Exchanges Rage Against The Trading Machine

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What's going on?

Shares of Nasdaq, Inc. and Intercontinental Exchange – respective owners of stock exchanges NASDAQ and the New York Stock Exchange – fell by 2% on Wednesday as regulators fixed them with a baleful eye.

What does this mean?

Skynet’s still a way off – but when it comes to trading, the machines have been taking over for years (tweet this). Since machine (or “algorithmic”) trading typically generates lower revenues for exchanges, its rise is bad news for them. But these algorithms need trading data to understand what’s going on in markets – and lots of it. Never ones to miss a trick, the exchanges have increasingly been making money selling the masters of the machines just that.

Predictably, the price of this data has quickly gone up – much to the chagrin of investors who have little choice but to pay up or risk being left behind. Now, US regulators have stepped in, saying that the exchanges’ price increases are unjustified – and overturning prior price hike approvals.

Why should I care?

For markets: Exchanging profit for compliance?

Selling more of the same product helps grow revenues and profits by a steady amount (all else equal), but increasing prices at the same time bumps up profits disproportionately. The American exchanges have benefited from this in the past, but future price rises now look less certain, likely leading investors to sell their shares (although both exchanges plan to appeal the regulator’s decision).

For you, personally: Traders may get a better deal.

Any money saved by larger institutions may flow through to smaller investors in the form of lower trading costs, especially as big brands battle for the average Joe’s (and Jane’s) trading dollar. In August, JPMorgan Chase announced it was offering 100 free online trades to customers via its investing app (down from $24.95 per trade). Elsewhere, investment manager Fidelity cut fees on several of its products in a possible bid to win new investors as rivals see money withdrawn (BlackRock, what’s good?).

Originally posted as part of the Finimize daily email.

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