The SEC has recently focused its attention on transparency regarding all aspects of the capital markets. This is seen by many as an attempt to ensure that Main Street investors have detailed and timely information necessary to make informed investment decisions.
One area that has come under review is how, when, and at what cost do investors have access to market data. Under the SEC’s Regulation National Market System, exchanges such as the NYSE and Nasdaq must make their “best bids and offers” data available to Securities Information Processors (SIPs).[1] This data is seen as crucial to inform investors on the status of the market. The SIPs are coincidentally also managed by the exchanges to ensure that this vital data is made public in a non-discriminatory manner and at a reasonable cost. However, in addition to this quasi-public data, the exchanges offer more detailed data on limit orders at prices below “best bids and offers,” which is extremely valuable in getting a full assessment of the securities market. This more detailed, valuable, and arguably necessary data is considered proprietary and as such is offered at a premium. However, even though this more detailed data is considered proprietary, the fees assessed for this data must be “fair and reasonable.”
The SEC recently addressed the issue of proprietary data fees. In October 2018, Chairman Clayton indicated that the Commission had set aside the questioned fees of the exchanges after it was determined that they had not “provided sufficient factual and legal support” for their use. While the Chairman made clear that fees may in fact be reasonable with supporting evidence, opponents of the fees claim that the fees have been increasing at an unreasonable rate with little rationale provided. In fact, a report by Expand Research indicated that the NYSE has increased their fees over 1,000% since 2010.[2] If accurate, investors deserve to have this substantial increase in fees rationalized and adequately explained.
In addition, the general data made available to the SIPs and the additional proprietary data must be released simultaneously to the extent possible, so as not to add any additional impediments for investors to receive timely data. As for the dispensation of market data, the timing of receiving this data can be seen as equally as important to the information itself, given how important computer algorithms have become to investment decisions. As the SEC Chairman indicated the timely receipt of all data is integral in the current “electronic trading ecosystem.”[3]
The offering of proprietary data, arguably in competition with the management of the SIPS, along with the claim that the two types of data are not being simultaneously released, has raised some concerns about potential conflicts of interests. Though the SEC did not address the conflicts of interest in the Chairman’s October statement, at a subsequent SEC Roundtable Commissioner Kara Stein asked whether the current governance of the NMS created internal conflicts.[4]
What seems clear from the recent SEC ruling and the subsequent SEC Roundtable is that transparency in the National Market System is needed. Exchanges must adequately show that the increasing fees being charged for proprietary data is fair and reasonable. In addition, the public disclosure of how the SIPs are operated would be incredibly helpful for both advisor and Main Street investor so that well informed investment decisions can be made. Main Street investors must be ensured that they are able to receive timely and sufficiently detailed data to encourage their continued participation in the market.
[1]70 FR 37497 (June 29, 2005)
[2]Securities Industry and Financial Markets Association (SIFMA) attached the August 2018 report to their comments submitted to the SEC, available at: https://www.sec.gov/comments/4-729/4729-4559181-176197.pdf
[3]SeeSEC Chairman Jay Clayton’s Statement on Market Data Fees and Market Structure, Oct. 16, 2018
[4]SEC Roundtable on Market Data and Market Access, Oct. 25 & 26, 2018
