Market Data Revenue Analysis

for panel Six

Funding of Core Data Infrastructure

Larry Tabb
Founder and Research Chairman
TABB Group

SEC Market Data Roundtable | Washington, DC | October 25-26, 2018

 Summary of revenue analysis
▪ Exchange revenues of ICE/NYSE, NASDAQ & Cboe have grown over the past 8
years faster than buy-side institutional commissions and market maker profits

▪ While transactional revenues have improved for exchanges (+2.2% CAGR) , it isn’t
attributable to equities (-0.5% CAGR)

▪ However exchange non-transactional revenues have grown on a compound

annual growth rate of 8.5% CAGR

▪ Much of this is attributable to data (market data, connectivity, and non-exchange

data, tech and services) which grew at a CAGR of 11.7%

▪ Exchange-based market data and connectivity grew at a CAGR of 6.1%

▪ But non-exchange data, technology & services grew at a CAGR of 18.7%

▪ This is attributable to the growth of adjunct businesses (SuperDerivatives, InteractiveData,
NASDAQ Market Technologies, Index data…)

2
 Exchanges trade approximately 63% of the market volume, down from a pre-
Reg NMS 90% in ’04, but down from 60% pre 2010 Flash Crash
On/Off Exchange Volume by Group
60.0%

49.7%
50.0%

40.0% 39.6% 37.2%

34.4%

30.0%

24.1%

19.6%
20.0%

16.6%

10.0% 10.2%

2.5%

0.0%

Off-Exchange Nasdaq Group NYSE Group Cboe/BATS Group Independent

3
 Revenues of ICE/NYSE, NASDAQ & Cboe increased 5.4% annually from 2010
through 2018 (annualized). Non-transactional revenue is greater than net transactional

Major Exchange Group's Revenue Breakdown

Quarterly Total, Transactional & Non-transactional (Data, Tech, Listings, & Fees)

$2,500.0

Difference between Total $2,141.5

and Net are Section 31
$2,000.0 fees and liquidity
incentives
CAGR 5.4%
$1,411.5
$1,500.0
$1,243.6
CAGR 8.5%
$1,000.0 $897.9
$778.4
CAGR 2.2%

$500.0 $633.1

$-

Total Net Revenues Net Transactional (Total) Non-Transactional (Data, Tech, Listings & Other Fees)

4 Source: Company filings & TABB Group Note: 2018 (for CAGR purposes) is annualized 1h ‘18 x 2
 SIP revenues remained constant, non-SIP market data grew 7.9% annually
from ‘10-’18 while non-exchange data & tech grew almost 19% annually

Exchange Market Data Spend Breakdown

Quarterly
$700.0

$600.0 CAGR 18.7% $584

ICE Acquisition of NYSE

$500.0

$400.0 $350.4
CAGR 7.9%

$300.0

$186.5
$200.0

$142

$100.0
CAGR -0.01% $78.0

$78.1
$-

SIP-Revenues Non-SIP Market Data & Connectivity Non-Exchange Market Data & Tech

5 Source: Company filings, CTA, UTP, & TABB Group Note: 2018 (for CAGR purposes) is annualized 1h ‘18 x 2
While the market data revenue is up, US Equity Commission pool is down 4.9%
annually from ‘10-’17. Last year was down 14.5% & ‘18 projected down too

US Institutional Equity Commission Pool

$15.0

$13.0 CAGR -4.9%

$12.2
$11.8
$10.8
$11.0 $10.4
$7.2 $10.2 $10.1
YoY: -14.5%
$5.0
$4.8
$9.0 $8.6
$4.0 $4.2 $4.9
$4.9 $4.6 -8.5%
$7.0
$4.2

$5.0

$7.2 $7.0
$3.0 $6.2 $6.0 $5.9 -19.4%
$5.5 $5.5
$4.4

$1.0

2010 2011 2012 2013 2014 2015 2016 2017

$(1.0)
Long Only Hedge Funds Total

6 Source: TABB Group Institutional Equity Trading Studies – 2011-2018

 Market maker profitability has also declined over the decade as
competition and technology costs have escalated
US Equity Market Maker / HFT Industry Profitability
US$ in Billions
$5.70

$4.10

$1.80 $1.80

$1.10 $1.00 $1.20 $1.10

$0.85

2010 2011 2012 2013 2014 2015 2016 2017 2018

7 Source: TABB Group estimate

 TABB Group’s view of market data issues

▪ Pricing of data has not been subject to large price increases

▪ It is the data licensing that has substantially changed

▪ Non-display proprietary data (which was included in traditional prop feed usage licenses
years ago) is now sold by use case
▪ A large broker could buy the same data 5 / 6 times (agency, principle & multiple ATSs)
▪ More than one firm has multiple ATSs – each use case needs to buy their own data

▪ Best execution guidelines push brokers to connect and buy data from virtually all
exchanges
▪ While eliminating OPR may reduce data purchases, best execution is the guiding factor
▪ SIPs are not fit for purpose for electronic trading

▪ SIP revenues have remained virtually unchanged over the past decade
▪ It may be time to reinvestigate not just the market data fee allocation formula but how
much revenue the SIP generates

▪ This is not a retail problem, or a problem with display data (outside of

market maker cost reflected in a wider spread), it’s an institutional issue
around execution-quality market data
8
 My take
▪ Do a more complete cost analysis
▪ Analyze data fees and costs by product and geo more accurately

▪ Exchanges seem to be capturing a larger percentage of industry revenues as they executed

a smaller percentage of shares
▪ The economics of exchange data doesn’t seem to be market-aligned – technology and
connectivity have generally gone down over the past decade not up
▪ Need to work with an economic & technology consulting group
▪ Maybe DERA can help

▪ Create a group to analyze licensing models for direct/non-displayed feeds

▪ Maybe extend SIP to resolve some of these issues
▪ However, SIP isn’t fit for electronic trading purpose
▪ Need faster access – not processing speed but current aggregation distance issues
▪ Need depth of book
▪ Messages on direct feed that are not on the SIP
▪ If you use a direct feed, FINRA looks for broker to use direct feed for best ex routing

▪ Leave non-exchange data, technology and services businesses alone

▪ As those are non-exchange & non-equity/options businesses
▪ Even though they are growing quickly they seem to be subject to traditional competitive forces and
don’t have a regulatory buttress

9
 Appendix

10
 Analyzing market data revenues produced by the exchanges is
not easy
▪ Different exchanges categorize revenues differently

▪ Acquisitions have complicated the analysis

▪ Exchanges are not monoline

▪ All have US Options Exchanges
▪ All have European operations
▪ Many have other derivatives exchanges
▪ They group connectivity and services somewhat differently

▪ While all break out transactional equity revenues many do not break out US
Equities from Europe or market data, listings, or services by business line/geo

▪ BATS did not produce quarterly financials prior to going public in 2013 (but annual
information was released in S1. Quarterly data was generated by dividing annual
by 4)

▪ The data contained in this deck is TABB Group’s best efforts of aggregating
exchange financial data, and depending upon how we have aggregated it we could
be misrepresenting exchanges’ actual view of their data given the above issues
11
 Net transactional revenues only increased by a 2.2% CAGR
while equities net revenue fell by 0.5% (CAGR)
Total Transactional Revenues vs. Equities Transactional Revenues
Quarterly
$1,000.0 $897.9

$900.0
$778.4
$800.0
CAGR 2.2%
$700.0

$600.0
$504.9
$451.5
$500.0
CAGR -0.5%
$400.0

$300.0
Difference between Net and
$200.0 Equities are other products, such
as options, futures and OTC
$100.0
Derivatives
$-

Net Transactional (Total) Equities Net Transactional

12 Source: Company filings & TABB Group Note: 2018 (for CAGR purposes) is annualized 1h ‘18 x 2
 While equity transactional revenues fell and listings kept pace,
data revenues grew substantially
Exchange Net Transactional Revenue vs. Listings, Market Data, and Non-exchange
Market Data
Quarterly
$700.0

ICE Acquisition of NYSE CAGR 18.7%

$600.0 $584

CAGR -0.5%
$500.0 $451.5
$504.9

$400.0 $428.4
CAGR 6.1%
$300.0 $264.6

$200.0 CAGR 1.6% $183.0

$160.0

$100.0 $142

$-

Equities Net Transactional Listings Market Data & Connectivity Non-Exchange Market Data & Tech

13 Source: Company filings & TABB Group Note: 2018 (for CAGR purposes) is annualized 1h ‘18 x 2
 Market data, connectivity and non-market data, data and transactional
revenues increased at a 6.1% & 8.5% CAGR respectively

Market Data, and Non-exchange Market Data

Quarterly
$700.0

CAGR 18.7%
$600.0 ICE Acquisition of NYSE $584

$500.0

$400.0 $428.4
CAGR 6.1%
$300.0 $264.6

$200.0

$100.0 $142

$-

Market Data & Connectivity Non-Exchange Market Data & Tech

14 Source: Company filings & TABB Group Note: 2018 (for CAGR purposes) is annualized 1h ‘18 x 2
 SIP revenues, over time have remained fairly steady at between
2 and 3 mils per share traded
SIP Revenue Per Share Traded
$0.00030 3.0

Trillions
$0.00028

$0.00025 2.5

$0.00021

$0.00020 2.0
1.86

$0.00015 1.5

$0.00010 1.0

$0.00005 0.5

$- 0.0

SIP Revenue per Share traded Aggregate shares

15 Source: Company filings, Cboe, CTA, UTP & TABB Group Note: 2018 is annualized 1h ‘18 x 2
 Market Data Revenue Analysis
for panel Six
Funding of Core Data Infrastructure

Larry Tabb
Founder and Research Chairman
TABB Group

SEC Market Data Roundtable | Washington, DC | October 25-26, 2018