The U.S. Securities and Exchange Commission ruled Tuesday that two major U.S. stock exchanges, NYSE Arca, Inc. and Nasdaq Stock Market LLC, were not able to justify certain market data fees, setting the stage for possible fee reform.
In an opinion dated Oct. 16, the SEC upheld a challenge to the exchanges’ market data fees from the Securities Industry and Financial Markets Association (SIFMA), an industry trade group, which argued that the fees amount to “improper limitations” on market access.
According to the SEC’s opinion , the exchanges “failed to meet their burden” of establishing that the fees challenged by SIFMA are fair, reasonable, and not discriminatory. The commission did not conclude that the fees in question were unfair, but that the exchanges failed to prove that they were fair, and it set aside the disputed fees.
Specifically, SIFMA challenged the fees charged by the exchanges for depth-of-book market data, which includes the best available bids and offers, and limit order information in an exchange’s order book at inferior prices.
“Among other uses, this data provides pricing information that can inform traders how best to place trades that are larger than the quantities available at the best bid and offer,” the SEC states in its opinion.
The ruling says that the exchanges argued that competitive forces prevented them from setting fees at unfair levels. “These forces, the exchanges argue, therefore constrain their pricing of the data products at issue here and adequately demonstrate that the challenged fees are fair and reasonable,” the SEC states.
However, the commission concluded that the evidence does not support the position of the exchanges. “… the exchanges have not demonstrated that an increase in the price of the exchanges’ depth-of-book products at issue here would cause a loss of order flow or that an increase in the cost of the depth-of-book products would cause customers to substitute other depth-of-book products for that exchange’s product,” the opinion states.
“Neither does the record support a finding that platform competition constrains the exchanges’ fees for the depth-of-book products at issue here,” the opinion adds. “In other words, the exchanges have not established that their theories of competition reflect market realities and satisfy the market-based test with respect to the challenged fees.”
Commenting on the decision, SIFMA managing director and associate general counsel, Melissa MacGregor, said in a statement, “This pragmatic ruling by the SEC indicates increasing recognition by policymakers that the fee structure for proprietary market data products is broken. Today’s decision should prompt further examination of policy reforms to ensure the efficiency of public market data feeds and fairness of fees.”
The New York Stock Exchange (NYSE) sharply criticized the SEC’s ruling and signalled that it intends to appeal.
“This decision represents a troubling shift by the SEC from its core mission of ensuring the long-term health of our financial markets to an agenda of regulatory overreach, prioritizing the interests of powerful Wall Street interests over those of retail investors and listed companies. We believe the commission’s decision will not withstand our challenge,” NYSE said in a statement published Wednesday.
“Based on our initial analysis of the SEC’s decision, we do not believe there will be any immediate change to the products that we deliver to customers or their associated fees,” it added.