Come Back in 20 Minutes for the Price Right Now

I never thought I would be posting something about the pricing of financial instruments but it’s something I know a little bit about. I spent around 8 years managing market data systems in the financial industry. For about 6 years I was responsible for “negotiating” with the various exchanges around the world, including the NYSE, NASDAQ, CME, and CBOT (it was more like being on the receiving end of a DWI pullover). Google recently announced that they would be providing real-time prices for Chinese stocks traded on Shanghai and Shenzhen stock exchanges. What about the NYSE, NASDAQ, AMEX, London Stock Exchange, and other major world exchanges?

Don’t hold your breath to know the current price of Google, right now. Most likely you’ll have to come back in twenty minutes to know that the price is right now, not twenty minutes from now. It isn’t like going to the grocery store and seeing that a can of soup is $1.99 and it will stay that way, at least for a week. What most people don’t realize is that each exchange is a monopoly. If you want to know the current price of Google, the price has to come from NASDAQ because that’s where GOOG has been listed and it’s where the most liquidity will most likely be for the stock. If Google, Yahoo, Charles Schwab, Morgan Stanley or any other providers of financial information want to use the pricing data of a security such as the stock price of Google, for their internal use, there’s the end-user price that these companies must pay to each exchange for each individual that would be seeing or using the prices for any purposes. For the Nasdaq, that’s $20/month/user for real-time prices. No charge for delayed pricing. However, if any of these companies want to provide pricing information to their clients or anyone outside their organization, they must contact the respective exchange and become a distributor of real-time pricing or delayed pricing data.

Companies like Reuters, Thomson Financial, and Bloomberg are distributors because they resell real-time and delayed data as well as full infrastructures to manage this data for almost all the exchanges around the world. However, Google and Yahoo are also distributors of pricing data since they provide stock quotes on their websites. Being reseller of real-time data requires paying some fairly hefty fees to the exchange (hefty for a startup but not really for these monsters) just for the right to provide the prices to a party outside of their organization. On top of that, the exchange requires payment for each user that has access to the real-time data. This can become pretty expensive when you have to pay the NYSE $127/month for the first user and then a discounted rate for each additional user/month.

There’s a very expensive infrastructure that exchanges must maintain for routing of orders, matching orders, and disseminating pricing information. However, in today’s day and age of freedom of information, the exchanges actually make it cost prohibitive for non-professional traders and investors to know that YHOO is exactly $28.50 at 14:45:05pm. Most of the brokerage companies have become distributors of pricing data just so they can provide a PnL or position value to clients trading with them.

Day trading isn’t as popular of a career choice as it was in the late 90’s but nonetheless, more and more non-professional investors are trading, and trading more frequently. Whether you are trading or investing, one thing that’s critical is data. If the data that you’re trading off is stale, you could very easily make a bad decision. On the other end, the steep fees that the exchanges extort for use of their pricing data means that it is very difficult for startups to use the data to build products and services providing this data, and hence, marketing the stocks listed on the respective exchange.

All and all, it’s a side of the financial industry that remains ignored. Too bad Elliot Spitzer didn’t take a look at this while he was AG of NY State. Maybe as Governor, he can persuade Andrew Cuomo, the current Attorney General of NY State or the SEC to look at this unnoticed monopoly. Till then, charge on Yahoo and Google!

Related Posts: