By John Filar Atwood
In a three-to-two vote, the SEC agreed to publish for comment a proposal to direct the equities exchanges and FINRA to file with the SEC a new national market system (NMS) equity data plan to increase transparency and address conflicts of interest presented by the existing governance structure of NMS plans. The Commission also will publish for public comment notices of proposed amendments to the existing plans filed by the plan participants that are intended to address conflicts of interest and the protection of confidential information.
The proposal seeks to address the gap that has developed between the public consolidated market data feeds provided by three equity data plans and the private, proprietary data feeds sold by the exchanges. Industry stakeholders have expressed concern that the gap adversely affects those who do not access the proprietary data products, or who may not have the processing capacity to trade competitively.
Equity markets and the corporate structure of exchanges have changed dramatically since the adoption of Regulation NMS in 2005. Exchanges have converted to for-profit entities that sell their own market data products. In addition, "exchange groups" (multiple exchanges operating under common ownership) have emerged through which much of the voting power and control of the equity data plans has been consolidated.
The Commission believes that these developments have heightened conflicts of interest between the exchanges’ commercial interests and their regulatory obligations to provide consolidated market data. In particular, the SEC noted that the operation of the equity data plans has not kept pace with the efforts of the exchanges to expand the content of, and to use technology to increase the speed of, certain proprietary data products.
Governance provisions. In addition, in drafting the proposal the SEC noted that the current governance structure of the data dissemination plans perpetuates disincentives to enhance consolidated equity market data feeds, which are often slower the SROs’ proprietary feeds. Accordingly, the proposed order attempts to modernize the governance of securities information processors (SIPs) by mandating governance provisions for the new consolidated data plan. Among other things, the new plan would have an operating committee that provides votes to individuals representing non-SROs, with non-SROs having one-third of the combined voting power.
Commissioner Allison Herren Lee does not believe that adding non-SRO voting members to the governance structure and giving them one-third of the vote will ensure robust and useful SIPs. "These members would have neither the voting power, nor necessarily the market incentives, to affirmatively usher in the larger reforms required for the SIPs to provide adequate market data to investors on a fair and reasonable basis," she said. Lee, who voted against the proposal, worries that the Commission will preserve for years to come an insufficient governance structure just because it has been somewhat improved.
Commissioner Robert Jackson, who also dissented, said that rather than giving investors a say on how public data feeds are run, the proposal invites for-profit exchanges to draft their own rules. He does not blame stock exchanges for seeking to maximize their opportunities. Rather, he thinks lawmakers should change the law to address the incentives that are created by giving exchanges both control over public feeds and the opportunity to profit by selling private ones. "Without changing those incentives, we cannot and should not expect the market to fix the market," he concluded.
No perfect solution. Commissioner Elad Roisman noted that the NMS has been a hot topic for a long time, and that there is no perfect solution to NMS issues. "If there were a silver bullet, we would have thought of it. We need to move forward, and this proposal is an important first step," he said.
Chairman Jay Clayton emphasized that modernization of the markets is necessary, but acknowledged that there are very different opinions on how to go about it. In his view, the proposal "looks past the noise and moves the issue forward in a thoughtful, sensible way."
It is worth evaluating the extent to which the structure of the three existing equity data plans is in need of modernization, Clayton said. "The current structure has redundancies, inefficiencies, and inconsistencies that it may be possible to eliminate for the benefit of all market participants without any meaningful adverse effects," he noted.
Clayton concluded by inviting commenters to suggest additional or alternative measures to those in the proposal. However, he asked that any such suggestions include a comprehensive explanation as to why the alternative would be effective in addressing the significant issues set forth in the proposal.