Business Insider Reporter Matt Turner writes:

“Information wants to be free,” the technology activist Stewart Brand once said. “Information also wants to be expensive.”

That is proving true on Wall Street, where stock exchanges – in particular the New York Stock Exchange and Nasdaq – both publicly traded and for-profit, stand accused by rivals and some users of unfairly increasing the price of market data.

The debate centers on whether that data is essential – some customers and rivals say it is, the exchanges say otherwise -and whether there is any competition in the market for that data.

The big market-makers argue they are in a bind. They say they have to sign up to use the NYSE’s and Nasdaq’s proprietary depth-of-book feeds and pay for other add-ons, such as having their servers located in exchange data centers. And costs have increased 20% a year for the last five years, according to some estimates.

“Exchanges don’t create any unique content – market data is generated by their members and other market participants including real investors – so it’s very hard to believe that exchanges can perpetually charge their members more every year to look at the members’ own data,” Brad Katsuyama, CEO of IEX Group, told Business Insider.

The exchanges, in contrast, argue that these feeds are optional, that there is competition, and that trading firms can terminate feeds or colocation arrangements if they get too pricey. Earlier this year, a chief administrative law judge at the Securities and Exchange Commission (SEC) sided with the exchanges in a long-running legal case focused on the issue.

“The SEC judge ruled based on an extensive evidentiary record that the cost of market data is subject to competitive forces,” Jeff Kimsey, head of global data products in global information services at Nasdaq, told Business Insider. “Her ruling confirms that competition is real and increases transparency and facilitates access to the best prices.”

Boiling point

All of this might sound like a Wall Street issue that lives and dies on trading floors. But a couple of recent developments provide reason to believe that the back-and-forth is about to boil over and go mainstream.

The major exchanges are levying a “tax” on the financial community to boost profits, according to IEX, which was approved to be America’s newest stock exchange earlier this year. They’ve used “monopolistic power” to introduce “abusive practices,” according to a former SEC commissioner. And they’ve increased the cost of data to achieve higher valuations, according to the CEO of a big market-making firm.

One industry consultant called it “the market data deathmatch” earlier this year in a lengthy report.

“If these costs are not reined in, it will almost certainly harm our markets as increased fees will push market-makers to widen quotes and create an increasingly difficult hurdle for brokers, leaving investors with a less liquid and effective market,” said the report, from Larry Tabb, founder of the Tabb Group.

It has even started coming up on earnings calls. On Tuesday October 1, Richard Repetto, an analyst at Sandler O’Neill, asked Jeff Sprecher, chairman and CEO of Intercontinental Exchange, the group that owns the New York Stock Exchange, whether he was noticing “a little drum beat of pushback” on the increased pricing of market data.

“It’s always interesting to us that a lot of the people that try to benefit from fragmentation of markets then complain about the fact that it costs them more to do business in that fragmentation that they helped create,” Sprecher said.

The upstarts

IEX and Bats Global Markets, the exchange group that’s set to be acquired by the Chicago Board Options Exchange, have emerged as vocal critics of the establishment exchanges.

IEX asked the SEC to investigate the NYSE for its market data and access fees, saying the charges for colocation and market data represent a “tax” and that “exchanges have an outsized influence on constantly rising trading costs.” And Bats urged the regulator to reject a Nasdaq proposal for a new network to carry data feeds.

To be clear, Bats also charges for data, and has said it would look to boost these kinds of revenues. IEX will “never need to rely on charging for market data and connectivity,” Katsuyama said.

Big trading firms are starting to go public with their dissatisfaction with rising costs, asking the regulator to step in.

“If you think about the improvements in technology and cost of information and how that has come down, this is the one industry that has gone the other way,” Doug Cifu, chief executive of the high-speed trading firm Virtu, told Business Insider.

“My take is that there have been some abusive practices – the fluctuation, the arbitrariness with which fees have been jacked up, and the monopolistic power that goes behind it – there is a problem,” Dan Gallagher, an SEC commissioner until 2015 who is now president of the consultant Patomak Global Partners, told Business Insider.

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