SEC seeks to improve governance of public market data streams

The SEC’s action is an effort to modernize the NMS, created in 1975, and to address concerns public consolidated equity market data feeds that report price and volume data are slower and contain less information compared to proprietary market data feeds. Currently, the organizations that oversee the operation of the public feeds have also developed their own proprietary feeds, a situation that has given rise to concerns about transparency and conflicts of interest.

Perhaps not surprisingly, the proprietary feeds typically cost more than the consolidated market data streams. In addition, the content and operational sophistication of the proprietary data products tends to be superior to that of the consolidated data feeds. In a statement made at the SEC meeting about its proposed order, SEC Chairman Jay Clayton reported that “institutional investors and the brokers who serve our Main Street investors, among others, have raised concerns about the gap” between the consolidated feeds and the proprietary ones.

The SEC’s proposed order is seeking to consolidate the three existing data plans into a single one and to make changes in the governance of the plans. Public comments must be submitted within 45 days after publication in the Federal Register.

The SEC also is publishing for comment proposed amendments to existing equity data plans submitted by the participants that address disclosure regarding conflicts of interest and establish a policy on certain confidential data. The public comment period will be 21 days from publication in the Federal Register.

How we got to this point

At one time, exchanges and their members were prohibited from disseminating their reports independently, SEC Commissioner Elad Roisman noted in a statement at Wednesday’s meeting. But in 2005, the SEC adopted Regulation NMS, which, in part, authorized self-regulatory organizations to act jointly to disseminate consolidated information about stocks. Regulation NMS also specified requirements for the collection, consolidation, and dissemination of data by these “securities information processors.”

Currently, three plans are jointly operated by all of the national securities exchanges and the Financial Industry Regulatory Authority (FINRA): the Consolidated Tape Association Plan, the Consolidated Quotation Plan, and the somewhat unwieldly named Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation, and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privileges Basis.

Regulation NMS was intended to modernize and strengthen the structure of U.S. equity markets. Since the regulation was adopted, though, both the structure of equity markets and the corporate structure of exchanges have “changed dramatically,” the SEC observed in a fact sheet accompanying its announcement about its proposed order.

The speed of trading has increased significantly, most exchanges now are owned by shareholders and also offer propriety products, and exchange groups where multiple exchanges operate under a single corporate umbrella have emerged, with the result that much of the voting power and control over the approved data feeds has been consolidated, the SEC noted. “In the Commission’s preliminary view, these market developments have heightened conflicts of interest between the exchanges’ commercial interests and their regulatory obligations” to provide consolidated market data, the SEC wrote in its fact sheet.

Controversial baby steps?

At its Wednesday meeting, the SEC just opted to seek public comment on a proposed order that would direct equities exchanges and FINRA to file a new plan for the consolidated data feeds. Should the Commission decide to move ahead after receiving public input, it would still need to issue an order to the NMS plan participants requiring them to submit a new plan for the feeds. That plan would then be published for public comment before any final action by the Commission. Until then, the SEC noted in its press release on the whole scheme, the current system remains in place.

It’s an approach that doesn’t satisfy Commissioner Allison Herren Lee. Acknowledging the SEC’s proposed order “takes steps toward addressing the conflicts of interests inherent in having for-profit exchanges both overseeing” the securities information processors “and selling their own competing proprietary data streams,” Lee maintained the proposed order “unfortunately falls short in safeguarding the public interest.”

Lee noted that under the proposal, securities information processors would be combined into a single processor governed by an operating committee with self-regulatory organization (SRO) members as well as “non-SRO members.” The latter, with just one-third of the votes on the operating committee, “would have neither the voting power, nor necessarily the market incentives, to affirmatively usher in the larger reforms required,” Lee said.

The SEC’s proposed order “may or may not be finalized,” Lee noted. If it is, it will just “seek future proposals from the stock exchanges, which proposals may or may not be sufficient or finalized,” she continued. The entire process “could take years to complete, and may ultimately produce an inadequate solution,” she said.

The plan also did not sit well with Commissioner Robert Jackson Jr., who provided a dissent. Instead of providing investors with “a real say over the data that drives our markets,” the SEC’s proposal “merely invites for-profit exchanges to draft their own rules,” he maintained.

“We should change the law to address the incentives produced by giving exchanges both control over our public feeds and the opportunity to profit by selling private ones,” Jackson suggested.

Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.