,000%. You can read the report here.

How did the exchanges respond? 

The exchanges answered our study with a detailed disclosure of their own costs and a thoughtful analysis of data and connectivity prices. Just kidding! Of course they didn’t do that. Instead, they predictably deflected from discussing market data cost burdens by fabricating something they call an “all-in” cost to trade. 

What is “all-in” cost?

Essentially, the way that exchanges calculate an “all-in” cost is by adding up all the fixed costs of the type we described in our study and combining them with variable transaction fees, which are heavily affected by rebates and pricing tiers provided to some of their members, to come up with an average cost per share. Why complain about the fixed costs, they seem to say. When you mash all the fees together, we’re actually a great bargain!

The problem - and it’s really a pretty obvious one - is that nobody pays an average. The fixed costs discussed in our report are needed regardless of how much any particular firm trades, much like a gym membership. The only way you could avoid them is if you avoid trading on all the exchanges that are part of one of the three major exchange families, and at that point you won’t have a trading business because regulations and commercial necessity preclude it. So, dividing these huge fixed costs by trading volume is about as realistic as Equinox saying that the average cost per gym membership is 9 cents per step on the treadmill. You are paying the entry fees regardless, so the exchange calculation is really just an exercise in taking a big number and trying to find a denominator that will make it look smaller.

What is the average cost to trade on an exchange?

Another big problem with exchanges quoting an “all-in” average cost is that it misrepresents the average experience of the members. In this version of exchange cost calculation, the transaction fees they charge (up to 0.3 cents per share, the maximum allowed by regulation) are reduced by the rebates and tiered volume discounts they give to some of their members, producing a smaller average cost per share traded.

For more information on related topics, visit the following channels:

Comments (0)

Add Your Comments:

You must be registered to post a comment.

Not Registered? Click here to register.

Already registered? Log in here.

Please note you must now log in with your email address and password.