French regulator turns up the heat with spot checks on market data providers

In June 2022, a blistering heatwave hit Europe. The worst affected country was France, where a low-pressure system lingered for much of the summer, pumping torrid air from the Sahel out across the continent. Wildfires raged from Normandy to Nice, and temperatures hit record highs in two-thirds of the departments in metropolitan France.

Beleaguered tourists sought relief from the punishing heat in fountains and parks. But for the compliance departments at four French trading venues, there was no such easy fix: They were feeling the heat on two fronts.

Nearly four years after Markets in Financial Instruments Regulation (Mifir) introduced new requirements for the provision of market data, France’s Autorite des marches financiers (AMF) conducted spot inspections on four firms to test their implementation of the rules. In a recent report, the French regulator revealed that it had identified some “significant shortcomings” in the compliance of the sample firms.

The AMF focused on three aspects of market data provision: the transparency of data policies, the accessibility of free delayed market data, and the provision of data on a reasonable commercial basis (RCB). The findings of the report call for significant strengthening in all three areas.

For many market data consumers, this modest reckoning has been a long time coming. The requirements set out in Mifir were crystallized as guidelines issued by the European Securities and Markets Authority (Esma) in August 2021 to define how firms can put the rules into practice. If the sample of firms inspected by the AMF are anything to go by, however, there is still a yawning chasm between the expectations of regulators and the realities of data provision.

“It is good that these spot inspections have taken place and that the gaps have been clearly highlighted,” says Antoine Pertriaux, a partner at consultancy firm Adamantia.eu. “Indeed, since the publication of the Esma guidelines in August 2021, we have not seen much effort from venues to align with them.”

Industry observers are now left wondering if the AMF’s opening gambit will lead other regulators in the region to follow suit.

Findings

Generally speaking, the AMF found the accessibility and transparency of data policies to be lacking. None of the firms fully complied with the principle of disaggregating data in their pricing policies—distinguishing between pre-trade and post-trade data, for example, or between different asset classes—and three of the four did not observe the requisite 90-day notice period for future price hikes. One of the four firms was charging users retrospectively for using market data in a way that was not covered by their contract, even though there was no mention of this in the license agreement.

And while all four data providers published annual transparency reports, the AMF could not characterize any of them as “complete and accurate”.

When it came to justifying their pricing, two of the firms in the sample could not prove that the price of their market data was based on the cost of producing and disseminating that data. And while Firms B, C, and D did disclose that they operated on a margin, none was able to adequately explain how that margin was determined.

“There has been a clear inflation in the cost of market data for financial institutions over the past years; it’s a fact,” Pertriaux says. “The regulator wants to increase transparency by requiring pricing of market data on the basis of the cost of producing and disseminating it and to ensure non-discriminatory access to that information.”

Beyond stipulating that costs should not be allocated based on revenues generated by a firm’s other activities, the AMF did not disclose the parameters it used to determine whether market data was provided on an RCB.

“I think the idea of RCB has some flaws,” says a market data executive at an exchange group. “The fundamental issue is that producing market data is very often a fixed-cost business, and venues need to apportion that cost over different firms and user groups while being non-discriminatory (having a single price list for all). You can’t simply divide the cost by your users, because you have institutions using it for trading; brokers displaying it to clients; firms creating indexes or contracts for difference (CFDs); and then you have individual users.”

Market data revenues will increase or decrease as the venue attracts or loses customers, they add.

“Exchanges are the most transparent players in the space since they are required under Mifid to disclose their price list, but are only ‘one part of the cost of infrastructure,’” the market data executive says, pointing out that some vendors add up to 7% onto every display fee from exchanges as an “administrative cost”.

Others argue that exchanges, which make significant revenues from market data, should be the first port of call for regulators.

Only one of the four venues inspected by the AMF—Firm C—has market data revenues in excess of €2 million. This organization runs five venues, including two multilateral trading facilities (MTFs). Using Esma’s register of regulated markets, MTFs, and organized trading facilities (OTFs), it is possible to identify Firm C as Euronext. This was confirmed by WatersTechnology sources.

Euronext did not respond to WatersTechnology’s request for comment in time for publication.

I am not sure this will have a positive impact on the price of market data in any way.

Antoine Pertriaux, Adamantia.eu

Pertriaux urges caution in analyzing the results of the AMF report, because the four firms inspected are of very different sizes. “Obviously, Firm C is much larger than the three others, so the conclusions must be read proportionately. While Firm C appears to be better than the others in complying with the rules at first glance, it does not meet the critical requirement of deriving the price of the market data from the cost of their production,” he says. “That is actually no surprise, but the good thing is that this has now been spotted by the AMF, and that means that Firm C—and in turn, other large venues—will be expected to fill the gap.”

Trouble ahead?

Now that the inspection has been completed and the results published, all eyes will be on market data providers to see whether pricing and policies will change.

“There may well be a follow-up from the AMF on the non-compliant points they have spotted,” Pertriaux says, “but don’t expect too much from it. I am not sure this will have a positive impact on the price of market data in any way. The trading venues will surely find a way to meet the regulator’s demands based on internal cost accounting methodologies, without changing their pricing in the end.”

But even if the AMF’s spot inspections do not change much at venues, they could set the tone for other regulators.

The UK Financial Conduct Authority (FCA) recently published the findings of a review into trade data, based on concerns that “the overall costs of trade data may be passed through to UK retail investors.”

At points, the conclusions of the FCA study are eerily similar to the AMF’s inspection report. Among other things, the study finds that “Mifir-based requirements on pricing trade data on a reasonable commercial basis are designed to constrain pricing but give trading venues wide pricing latitude and don’t appear to be a significant constraint on pricing.”

This indicates the extent to which national authorities influence each other, particularly when they are working off the same template—in this case, Mifid II and Mifir.

“The EU level is supposed to override the local one, but the local regulators do the enforcement,” says Keiren Harris, co-founder of MarketData.Guru, a market data strategy consultancy firm. “For instance, it took years of pressure from Esma before the Cyprus Securities Commission acted on the dubious CFD operators there.”

It remains to be seen to what extent regulators will harden their tone in the future, if at all. And consumers of market data remain downbeat on the prospect of venues taking the lead unprompted. Asked how likely it was that the four firms inspected by the AMF would publish an explanation of how their margins are calculated, an executive at one market data industry association laughed. “Don’t kid yourself,” they said.