Every security traded in public markets represents several data points that can be valuable to future trades (not to mention compliance). The Regulation National Market System (or “Reg NMS”) grants exchanges, licensed as self-regulatory organizations (“SROs”), the responsibility to disseminate market data consolidated from their platforms. Exchange data is vital to matching orders, especially in today’s electronic and automated markets.
Like most “platform” companies, exchanges seek to monetize the data generated by their trading platforms. This market data has obvious value: Virtually instantaneous access to granular information on previous trades translates into clear competitive advantages for market participants. Exchanges sell this market data and base the price on the level of detail. Market data fees are at the core of a heated and decade-long dispute among brokerage firms, Bloomberg, and exchanges, and the debate broke out again following SEC’s renewed interest and actions on the topic.
SIP vs. Prop Data
Reg NMS seeks to secure a sufficiently level playing field for market information. What we see as the price of a publicly traded security on Google Finance or Yahoo! is a free and simplified version of the more plentiful price data produced by trading activity on a multitude of platforms. The computation of a single price is preceded by a complex process whereby 13 exchanges aggregate price data into one single quote, as required by SEC rules (also called “SIP data”), which includes the current National Best Bid and Offer (“NBBO”) benchmark price. This ensures that, despite the plurality of trading venues (exchanges, dark pools, and other trading platforms), investors see their trade executed in accordance with the “market value” represented by the NBBO. This contributes to price discovery and liquidity, which benefits overall market quality. The dissemination, brokers’ display to clients, and pricing of SIP data is strongly regulated, because it is core to fair market objectives of Reg NMS.
More professional investors (e.g. algorithmic traders) might need more than what the SIP’s “top-of-the-book” price data offers in speed (“latency”) and detail. Exchanges offer those market players their proprietary data: This information is taken into account by the consolidated SIP feed but is more granular and faster (e.g. “depth-of book” data). SEC Commissioner Robert Jackson believes that “the result has been a public [SIP] feed that is slower and less robust than the private feeds the exchanges sell.” This invites more research – also because the private feeds come in many forms, customized to different market players’ needs. Among a select group of market players (think Virtu, Citadel, and other electronic trading firms), the data included in the more affordable SIP feeds will never be enough. However, many market players don’t need that level of informational sophistication. The choice between SIP and prop data therefore depends on the user. That said, Commissioner Jackson is right in that there is a delicate balance of incentives where the SIP competes with the exchanges’ prop data feeds. The solution is less clear. SIP market data should be robust and secure for its users, and that is why its collection and dissemination come with a cost for exchanges for which they need to be rewarded somehow. As SIP data fees are restricted, how much freedom should exchanges have in pricing their prop data?
Recent SEC Actions
Exchanges’ listing revenues have been in decline, and data is a booming business in every sector. Brokerage firms and large banks, operating under the Securities Industry and Financial Markets Association (“SIFMA”), claim that exchanges compensate for declining listing revenues by creeping up prop data fees. Since 2013, SIFMA has been arguing that exchanges misuse investor protection rules under Reg NMS, as well as their self-regulatory status, to disproportionally raise all sorts of market data fees. They argue that market forces as well as regulatory requirements indirectly force them to buy the most expensive data feeds. Clients would demand brokerage firms use the best data out there, even if just for the idea of working with the best information possible. SIFMA points to the Securities Exchange Act of 1934 (“Exchange Act”), requiring that exchanges’ market data fees be “fair and reasonable” and “not unreasonably discriminatory.” Last October, the SEC issued an opinion stating that exchanges failed to meet that requirement.
This is a remarkable development, not only because the SEC has been siding with the exchanges until now, but also because it departs from the ruling by an administrative judge in 2016 (ratified in 2017) against SIFMA’s claim. Moreover, this most recent SEC opinion came a week before a two-day SEC roundtable that allowed stakeholders to voice their views on the same issue.
The scope of this SEC opinion is limited to depth-of-book (level 2) data, used by the more professional market players. Moreover, the SEC did not establish that exchanges’ data fees are too high; the commission found that exchanges haven’t met their statutory obligation of proving the fees are fair and non-discriminatory. The SEC also issued an order to remand more than 400 other challenges to market data and access fees. The case will continue, because exchanges said they would appeal.
A Long Time Coming
Already back in 2001, the SEC was assessing the market for market information and the role of exchanges therein. I worked with the Seligman Advisory Committee on Market Information when I was at the NYSE. I thought at the time – naively – that the Seligman Committee results would resolve the issue between the industry and the exchanges. Instead, over the last decade, litigation brought by industry groups has continued to challenge the fees exchanges charge for market data. Neither the latest SEC opinion nor the roundtable concluded the debate on market data pricing.
The stakes are high and go beyond the issue of market data prices. Commissioner Jackson put pressure on exchanges by pointing out their “unfair” status under Reg NMS. He referred to the delicate balance between exchanges’ leverage (including a certain legal immunity) as regulatory organizations licensed to safeguard market integrity; and exchanges as profit-maximizing listed entities. In his view, the SEC has “far too often continued to treat the exchanges with the same kid gloves we applied to their not-for-profit ancestors.” By requiring more justification for exchanges’ market data fee structure, this month’s SEC opinion seems to answer this concern.
Reconsidering the Market Data Ecosystem
First, a useful debate on market data requires looking at the broader picture beyond market data fees. The market data debate is not between the large exchanges and their smaller counterparts; exchange revenues represent $1 billion in a $16 billion market. The largest broker-dealers are competitors of exchanges for order flow through their dark pools as well as for buyers of market data. Also, Bloomberg and Thomson Reuters are responsible for the high costs of market data for brokers. Market data are only one element of a multi-faceted web of dealings. Only focusing on exchanges will not change the fact that market data are highly desired but also complex products that demand a sophisticated regulated ecosystem. Other rules included within Reg NMS—such as the Vendor Display, Order Protection or Best Execution rules – may be re-assessed, as they arguably affect the mandatory data suite for market participants.
Second, fixating on exchanges’ market data ignores the evolution of how trading massively moved from exchanges to alternative trading venues. Should market data be considered as intrinsically connected to trading, or as a by-product that can be dealt with in isolation? Indeed, the SEC roundtable discussed the correlation between the production costs and prices of market data. Yet it is difficult to isolate the production costs for market data, as we talk about entire trading infrastructures. Improved transparency will probably not provide exact numbers on the production cost of market data. However, more understanding on the cost of exchanges’ fee structures in general (be it only for SEC eyes) might be constructive.
Third, the debate must also be extended to investors. Not so much individual investors: They pay next to nothing for market data, and barely depend on exchanges’ costlier proprietary data in today’s intermediated markets. More relevant is the voice of institutional investors that have skin in the game, owning about 80 percent of U.S. equity trading. They are the ultimate liquidity providers and strongly depend on markets’ robustness and data reliability.
The fact that exchanges are listed entities as well as SROs defines their complex business model. That said, their profitability itself is not the problem. Strictly regulated utilities or telecommunications companies are also publicly listed yet profitable, as they provide, over and above retail prices, corporate and other services. When reconsidering the role of exchanges and their stake in market data, let’s take account of the sustainability of the core institutions that act as a crucial constituent for the stability and efficiency of the equity markets.
 A System Information Processor (“SIP”) consolidates the data reported by exchanges. These consolidated exchange data are valuable because stocks can be traded at multiple exchanges, also where they are not listed (due to unlisted trading privileges or UTPs). SIPs are governed by National Market System (NMS) plans, operated by exchanges.
 Commissioner Robert J. Jackson Jr (Sept. 19, 2018), ‘Unfair Exchanges: the State of American Stock Markets’, Speech at George Mason University, Arlington, Virginia. https://www.sec.gov/news/speech/jackson-unfair-exchange-state-americas-stock-markets.
SEC Opinion, Exchange Act Rel. No. 84432 (October 16, 2018). https://www.sec.gov/litigation/opinions/2018/34-84432.pdf.
 Seligman Committee (September 14, 2001), “Report of the Advisory Committee On Market Information: A Blueprint For Responsible Change” https://www.sec.gov/divisions/marketreg/marketinfo/finalreport.htm.
 Most notably, see: NetCoalition v. Sec. & Exch. Comm’n, 615 F.3d 525 (D.C. Cir. 2010); NetCoalition v. Sec. & Exch. Comm’n, 715 F.3d 342 (D.C. Cir. 2013); Sec. Indus. & Fin. Mkts. Ass’n, Initial Decision Release No. 1015, 2016 WL 4035551 (June 1, 2016).
Commissioner Robert J. Jackson, Jr (Sept. 19, 2018), ‘Unfair Exchanges: the State of American Stock Markets’, Speech at George Mason University, Arlington, Virginia. https://www.sec.gov/news/speech/jackson-unfair-exchange-state-americas-stock-markets.
 Exchange revenues have grown, faster than most buy-side firms. Much of their profitability comes from market data in the broadest sense (market data fees, connectivity, non-exchange data, tech, and services) accounting for a 11.7 percent CAGR. However, the bulk of market data-related profits comes from non-exchange data such as from the growing index data business (growing with an 18.7 percent CAGR), according to Tabb Research.
 Interestingly and unexpectedly, Bloomberg emerged as a signatory of the SIFMA petition.
This post comes to us from Georges Ugeux, who teaches a course entitled, International Banking and Finance: The Challenges, at Columbia Law School. He is chairman and CEO of Galileo Global Advisors and was group executive vice president of the New York Stock Exchange, in charge of International and Research, between 1996 and 2003.