Statement on Market Data Infrastructure
Dec. 9, 2020
For many decades, America’s stock exchanges were centralized, physical floors where traders gathered to buy and sell securities. Based on the model established by the New York Stock Exchange – which famously was formed by the mutual agreement of 24 traders in 1792[1] – they operated as member-owned, not-for-profit entities.[2] That was true when the exchanges were first granted status as self-regulatory organizations in 1934,[3] and remained so when Congress amended the Exchange Act in 1975 to establish the National Market System.[4]
Today’s stock exchanges bear little resemblance to those early days. Our equity markets have become almost exclusively electronic, and the exchanges have undergone major structural changes. Stocks now trade in microseconds across 16 exchanges,[5] generally with little human intervention. And, since the early 2000s, the exchanges have operated as for-profit businesses.[6]
While the exchanges have changed dramatically, the core of our approach to exchange regulation has not. Our regulatory framework is still based on the model of a non-profit trading floor. That framework did not contemplate for-profit exchanges, and as a result does not adequately address the reality that today, an exchange’s incentives to maximize its own profits are often in direct tension with its regulatory obligations. It is this tension - these conflicts - that has led to a broken and inequitable system of market data distribution. Today’s rule is a step toward fixing the regulatory mismatch that now exists.[7]
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Market participants need access to accurate, timely market data – the trades, prices, liquidity, and other information about what’s happening in the securities markets.[8] Our system is, in fact, premised on the notion that this data is broadly accessible to all participants. But the evidence suggests the current framework has created a two-tiered market:[9] one for those participants who can afford to pay ever-increasing prices for faster and better quality market data, and another for those who cannot.
Currently, the exchanges are responsible for administering the distribution of this market data to the general public. They do this through data feeds known as the Securities Information Processors (or “public data feeds”). These feeds consolidate data reported by all the exchanges and relay it to market participants who eventually use it when buying or selling stock for themselves or the investors they serve. This step of consolidating data from all the exchanges before distribution to participants takes time.
Meanwhile, these same exchanges sell their data directly to market participants through proprietary data (or “prop data”) feeds – generating significant revenue for the exchange.[10] In most cases, this feed provides a faster and deeper picture of that exchange’s market. And to get a complete picture of the markets, firms need to subscribe to multiple feeds.[11] This is a must for those who can afford it.[12]
This creates a conflict. The exchanges stand to gain from any gap in speed and content that forces market participants to pay for the expensive prop data feeds in order to stay competitive. It should surprise no one that this conflict of interest has resulted in public feeds that cannot compete on the same level as the prop data feeds.
This model serves very few investors well. Market participants who are unable to afford the prop data feeds must rely on a slower and less comprehensive picture of the market, while trading against participants with access to faster and more robust data. That seriously limits their ability to achieve the best possible trading outcomes for the investors who rely on them. Meanwhile, the cost of doing business continues to increase for larger and more sophisticated market participants, who must purchase expensive prop data feeds from numerous exchanges to compete effectively. In the end, the current system is heavily tilted toward the exchanges, who can sell their prop data feeds at increasingly high prices without any meaningful competition from the public feeds or otherwise.[13] The investing public pays the price, though they may never even know it.[14]
I believe today’s rule, by improving both the speed and the content of the public data feeds, is a step toward remedying this conflict. First, participants relying on the public data feeds can have access to crucial market information that, until now, had largely been available only to those who subscribe to high-priced prop data feeds. Second, introducing competition into the market for the consolidation and distribution of the public data feeds has the potential to meaningfully improve the speed, quality, and affordability of the data in those feeds.
While I do believe this rulemaking is a positive first step, it is not a panacea. It is imperative that we carefully monitor the effects of the rule to ensure that it is benefitting investors, and to identify the areas where we need to continue to modernize. For example, using the information the consolidators will be required to report under today’s rule, we should assess quality and consider whether we need to implement minimum data standards for the public feeds.[15] Additionally, we should closely watch how market participants use the proprietary and public feeds for their own trading and for their customers, to ensure that investors are being treated fairly.[16]
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This rulemaking[17] represents a long overdue acknowledgement of the problems in our market structure that have resulted from the exchanges’ conflicts of interest and the lack of competition with respect to the sale of market data. This is a step forward in addressing the inherent conflicts, but it is only the first of many needed steps, and the Commission must continue to work to address other problems in our equity market structure.[18]
Still, today’s rulemaking is an impressive accomplishment. It is the result of years of study and consideration by the SEC staff. I’m particularly appreciative of the incredible effort by Director Redfearn, whose passion for improving the structure of our markets is invaluable to the Commission. And as always, I’m grateful for the knowledge and dedication of the staff, especially in the Division of Trading and Markets, the Office of the General Counsel, and the Division of Economic and Risk Analysis. This rulemaking reflects what I believe is a broad consensus that we need to do more to address the conflicts of interest and misaligned incentives that characterize the exchanges’ role in supplying vital data to our national market system. I therefore support today’s rule, and I am optimistic that we will be able to build on this momentum and tackle more of the inequities investors face today.
[1] See Daniel Gallagher, How to Reform Equity Market Structure: Eliminate “Reg NMS” and Build Venture Exchanges, The Heritage Foundation (Feb. 27, 2017).
[2] See, e.g., Joel Seligman, The Transformation of Wall Street, at 128 (3rd ed. 2003) (describing the early interactions between the major exchanges and the SEC).
[3] The Securities Exchange Act of 1934 classifies each of the national securities exchanges as self-regulatory organizations. See Exchange Act, §3(a)(26), 15 U.S.C. §78c (a)(26) (2012). Under the Exchange Act, no exchange shall be registered as a national securities exchange unless it is “organized and has the capacity . . . to enforce compliance by its members and persons associated with its members.” Id. §78f(b). Status as a self-regulatory organization (“SRO”) confers the exchanges absolute immunity from claims arising out of the performance of their regulatory duties. See, e.g., Rabin v. NASDAQ OMX PHLX LLC, 182 F. Supp. 3d 220, 240 (E.D. Pa. 2016) (holding that the plaintiff’s claims must be dismissed because “SRO immunity shield[s] the Exchange Defendants in this case” but noting that that exchanges have evolved over time into entrepreneurial engines with both commercial activity and governmental functions).
[4] These amendments are largely responsible for creating the modern framework for the distribution of market data to the public. See 15 U.S.C. §78k-1(b) (2018).
[5] In addition to the 16 national securities exchanges that trade NMS securities, equity securities are quoted and traded at numerous other venues. See Sec. & Exch. Comm’n, Staff Report on Algorithmic Trading in U.S. Capital Markets, at 7 (2020) (noting that current equity market structure consists of national securities exchanges, “over thirty alternative trading systems” and multiple single-dealer platforms within broker-dealers, and other forms of order matching).
[6] See Reena Aggarwal & Sandeep Dahiya, Demutualization and Public Offerings of Financial Exchanges, 18 J. Applied Corp. Fin. 96, 96 (2006) (“The successful completion of the NYSE’s demutualization and self-listing marks the final phase of a remarkable organizational transformation wave that has swept across most of the major financial exchanges in the last ten years.”).
[7] Cf. Market Data Infrastructure, Release No. 34-90610 (adopted Dec. 9, 2020) at 19-20 (“Adopting Release”) (“[T]he Commission is concerned that a two-tiered system has developed in which certain market participants who are able to afford, and choose to pay for, the exchanges’ proprietary DOB data feeds and associated connectivity and transmission offerings receive more content-rich data faster than those who do not receive these data feeds, such as market participants that face higher barriers to entry from data and other exchange fees”).
[8] For purposes of this discussion, we use “market participants” primarily to refer to broker-dealers. While other types of entities, such as investment advisers, may subscribe to market data feeds, it is broker-dealers who are members of the exchanges and submit and execute orders on exchanges, and thus are most directly impacted by differences in market data feed speed and content.
[9] See Adopting Release at 19-20.
[10] See Adopting Release at 571-573 (discussing the exchanges’ proprietary fee increases over the past decade and concluding that, for both NYSE and Nasdaq, revenues from their proprietary data and connectivity business have been growing faster than the revenues collected from SIP data). We note that rather than subscribing directly to the prop data feeds, market participants may also obtain consolidated market data from data aggregators. These data aggregators generally purchase the data from the exchanges, consolidate the data, and distribute it to their subscribers. While this process also involves the step of consolidating the data prior to dissemination to market participants, the Commission believes that this method is generally still faster than the SIPs. Id. at 547
[11] See, e.g., Investors Exchange, LLC, Comment Letter on Proposed Rule on Market Data Infrastructure, at 4 (May 28, 2020) (“[M]any firms today construct their own individual views of the NBBO by subscribing to and aggregating multiple proprietary data feeds.”). See also T. Rowe Price, Comment Letter on Proposed Rule on Market Data Infrastructure, at 1 (June 3, 2020) (“As a fiduciary, we encourage our broker-dealers to obtain the fastest and deepest possible information for a full and accurate view of the market so that we can best serve our clients’ interests.”); McKay Brothers, Comment Letter on Proposed Rule on Market Data Infrastructure, at 1 (May 31, 2020) (“[M]any broker-dealers believe they cannot trade competitively or provide best execution to their customers without also subscribing to exchanges’ proprietary data feeds.”). Investment Company Institute, Comment Letter on Proposed Market Data Infrastructure, at 4 (May 26, 2020) (noting that despite significant cost [of proprietary data feeds], funds seek access to these feeds to obtain the full scope of market activity and optimize trading and optimize trading); Securities Industry and Financial Markets Association, Comment Letter on Proposed Rule on Market Data Infrastructure, at 3 (May 26, 2020) (noting that adequately addressing latencies in the public feeds “could allow market participants the ability to choose to rely on [public feed] data without being forced to also purchase multiple exchange proprietary data feeds”).
[12] See, e.g., Securities Industry and Financial Markets Association, Comment Letter on Proposed Rule on Market Data Infrastructure, at 3 (May 26, 2020) (“SIPs no longer provide enough market data at sufficient speeds for today’s marketplace. This causes many firms to have no other choice but to rely on exchanges’ proprietary feeds to meet best execution obligations and remain competitive when routing customers’ orders…The SROs as operators of the SIP Plans have not made –or have been slow to make—similar investments in the SIPs that they have made to their proprietary data feeds. This is not surprising, as the current market data infrastructure does not provide them with an incentive to do so.”).
[13] While in theory, the 16 equities exchanges might compete against each other to sell prop data, each exchange has unique data inputs that allow it to offer a slightly different product, essentially forcing sophisticated market participants to purchase multiple feeds. Further, estimates indicate that between 2010 and 2018 data fees charged by some exchanges went up by three orders of magnitude or more, while public data fees went up by 5% during the same period. See Adopting Release at 557. Additionally, 14 of the 16 equities exchanges are owned by three entities. Specifically, five are owned by InterContinental Exchange (New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., NYSE National, Inc.), four are owned by NASDAQ (Nasdaq BX, Inc., Nasdaq ISE, LLC, Nasdaq PHLX LLC, Nasdaq Stock Market LLC) and five are owned by CBOE Global Markets (Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe Exchange, Inc.).
[14] As one SEC Chairman noted nearly 20 years ago, “a stubborn fact about market infrastructure [is that] individual competitive interests cannot always be relied upon to produce a basic framework for competition that serves the public.” See Chairman Arthur Levitt, Sec. & Exch. Comm’n, The National Market System: A Vision That Endures (Jan. 8, 2001). This is especially true with respect to the exchanges, where – for the most part – the investing public does not consume their services directly, but rather through broker-dealers or other intermediaries, and the costs imposed on investors are not transparent or well-understood.
[15] See Adopting Release at n. 976 (“The Commission will monitor the performance of competing consolidators, including whether there is a need to establish minimum standards for competing consolidators.”).
[16] See Adopting Release at 42-43 (“The Commission believes that a broker-dealer that uses low-latency or content-rich consolidated market data, whether self-aggregated or received from a competing consolidator, for its proprietary trading, would also be expected to use those data products when pursuing the best execution of customer orders, particularly those handled within the same aggregation unit that conducts proprietary trading. For example, a broker-dealer should not use a separate, less performant data source for its customer orders than the data source used for proprietary orders that may interact with those customer orders in a manner disadvantageous to those customer orders.”). Prior to today’s final rule, the national best bid and offer (“NBBO”) was back-stopped by the public data feeds. This back-stop helped prevent market participants from using proprietary data feeds to construct a NBBO that is advantageous to the participant at a cost to the participant’s clients. See Healthy Markets, Comment Letter on Proposed Rule Market Data Infrastructure at 4-5 (May 26, 2020) (“Healthy Markets Comment Letter”). Going forward there will be multiple alternative public data feeds, which could allow market participants to cherry-pick the data feed that costs them the least or is most advantageous for best execution analysis and the Commission should endeavor to monitor this potential for investor harm.
[17] Commission actions related to market infrastructure include, among others, the Rescission of Effective-Upon-Filing Procedure for NMS Plan Fee Amendments and the Proposed Order Directing the Exchanges and FINRA to Submit a New NMS Plan Regarding Consolidated Equity Market Data. See Rescission of Effective-Upon-Filing Procedure for NMS Plan Fee Amendments, Release No. 34-89618 (adopted Aug. 19, 2020); Notice of Proposed Order Directing the Exchanges and the Financial Industry Regulatory Authority to Submit a New National Market System Plan Regarding Consolidated Equity Market Data, Release No. 87906 (proposed Jan. 8, 2020).
[18] For example, we should consider changes to the Vendor Display Rule to ensure that when broker-dealers provide data to their customers, those customers see complete and up-to-date pricing information. Some broker-dealers have interpreted their obligations under the Vendor Display Rule to permit the use of top-of-book proprietary products, which are generally slower and less expensive than SIP data feeds, when providing quotations to their customers. However, these slower products may provide customers with an inaccurate picture of the market. See FINRA, Regulatory Notice 15-52: Providing Stock Quotations to Customers, at 2 (Dec. 2015) (noting that in order to satisfy the Vendor Display Rule customer quotations must be provided in a context “in which trading or order-routing decisions can be implemented”); Healthy Markets Comment Letter at 4 (noting that NASDAQ has attempted to offer its less-expensive “BASIC product as a substitute for the SIPs for brokers seeking to satisfy the Vendor Display Rule, despite its facially inferior content”). We should also consider requiring more transparency from the exchanges about how they operate – specifically, how they make their money. This information will help investors understand the costs they incur when they seek to invest in the markets. The exchanges generate revenues, in part, from market data, connectivity, and trading fees. Evidence suggests that between 2010 and 2018, data fees increased anywhere from 967% to 2,916%, depending on a firm’s business model, for the same data. See SIFMA, Comment Letter Relating to Roundtable on Market Data and Market Access, at 12 (Oct. 24, 2018). A loss of market data revenue, and the recent low trading fees, could mean that revenue from fees may be recouped elsewhere. Greater fee transparency would allow regulators and investors to better understand how fees are being implemented and provide insight into whether and how fees are being passed to investors.