Large brokerage firms with internal order crossing engines and ECNs will start selling market data hoping to reap millions in the process. Once Reg. NMS goes into effect later this year, brokerages will be allowed to charge for market data, which is necessary for brokerage and buyside traders hunting for liquidity. At the moment they can get only a limited amount of data from Nasdaq Stock Market--which hosts the alternative trading facility where ECNs and ATS post quotes.
“It’s tough to make a living in an environment of compressed spreads and commissions, so brokerages are looking for any opportunity to make extra money,” said Sang Lee, founder of research firm Aite Group. Depending on the size of the ECN or ATS, brokerages could earn as much as $10 million a year each on market data alone, analysts estimate. ATS and ECN market data will become essential to traders once Reg. NMS comes into effect so they can achieve the required best price; if the best price resides in an alternative trading system, the trader needs to sweep that book to fulfill best execution requirements.
Lining up at the trough are BATS ECN, Knight Trading, Citigroup, which just bought On Trade ECN, and Credit Suisse, which recently registered its crossing mechanism as an ATS.
Deep data is in most demand and the hardest to come by. Brokerages and buyside traders want this historical execution information to configure their direct market access tools, such as algorithms, so they can find the best price. Before NMS, algorithms were merely designed to speed up trading, but not necessarily achieve best price.
Exchanges made $400 million in market data revenues last year. “It costs you money to print there [Nasdaq]. Why pay someone else when you can turn market data from a cost into a revenue producer?” noted one trading executive.
There is a drawback: brokerages who open up their book expose their customers’ anonymity. “Some alternative trading facilities will offer better value closed; no one will cannibalize their own value proposition [anonymity],” cautioned Robert Iati, analyst with TABB Group.