Court thwarts exchanges’ petition to head off market data threat

On May 24, the District of Columbia Circuit Court of Appeals denied a petition from the large US exchanges—Nasdaq, New York Stock Exchange and Cboe Global Markets—to quash regulation they say will undermine their businesses.

On the same day, the Securities and Exchange Commission (SEC) postponed a decision on a fee schedule that will set out how much the exchanges will charge subscribers for their data under the commission’s new regime for market data distribution.

The exchanges took the SEC to court earlier this year, trying to overturn its new Market Data Infrastructure (MDI) Rule. The self-regulatory organizations’ counsel argued that, in finalizing the rule, the commission had overstepped the authority granted it by Congress, that it had not carefully considered the impacts of the rule—both on the market and on the incumbent exchanges—and that it would damage the exchanges’ bottom line and even hinder them in their special role as SROs.

The court heard oral arguments in March and made its decision almost eight weeks later to the day, on May 24.

The judges’ decision says that the MDI Rule “clearly represents a reasonable balancing of the objectives Congress directed the commission to address in a complex and technical area based on the record before the commission. Accordingly, the court denies the petition.”

The MDI Rule is one prong of the regulator’s efforts to modernize the US consolidated tapes and break what the commission believes is a monopolistic stranglehold of the large exchanges over equity market data. The rule, finalized in 2021, causes more detailed data to go on to the Securities Information Processors (Sips)—which consolidate and distribute the public feeds of market data—and created the possibility for the emergence of multiple competing Sips.

These competing consolidators would buy market data from the exchanges for a fee decided upon by a committee and approved by the commission, and create their own products from it. Currently, there are two exclusive Sips, the governance of which the SEC believes is unduly dominated by the exchanges, resulting in a conflict of interest. So the commission believes that multiple, competing Sips would introduce innovation and lower prices for consumers of market data, ultimately benefiting investors.

The petitioners’ arguments against the MDI Rule are laid out in more detail here. Essentially, they hinged on the idea that the SEC’s adoption of the MDI Rule was “arbitrary and capricious.” In the US, arbitrary-or-capricious is a standard that judges can apply to administrative agencies in deciding whether to invalidate rules they create. Lawyers say it’s quite a difficult standard for a petitioner to prove.

In this case, the petitioners said the commission was arbitrary and capricious because the MDI Rule would exacerbate unequal access to data in the market, contrary to the SEC’s intentions, and because it was based on “unfounded speculation”—essentially, that the SEC was just hoping and guessing that a critical mass of competing consolidators would emerge into market conditions that could support them.

However, the court said in its decision that it did not believe the commission had acted in an arbitrary or capricious way in adopting the MDI Rule. The judges also disagreed with the petitioners that the commission’s efforts represent a threat to their businesses.

“Petitioners’ claims that reduced revenues will cripple their reinvestment in their own products, hurting their customers, defies basic economic principles,” the decision says. “The commission points out that like any business, the exchanges can obtain external funding for promising opportunities to develop new products in the future; they are not limited to their internal cash-in-hand for developing new products and services.”

The judges also gave short shrift to the exchanges’ suggestion that reduced market data revenue would also limit their ability to perform their roles as regulatory bodies. “The notion that any reduction in revenue would necessarily compromise the exchanges’ bottom line so severely as to affect their ability to comply with their regulatory responsibilities is unsubstantiated,” the decision says.

Countering the exchanges’ argument that the commission failed to consider the economic impacts of the MDI Rule, it adds that “the court declines to re-weigh the technically complex trade-offs the commission carefully considered.”

Fee filings delayed

Market data solutions vendors have expressed their interest in throwing their hats in the ring to become competing consolidators, once there’s clarity on how the new system will look and once they knew the court wouldn’t be vacating the rule.

These vendors believe they have unique capabilities and experience they can leverage to become the new Sips. However, those services will be operated as commercial solutions rather than as utilities, and that exchange data doesn’t come for free. So before they can formulate the business plans that will underpin their bids, they need to know how much the exchanges will charge them for the data they will be using, and how revenues will be distributed.

Under the MDI Rule, the exchanges had to file plan amendments detailing how they would be charging Sips for their market data. These fees had to be filed by the plans of the exclusive Sips—CTA, CQ and UTP—by November 5, 2021.

Some among the competing consolidators had high hopes for the new fee structures. The SEC has said that market data fees should be fair and reasonable, tied to what market data costs to produce rather than its value to the subscriber. But when the filing was made public, some consolidator hopefuls said the fees were still too high for them to consider their chances as viable businesses.

The commission did not accept or deny the exchanges’ proposed fees, but instead put them out for public comment. Under its own procedures, the commission had 180 days before it had to make any decisions about the proposal, and May 25 is 180 days after February 24, when the plan amendment was published in the Federal Register.

And so on May 24, the commission put out a notice saying that it was giving itself an extension, as it needs more time to consider the amendment and the submissions received during the comment period. The next deadline is July 24, when the commission will decide whether to approve or disapprove the amendments, the letter says.

In the meantime, the appeals court is considering a second petition that is closely related to the MDI Rule petition. This is the CT Plan, created by the SROs in response to an order from the SEC and that will administer the competing consolidators and exclusive Sips in the future.

The SROs also challenged the governance order in the court, achieving a stay on the implementation of the CT Plan, which began last summer to an aggressive timeline. Oral arguments in this second petition were heard within days of the other, and industry participants say they expect a decision in this case within the next two or three weeks.

The CT Plan looks to dilute the big exchanges’ voting power on the Sips operating committees by assigning votes to each exchange group rather than per medallion, and bringing voting participation from industry reps. The SROs say the SEC has no authority to make them include these individuals on the committees, nor do they have the authority to run a Sip.