Competition and Exchange Data Fees

We investigate whether the introduction of market data fees on three exchanges induces market participants to change their trading behavior and whether this affects exchange and market-wide market quality. The introduction of data fees leads to an economically significant fall in that exchange's market volume. The impacted exchange experiences a decline in its time with competitive quotes and in participants routing their orders to it. The informativeness of trading on the impacted exchange declines. Market-wide the fee introduction decreases liquidity and increases volatility. At least part of the data feed value comes from the order book depth. We show that some market participants appear to have elastic demand for data, and that their response to the introduction of data fees on one exchange can reverberate throughout the stock market.