Why crypto exchanges aren't likely to charge for market data anytime soon

The list of differences between the market structure in U.S. equities and the burgeoning digital asset market is long. 

From exchange fragmentation to the lack of a full-scale prime brokerage, the crypto landscape has a long way to go before it looks anything like a modern market. One interesting difference that often goes unnoticed in the crypto press was brought to light this week after the Department of Justice and Securities and Exchange Commission said they would partner to examine the fees charged by equity venues like Nasdaq and NYSE to access market data. 

The issue of rising data costs — the lifeblood of Wall Street's traders — has long been debated among stock market participants. Market data has become a big money maker for U.S. bourses, with 45% of total annual revenue coming from market-data related services for Nasdaq, Cboe Global Markets and Intercontinental Exchange, as reported by The Wall Street Journal. Brokers and trading firms say exchanges charge too much, whereas exchanges say they are offering key services that's worth the price tag. 

In the crypto markets, such a debate has yet to transpire as virtually none of the best known exchanges charge for market data. 

The reason why is simple: exchanges are already making far too much money on trading fees to necessitate charging for data, according to industry insiders.

"Data isn't a product in crypto," said Joshua Lim, head of derivatives at Genesis Global Trading. "It's a loss leader for the real product: trading fees."

Indeed, the cost to trade in the crypto market is known for being expensive, as The Block Research has previously illustrated. For retail clients, fees for market takers can be as high as 35 basis points. That's a far cry from U.S. equity markets, which are capturing a fraction of a basis point on each trade, according to Dave Weisberger, CEO of crypto smart-order router CoinRoutes. 

"Net capture on equity exchanges top out at 10 mils, which on a $100 average price is 1/10th of a basis points and the average capture with large firms is less," Weisberger said. "Net capture on crypto exchanges averages 10 basis points (100 times larger) and is much larger for retail clients."

Still, the revenue being made in trading fees hasn't stopped certain firms from at least exploring the idea of charging for market data. 

Coinbase offers one example. According to people familiar with Coinbase's business, two years ago, the firm considered charging for market data, taking a leaf from the book of major stock exchanges. Still, such a move would have been too early, according to Weisberger. 

"It is very unlikely, until transaction fee rates compress massively," Weisberger said. "Right now, charging for market data would cost exchanges volume (from losing clients) in an increasingly commoditized market."

Su Zhu, the cofounder of crypto fund Three Arrows Capital, agreed that it wouldn't make sense for crypto exchanges to charge for data given the fact that it would hurt their volumes. 

"[They] would not be able to enforce or get enough people to pay," he said. Part of the reason why: no one exchange has a strong enough monopoly on trading volumes and there are plenty of places to trade. 

Still, that may change. If crypto markets evolve in the same way as traditional markets, then trading and custody fees will continue to come down and firms will compete on volume and assets under management. At that point, market data price will rise as firms look for new streams of revenue. 

"Maybe in five years," Bobby Cho of CMS Trading said. "Right now everything is free."