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IEX report discloses exchange costs, challenges pricing practices

Stock market chart on LCD screen. Selective focus.

Exchange prices for market data and connectivity are higher than they need to be, according to a research report sent Tuesday to the SEC by low-cost exchange provider IEX Group, operator of the Investors Exchange.

The first public disclosure by an exchange of its costs for providing market data and connectivity, the report, "The Cost of Exchange Services," follows rising criticism from institutional investors and other market participants about the predominant exchanges — ICE/NYSE, Nasdaq and Cboe/Bats — access fee practices and perceived disparities in the dissemination of market data and connectivity.

A Securities and Exchange Commission Roundtable on Market Data and Market Access in late October aired many of those concerns and pointed out the need for transparency in costs and pricing. That led IEX to open its books to show how much it costs the firm to provide proprietary market data and connectivity. Comparing its costs to prices charged by the incumbent exchanges, IEX found what it called "egregious markups." Fees for proprietary depth-of-book market data products are 900% to 1,800% higher than IEX's costs for a comparable product. Physical connectivity fees are 2,000% to 4,200% above IEX's for comparable services, and fees for virtual sessions used by traders were 500% to 1,800% above IEX's costs.

The SEC did not comment on the IEX report, but Chairman Jay Clayton noted last year that fees charged by exchanges have been the subject of numerous commission and court proceedings over the past decade, and Mr. Clayton said that with technological and other market changes, taking a harder line would protect markets and Main Street investors.

IEX officials charge that because the exchanges operate with government licenses, "they have abused their regulatory position to the tune of billions in profit. One bad side effect is that perpetually rising costs for data and connectivity create a huge cost barrier for brokers to deliver best execution to the pension and institutional investor community," the IEX report said.

"With this unique regulatory position comes the responsibility to prove that the prices they charge their members are fair, reasonable, and promote rather than undermine competition. The exchanges owe us all some answers," IEX CEO Brad Katsuyama said in a letter to the SEC on Tuesday. "IEX hopes that this paper serves as a basis for further action by the SEC and will help both regulators and the industry challenge fees for market data and market access that fail to meet the minimum standards the investing public has a right to expect."

A spokeswoman for Cboe Global Markets said the IEX report "fails to take into account significant differences in transaction fees when comparing IEX with the leading exchanges that operate fully displayed markets." The report's focus on direct expenses "overlooks the full range of costs incurred to attract displayed liquidity and operate trading platforms that produce valuable market data. It also ignores the significant value of exchange data that contributes to meaningful price discovery," she said.

Calls to the other exchanges were not returned.