Market Data Revenue Analysis

for panel Six

Funding of Core Data Infrastructure

Larry Tabb Founder and Research Chairman

TABB Group

SEC Market Data Roundtable | Washington, DC | October 25-26, 2018

Summary of revenue analysis

Exchange revenues of ICE/NYSE, NASDAQ & Cboe have grown over the past 8 years faster than buy-side institutional commissions and market maker profits

While transactional revenues have improved for exchanges (+2.2% CAGR) , it isn’t attributable to equities (-0.5% CAGR)

However exchange non-transactional revenues have grown on a compound annual growth rate of 8.5% CAGR

Much of this is attributable to data (market data, connectivity, and non-exchange data, tech and services) which grew at a CAGR of 11.7%

Exchange-based market data and connectivity grew at a CAGR of 6.1%

But non-exchange data, technology & services grew at a CAGR of 18.7% This is attributable to the growth of adjunct businesses (SuperDerivatives, InteractiveData,

NASDAQ Market Technologies, Index data…)

2

Exchanges trade approximately 63% of the market volume, down from a pre-Reg NMS 90% in ’04, but down from 60% pre 2010 Flash Crash

On/Off Exchange Volume by Group 60.0%

10.2%

39.6% 37.2%

19.6%

34.4%

49.7%

24.1%

16.6%

2.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Off-Exchange Nasdaq Group NYSE Group Cboe/BATS Group Independent

3

Revenues of ICE/NYSE, NASDAQ & Cboe increased 5.4% annually from 2010 through 2018 (annualized). Non-transactional revenue is greater than net transactional

Major Exchange Group's Revenue Breakdown Quarterly Total, Transactional & Non-transactional (Data, Tech, Listings, & Fees)

$2,500.0

$1,411.5

$2,141.5

$778.4 $897.9

$1,243.6

$1,000.0

$1,500.0

$2,000.0

CAGR 5.4%

CAGR 8.5%

CAGR 2.2%

Difference between Total and Net are Section 31

fees and liquidity incentives

$500.0 $633.1

$-

Total Net Revenues Net Transactional (Total) Non-Transactional (Data, Tech, Listings & Other Fees)

Source: Company filings & TABB Group Note: 2018 (for CAGR purposes) is annualized 1h ‘18 x 2 4

SIP revenues remained constant, non-SIP market data grew 7.9% annually from ‘10-’18 while non-exchange data & tech grew almost 19% annually

Exchange Market Data Spend Breakdown Quarterly

$700.0

$78.0

$186.5

$350.4

$142

$584

CAGR -0.01%

CAGR 18.7%

CAGR 7.9%

ICE Acquisition of NYSE

$600.0

$500.0

$400.0

$300.0

$200.0

$100.0

$78.1

$-

SIP-Revenues Non-SIP Market Data & Connectivity Non-Exchange Market Data & Tech

Source: Company filings, CTA, UTP, & TABB Group Note: 2018 (for CAGR purposes) is annualized 1h ‘18 x 2 5

While the market data revenue is up, US Equity Commission pool is down 4.9% annually from ‘10-’17. Last year was down 14.5% & ‘18 projected down too

US Institutional Equity Commission Pool

$7.2 $7.0 $6.2 $6.0 $5.5 $5.9 $5.5

$4.4

$5.0 $4.8

$4.0 $4.2 $4.9 $4.9

$4.6

$4.2

$12.2 $11.8

$7.2 $10.2 $10.4 $10.8

$10.1

$8.6

$1.0

$3.0

$5.0

$7.0

$9.0

$11.0

$13.0

$15.0

CAGR -4.9%

YoY: -14.5%

-8.5%

-19.4%

2010 2011 2012 2013 2014 2015 2016 2017$(1.0)

Long Only Hedge Funds Total

Source: TABB Group Institutional Equity Trading Studies – 2011-2018 6

Market maker profitability has also declined over the decade as competition and technology costs have escalated

US Equity Market Maker / HFT Industry Profitability US$ in Billions

$5.70

$4.10

$1.80$1.80

$1.10 $1.20$1.00 $1.10 $0.85

2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: TABB Group estimate 7

TABB Group’s view of market data issues

Pricing of data has not been subject to large price increases

It is the data licensing that has substantially changed Non-display proprietary data (which was included in traditional prop feed usage licenses

years ago) is now sold by use case

A large broker could buy the same data 5 / 6 times (agency, principle & multiple ATSs) More than one firm has multiple ATSs – each use case needs to buy their own data

Best execution guidelines push brokers to connect and buy data from virtually all exchanges While eliminating OPR may reduce data purchases, best execution is the guiding factor

SIPs are not fit for purpose for electronic trading

SIP revenues have remained virtually unchanged over the past decade It may be time to reinvestigate not just the market data fee allocation formula but how

much revenue the SIP generates

This is not a retail problem, or a problem with display data (outside of market maker cost reflected in a wider spread), it’s an institutional issue around execution-quality market data

8

My take

Do a more complete cost analysis Analyze data fees and costs by product and geo more accurately

Exchanges seem to be capturing a larger percentage of industry revenues as they executed a smaller percentage of shares

The economics of exchange data doesn’t seem to be market-aligned – technology and connectivity have generally gone down over the past decade not up Need to work with an economic & technology consulting group

Maybe DERA can help

Create a group to analyze licensing models for direct/non-displayed feeds

Maybe extend SIP to resolve some of these issues

However, SIP isn’t fit for electronic trading purpose Need faster access – not processing speed but current aggregation distance issues

Need depth of book

Messages on direct feed that are not on the SIP

If you use a direct feed, FINRA looks for broker to use direct feed for best ex routing

Leave non-exchange data, technology and services businesses alone As those are non-exchange & non-equity/options businesses

Even though they are growing quickly they seem to be subject to traditional competitive forces and don’t have a regulatory buttress

9

Appendix

10

Analyzing market data revenues produced by the exchanges is not easy

Different exchanges categorize revenues differently

Acquisitions have complicated the analysis

Exchanges are not monoline All have US Options Exchanges

All have European operations

Many have other derivatives exchanges

They group connectivity and services somewhat differently

While all break out transactional equity revenues many do not break out US Equities from Europe or market data, listings, or services by business line/geo

BATS did not produce quarterly financials prior to going public in 2013 (but annual information was released in S1. Quarterly data was generated by dividing annual by 4)

The data contained in this deck is TABB Group’s best efforts of aggregating exchange financial data, and depending upon how we have aggregated it we could be misrepresenting exchanges’ actual view of their data given the above issues

11

Net transactional revenues only increased by a 2.2% CAGR while equities net revenue fell by 0.5% (CAGR)

Total Transactional Revenues vs. Equities Transactional Revenues Quarterly

$1,000.0 $897.9

$778.4

$504.9 $451.5

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

$800.0

$900.0

CAGR 2.2%

CAGR -0.5%

Difference between Net and Equities are other products, such

as options, futures and OTC Derivatives

$-

Net Transactional (Total) Equities Net Transactional

Source: Company filings & TABB Group Note: 2018 (for CAGR purposes) is annualized 1h ‘18 x 2 12

While equity transactional revenues fell and listings kept pace, data revenues grew substantially

Exchange Net Transactional Revenue vs. Listings, Market Data, and Non-exchange Market Data

Quarterly

$-

$504.9 $451.5

$160.0 $183.0

$264.6

$428.4

$142

$584

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

CAGR -0.5%

CAGR 1.6%

CAGR 6.1%

CAGR 18.7% ICE Acquisition of NYSE

Equities Net Transactional Listings Market Data & Connectivity Non-Exchange Market Data & Tech

Source: Company filings & TABB Group Note: 2018 (for CAGR purposes) is annualized 1h ‘18 x 2 13

Market data, connectivity and non-market data, data and transactional revenues increased at a 6.1% & 8.5% CAGR respectively

Market Data, and Non-exchange Market Data Quarterly

$700.0

$264.6

$428.4

$142

$584

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

CAGR 6.1%

CAGR 18.7% ICE Acquisition of NYSE

$-

Market Data & Connectivity Non-Exchange Market Data & Tech

Source: Company filings & TABB Group Note: 2018 (for CAGR purposes) is annualized 1h ‘18 x 2 14

SIP revenues, over time have remained fairly steady at between 2 and 3 mils per share traded

SIP Revenue Per Share Traded $0.00030 3.0

$0.00028

$0.00021

1.86

1.5

2.0

2.5

$0.00015

$0.00020

$0.00025

Trilli

ons

$0.00010 1.0

$0.00005 0.5

$- 0.0

SIP Revenue per Share traded Aggregate shares

Source: Company filings, Cboe, CTA, UTP & TABB Group Note: 2018 is annualized 1h ‘18 x 2 15

Market Data Revenue Analysis

for panel Six

Funding of Core Data Infrastructure

Larry Tabb Founder and Research Chairman

TABB Group

SEC Market Data Roundtable | Washington, DC | October 25-26, 2018