I’m celebrating a landmark birthday soon, and I’ve been interested in buying myself an automatic watch. The appeal for me is that, often, designers leave little “windows” on the dial through which you can see the internal mechanisms. Looking at the initiative by the Securities and Exchange Commission (SEC) to modernize how public market data is sent out to consumers reminds me of peering through those little windows: You can see the moving parts, but not necessarily how the whole assemblage works together.

There are lots of moving parts in the SEC’s rethinking of the National Market System (NMS). The first, the so-called “infrastructure rule,” became effective on June 8, kicking off the implementation of a system where vendors—called “competing consolidators”—will take raw data from exchanges, consolidate it, and disseminate it to consumers. These competing consolidators are supposed to replace the two Securities Information Processors (Sips). The idea is that their offerings will be differentiated, bringing competition and innovation to the market, and democratizing access to market data.

Another moving part is the CT Plan, which the SEC ordered the self-regulatory organizations (mainly the large exchanges) to draft, and approved on August 6. The exclusive Sips are currently run by three plans and two operating committees; the CT Plan consolidates those three into one plan, which takes the form of a limited liability company run by one operating committee (which has not yet been formed). The CT Plan will not, as the former plans did, operate the exclusive Sips, but rather the market data system generally.  

The SROs have argued since the beginning of this process that these two pieces—the infrastructure rule and the CT Plan—were so intertwined and dependent on one another that the SEC should consider them as one piece of rulemaking. The SEC, however, insisted that while they are related and tackle the same concerns, they are nonetheless independent of one another: It never mattered to the timelines of one how the other was progressing.

However, even observers who support the SEC’s initiative say they’re still confused about how these two aspects work together.

“It’s still unclear when and how the market data infrastructure rule will intersect with the CT Plan,” says Manisha Kimmel, chief policy officer at market data infrastructure provider MayStreet, and who worked at the SEC for two years before joining MayStreet. “There still needs to be a plan that covers the exclusive Sips, even under the infrastructure rule, given that the exclusive Sips will operate in parallel with the competing consolidators.”

One question is: What happens to the Sips now, and how will this affect market data subscribers? We do know that once there are competing consolidators, they will run in parallel with the exclusive Sips for 180 days. The Sips will still be governed by their current plans and distribute the same data as they do now, to prevent confusion and keep their costs down. Some of their current duties, like timestamping, will fall to the listing exchanges.

After the 180 days, the CT Plan operating committee will decide if the exclusive Sips should be shut down, and can choose to make a recommendation to the SEC either way. The SEC in turn can decide if it wants to accept the recommendation, whatever it might be.

Currently, most of the industry seems to assume that the Sips will be decommissioned after a while. But what few appear to realize is that this is not a given: There’s no rule obliging either the operating committee to recommend shutting down the Sips, or the SEC to make good on such a recommendation. In which case, what will that look like, and who will run the exclusive Sips? 

Another point is that, given that the exclusive Sips will have fewer obligations now, they will cost less to run. This leads us to another major uncertainty about how this will work: revenue allocations. Currently, the plans collect revenue earned from the Sips and distribute it to members according to a formula developed just after Regulation NMS was passed in 2005. The infrastructure rule doesn’t require that a new formula be created, but it does say the operating committee could create a new one that better reflects the changing SRO obligations if it saw fit.

There’s a lot of interest in the allocations among observers of the SEC’s efforts. As Kimmel says, “Given the amount of work that went into creating the last formula, it will be interesting to see if the operating committee decides to tackle this issue.”

Outsourced operations

Yet another moving part is the CT Plan’s new operating committee, which will have an important say in, among other things, how much market data will be charged for, and how the competing consolidators are run.

The SEC believes SROs have too much power on the current Sips operating committees, so the modified CT Plan makes space for non-SRO voters, as well as smaller exchanges. According to the finalized CT Plan, market participants’ representatives will be chosen from six categories, including institutional and retail broker-dealers, market data vendors, and stock issuers.

Some have welcomed these changes; others have not; some think they do not do enough for a fairer NMS. But everyone agrees this is another part of the mechanism that is still partly obscure.

“The overwhelming majority of power has been in the SRO conglomerates,” says Shane Swanson, senior analyst in market structure and technology at Greenwich Associates. “That does shift now: SROs will still have two-thirds of the votes. But a faction of the non-SRO voting members plus the independent SROs could suddenly make some decision and move forward from there. What does that mean, and how will that impact things? We don’t know. But you have some strong industry advocates in the exchange world now. And that is fascinating.” 

Consultant Kelvin To says the SEC has vested too much power in the operating committee of the new plan—which is a problem, he says, because the makeup of the committee is almost inevitably going to be skewed toward the largest and most powerful firms.

“The word is ‘outsource’! The SEC has in effect outsourced the decision-making process [to the operating committee]. There are a lot of details in the CT Plan that talk about strengthening its governance; I agree there needs to be strong governance. But what’s underneath the whole thing, if you boil it down, is that they are outsourcing authority to the operating committee,” says To, who is founder and president of Data Boiler Technologies.

“A lot is still up in the air. Who will be in those six categories? Will it just be, for example, the MEMX sponsors and/or other large firms?” says To, who is a prolific commenter on this and other NMS initiatives.

To says the operating committee will almost certainly include big names like Charles Schwab and T. Rowe Price on the retail and institutional sides, respectively. BlackRock, Fidelity, and Virtu may also want a seat, he adds. These firms have all been active commenters on the SEC’s proposals.

To says the operating committee will likely exclude options and swaps market participants, To says, but “if you change equities, it likely changes options.”

“And what about academia? Academics also use market data—will their interests be properly represented? How will the voices of these smaller and second-tier players be heard? Diversifying the people participating in the market makes it richer and deeper, and that is how you grow the overall pie,” he says. 

The SEC has taken great care with all its related releases to incorporate industry feedback. No doubt, in coming months, some of these issues will become a bit clearer (of particular note, for example, is an amendment to the infrastructure rule that will set market data fees).

Meanwhile, market data consumers will be hoping that all these moving parts do interoperate elegantly under the surface of the dial, so to speak, and aren’t just a hodgepodge of ill-considered measures, as some have implied.