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Market data and the prisoner’s dilemma

The prisoner’s dilemma is an aspect of game theory that shows why two individuals might not agree, even if it appears that it’s best to do so.  In its simplest version, two prisoners have to decide whether to assist or betray one another. If they co-operate then they both receive relatively light punishments, whereas a betrayal by one prisoner means that the other is severely punished whilst the betrayer goes free.

It seems like a similar situation is playing out (again) in Europe over the consolidated tape. It’s a complicated issue and different industry bodies are naturally trying to achieve the best outcome for their members. The problem is that the players concerned have different outcomes in mind. The exchanges want to protect their market data revenues whilst the MTFs want to challenge the monopolies of the big boys. The brokers want lower market data fees and the buy-side wants to be able to make sense of best execution. Hardly surprising that progress on finding a way forward has been slow.

But, just as with the prisoner’s dilemma, all these participants need to decide if mutual co-operation is better than trying to outflank one another. Maybe the only realistic outcome we can expect is that everyone ends up equally dissatisfied and there can be no outright winner in this version of the game.  A colleague suggested to me that one thing that would help would be the imposition of standardised market data contracts. It may sound like a small point but, in many instances, the legal and compliance burden of negotiating different market data contracts with every venue in Europe is often more onerous than actually doing the technical work. If you think this would make a difference then click below and I’ll forward to Brussels.

Meanwhile, and after four years, the European securities industry is still struggling to make sense of the effectiveness of MiFID as no two measurements of the results produce the same answer.

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3 Responses to “Market data and the prisoner’s dilemma”
  1. darren sinden says:

    Its not the contracts that need to be standardised rather the obligations of the reporting venues and mechanisms… if all trade reports had to implemented in a common format within a common time-scale that would solve much of problem admittedly that may not solve the issue of access or dissemination but there has always been some opacity here.

  2. Mark Rest says:

    In summary if all the players coperate we all win in supplying Market Data .

    The next question is: Will it happen?

    I recommend Chapter 12 “Nice Guys Finish First” from the book “The Selfish Gene” by Richard Dawkins for anyone interested in why, in my humble opinion, this works.

  3. Hi Steve –

    Whilst I would agree that standardised contractual terms for customers who receive consolidated data would be useful, the priorities that we all need to focus on at the moment is to fix the underlying problems which preclude the consolidated data from providing useful information to investors and the transparency our industry needs to operate efficiently.

    Since these transparency issues were raised and recognised by regulators as needing attention there has been many attempts to expand the scope of the attention to focus on just about everything but the root cause of the transparency problems we set out to fix. These attempts have been the single biggest obstacle to making progress frustrating everyone involved who understands that the regulators have asked us to act as an industry rather than lobby them on how to act on our behalf.

    Despite all that, there has been much progress made thanks to the focus and effort of many constructive contributors and industry associations. I took part in the CESR Technical Working Group who last summer delivered the blue print for standardised OTC trade reports. CESR recognised at an early stage that the root cause of our transparency burdens stemmed from the inherent lack of standards in OTC trade reporting where much of the increased competition which resulted from MiFID 1.0 has resided. Following the delivery of CESR’s work, FESE Exchanges formed a working group to extend this work to on-market trading (RM and MTF). The working group also delivered the Market Model Typology (MMT) which provides a cross reference to legacy trade report protocols enabling these standards to be immediately adopted by the industry rather than having to wait for the underlying systems to incorporate the standards natively which could take years.

    Bloomberg, Thomson Reuters and your own Fidessa have commited to leveraging the MMT so that users of their platforms are able to leverage the good work being done. MMT has become an industry-owned initiative now independent of FESE and supported by the likes of many contributors including Chi-X Europe, Markit BOAT and most recently the FIX Protocol organisation (FPL) who understands data standards quite well.

    That all said, FESE efforts continue and in parallel, the working group has: 1) coordinated its members creation of unbundled post-trade data to lower the cost associated with acquiring real-time consolidated data; 2) Free 15 minute delayed data as a standard to allow the industry to create completely free tapes of record to investors (NYSE Technologies will launch the first this year on the web); 3) Initiated a contractual standards working group to deliver precisely what you suggest here!

    There is plenty left to do but the scope of the problems are being narrowed each day.

    In the spirit of the industry taking action to address its own issues, I would suggest that you send the results of your survey to the FESE Data Contract working group rather than ‘Brussels’. I can assure you that it will be illicit a constructive response.

    Best Regards,
    Mark Schaedel

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