Monday, November 27, 2006

Second Look at Google/Yahoo Challenge of Stock Exchange Data Fees

Google (GOOG), Yahoo (YHOO), CNET (CNET) and IAC/Interactive (IACI) have mounted a challenge to Archipelago’s streaming data fee increase. They are not happy with Nasdaq as well. Stock exchanges have long relied on data sales as an additional source of income to supplement trading activity fees. The trading activity fee traditionally was marked up and embedded into the brokerage fee. Brokerage fees have experienced competitive pressures and dropped dramatically (reference the latest online broker offering dirt cheap fees) Brokerage fees have long been considered friction costs which made for inefficient markets. Stock Exchanges naturally want to expand their revenue sources by selling data.

The conflict dynamic will manifest as a battle between information and transaction. The online brokers are offshoots of old school brokerages who depended on exchange membership, access to pricing data and settlement mechanism’s for their business model. They controlled the gates to supposed wealth.

Google, Yahoo, CNET and IAC/Interactive have developed large investment oriented communities who rely on information first and then worry about low value added execution mechanics last.

If you believe in price elasticity the exchanges should decrease information pricing and charge more for execution.

If you believe in consolidation Google will buy both Nasdaq and NYSE and destroy Yahoo Financial and the rest.

If you believe in white knuckle regulators trying to preserve the status quo (their jobs) the data stream pricing will be adjusted downwards marginally forcing the Google’s et al to stay true to the advertising models. (Most likely pick for the present)

If you are a stock exchange maybe you should buy Google or someone from that camp recognizing the information trumps execution.

Stock exchanges need to decide if they are in the execution business which has become a commodity or in the information business which has value added.