New Trend in Trading Based Non-Display Policies

JULY 24, 2020  |  Peter Tyson

Some Exchanges are Beginning to Interpret Their Trading Based
Non-Display Policies to Apply More Broadly to EMS/OMS Software and FIX Messaging Related to Order Submission

Over the past several years, exchanges have sought to generate more revenue from their market data businesses as other business lines have been squeezed by competition. Typically, this has manifested itself in the form of increased market data licensing fees and more granular, usage-based licensing models. However, more recently there appears to be another trend geared towards generating increased revenue. Specifically, some exchanges have started to enforce their trading based non-display policies in a manner that captures a broader number of buy-side firms, including those that traditionally wouldn’t consider themselves as engaging in trading based non-display use.

While non-display policies are not always the same across all exchanges, many exchanges have separate licenses for “trading based” versus “non-trading based” non-display use. Trading based non-display use typically pertains to automated or semi-automated trading activities such as algorithmic trading, automated order generation and smart order routing, and operation of trading platforms. Non-trading based non-display use includes activities indirectly related to trading, such as portfolio management, risk management, and quantitative analysis.

Up until now, firms that did not themselves engage in activities like automated trading or smart order routing, but rather used a prime broker or EMS/OMS vendor for these services, would not obtain trading based non-display licenses from exchanges. Instead, they only obtained non-trading based non-display licenses to cover their portfolio valuation and risk management activities, leaving the responsibility for acquiring trading based non-display licenses with their prime brokers or EMS/OMS vendors who actually performed the automated trading, smart order routing, etc. on their behalf.

Recently, a few exchanges have started to take the position that the mere use of EMS/OMS software and the automated or semi-automated generation of FIX messages used to send orders to a prime broker or EMS/OMS vendor fall under the purview of their trading based non-display policies even if the firm in question isn’t itself engaging in automated trading, smart order routing, etc. This is a significant departure from how trading based non-display policies have been interpreted and enforced during audits. Furthermore, this change in interpretation and enforcement has serious financial consequences. License fees for trading based non-display use can increase exchange market data spend by a significant amount – sometimes thousands of dollars a month just for one market or data product from an exchange.

While a few exchanges have begun to interpret and enforce their trading based non-display policies in the aforementioned manner, it is not clear whether other exchanges with similar non-display policies will follow suit. That said, firms should be aware of this issue and consider assessing any potential audit liability associated with trading based non-display licensing. Jordan & Jordan’s market data practice can help firms grapple with this issue by providing guidance on exchange non-display policies and audit practices, assessing non-display usage and making recommendations on how to reduce audit risk, as well as by calculating potential audit liability and assisting with obtaining any required non-display licenses.

Peter Tyson, Esq.
Data Licensing Manager, Jordan & Jordan
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