By Rodney F. Tonkovic, J.D.
The D.C. Circuit has denied Nasdaq's challenge to the SEC's Market Data Infrastructure rule. Nasdaq and a group of securities exchanges challenged the 2020 rule as arbitrary and capricious. Among other arguments, the petitioners asserted that the rule would exacerbate the information asymmetries it set out to address and that the rule itself rested on speculation about competition in the data market. The panel concluded that the Commission reasonable concluded that the rule would promote its stated goal and that the agency carefully considered the costs and benefits to the public interest (The Nasdaq Stock Market LLC v. SEC, May 24, 2022, Rogers, J.).
Market Data rule. In 2005, the SEC adopted Regulation NMS, which created a "centralized consolidation model" for the distribution of market data. Under this model, the national securities exchanges and the SROs acted jointly under NMS plans to collect, consolidate, and disseminate core market data. To obtain more detail, however, participants were required to subscribe to the exchanges' proprietary feeds. As the market evolved, these proprietary data feeds became much more comprehensive and were available more quickly than the more affordable core feeds, leaving the users of the core feeds at a disadvantage.
To address this asymmetry, the Commission's Market Data Infrastructure rule, as proposed and approved in 2020, promoted the development of new data distribution tools. The rule provided that core data would include more detailed information and adopted a competitive model for data feeds.
Earlier setbacks. In March 2021, the SEC rejected a request by several exchanges to stay implementation of the Market Data Rule. In denying the motion for a stay, the Commission said that the exchanges failed to show that the rule would cause irreparable harm, among other factors, and, moreover, the exchanges did not challenge the actual merits of the rule. The exchanges also petitioned the D.C. Circuit to review the rule, but the court dismissed the petition for lack of jurisdiction because the challenge was made before the rule was published in the Federal Register. The petitioners in this case challenged the rule after it was published.
Rule is reasonable. The circuit panel's review was limited to whether the rule was arbitrary, capricious, an abuse of discretion, or otherwise against the law. The panel concluded that the exchanges failed to show that the rule was arbitrary and capricious because it promotes the Commission's stated goals and is grounded in the record before the Commission. The panel found further that the Commission properly weighed the rules costs and benefits.
Not arbitrary. According to the panel, the Commission reasonably concluded that the rule would promote its goal of reducing information asymmetries. First, the rule added new categories to "core data" to reduce the gap between investors relying on that and those who subscribe to consolidated data feeds; eliminating the gap was not the goal, the court noted. The rule also introduced competition into the data market by allowing non-exchange entities to develop and sell data products, making different types of data products available at different price points.
The exchanges countered that the rule would exacerbate information asymmetries. A multi-tiered data market will be even more asymmetrical than a two-tiered one, the exchanges argued. The court disagreed, observing that the Commission did not aim to give everyone access to the same data at the same speed but rather meant to give consumers with differing needs more options. In addition, the court said, competing data consolidators would face regulatory requirements and competition that would encourage their resiliency and reliability.
The exchanges also maintained that the rule was based on speculation: what if competing consolidators don't enter the market? The court answered that this concern is misplaced because the Commission provided a reasonable analysis behind its prediction that there would be sufficient entrants into the market to promote competition. Regarding the petitioners' argument that there may not be a sufficient variety of products and prices, the court said that the Commission reasonably concluded that demand for less expensive products could make it worthwhile for a consolidator to make such a package available.
Public interest considerations. The Commission was also required under the Exchange Act to act with due regard for the public interest in assuring the fair collection and distribution of market data. In the D.C. Circuit, an agency is not required to conduct a precise cost-benefit analysis but may use "a general analysis based on informed conjecture." Here, the exchanges argued that the rule will, among other outcomes, stifle innovation, drive order flow to "dark" trading venues, and deprive the exchanges of a source of revenue. The court concluded, however, that the record showed that the Commission considered each of the petitioners' concerns and reasonably determined, based on the information available to it, that the rule was warranted.
The case is No. 21-1100.