Thursday, February 01, 2018

Rulemaking petition seeks modernization of equity market data regime

By Jacquelyn Lumb

Healthy Markets Association has petitioned the SEC to initiate rulemaking proceedings to reduce the conflicts of interest, market complexity, and costs related to the provision of equity market data. The regulatory regime that governs equity market data has not evolved to reflect significant changes in the marketplace such as the conversion of exchanges to for-profit entities, Healthy Markets explained. The non-competitive forces for market data and connectivity has resulted in significant price increases with little regulatory scrutiny. Healthy Markets asked the SEC to address conflicts of interest in the NMS plan structure; excessive costs and market participant concentration; increased market complexity and venue fragmentation; increased risk and market failures; and burdens on competition for market data provision.

Changing markets. When the NMS plan was created, the self-regulatory organizations were non-profit entities. All have since become for-profit entities while retaining their SRO status, Healthy Markets noted. The SROs are required to ensure that the public has a timely, consolidated view of market relevant information, which they do through SIP data feeds. The SIP tape revenues were intended to cover the expenses of the system, according to Healthy Markets, but now the public SIP data feeds act as competitors to the private data feeds and connectivity products sold by the exchanges.

Healthy Markets advised that the privileged regulatory status of the exchanges and their conflicted oversight of data fees and connectivity has led to skyrocketing prices for both public and private data. Market participants must have information on both feeds and faster connectivity to remain competitive and in some cases to comply with their regulatory obligations. Some have argued that these surging fees are a leading contributor to consolidation in the industry.

Eliminate SRO privileges. Healthy Markets recommends that Congress and the SEC work together to eliminate the regulatory responsibilities and privileges held by the SROs, including the elimination of NMS plans and immunity. Meanwhile, the SEC should revise its rules, guidance, and enforcement efforts to require the justification of data, connectivity, and fee changes for both public and private feeds. The staff also should review all changes for fairness, potential discriminatory impacts, and potential undue burdens on market participants.

In addition, Healthy Markets urged the SEC to clarify that rule filing requirements apply to all data derived from an exchange’s role in the national market system and marketed to anyone, and that standards for market data filings apply. The SEC should acknowledge the governmental function of the SIP data feeds and prohibit the exchanges from generating any profits from the operation and maintenance of the SIP data system, in Healthy Markets’ view.

Simplify pricing models. The coalition also urged the SEC to simplify pricing models within the SIP to eliminate the need to count end users, accounts or terminals, display versus non-display uses, and eliminate the distinction between professionals and non-professionals. The SEC should establish clear parameters for market data audits by exchanges or their representatives; increase the transparency of revenue collection and cost; and expand the SIP feed information to include the order depth of book.

Other proposed improvements. Healthy Markets also recommended that the SEC minimize the time discrepancies between private and SIP data feeds; require exchanges to provide detailed financial information about their fees, revenues, and expenses related to public and private data and connectivity; and increase transparency about enhancements to SIP resiliency.

While Healthy Markets would prefer the elimination of NMS plans, to the extent that this option is not possible, it suggested a change to NMS plan governance to include voting representation from investment advisers and broker-dealers and the elimination of one vote per exchange, to be replaced by one vote per exchange group on NMS plans. If competing SIPs are permitted, Healthy Markets said the SEC should establish means of mitigating conflicts of interest and abuses.

The regulatory framework for equity market data is outdated and must be modernized to reduce conflicts of interest, market complexity, and costs to participants, Healthy Markets concluded.