Early this year, WatersTechnology interviewed vendors that were interested in putting themselves forward as competing consolidators of US National Market System (NMS) data under a new regulatory plan to modernize the way that such data is consolidated and disseminated to consumers.

At that point, the Securities and Exchange Commission’s infrastructure rule and its associated governance plan, the CT Plan, were still just in the works, but a lot has happened since then—at almost dizzying speed in regulatory terms. The infrastructure rule went into effect on June 8; the implementation of the CT Plan began on August 6. The large exchanges challenged both the infrastructure rule and the CT Plan in court, and won a stay on the latter, halting it possibly forever if the court sides with them.

Over the months, the competing consolidator hopefuls have watched each development gradually bring more clarity on how the new system will look (unless it is vacated by the courts, of course!).

These vendors believe they have unique capabilities and experience they can leverage to become the new securities information processors (Sips). However, although they will be providing an industry service, 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.

As Stéphane Tyč, co-founder of McKay Brothers and Quincy Data, said back in March: “Everything revolves around how high the new Sip fees redistributed to the exchanges will be. That is the parameter that will make or break this modernization initiative.”

Under the infrastructure rule, these fees had to be filed by the plans of the exclusive Sips—CTA, CQ and UTP—by November 5. Some in the market data vendor community believed the CT Plan court stay would delay the vote and the resulting fee filing, but the plan operating committee voting went ahead and the three plans made their filings on time.

The plans have published two documents—a fee filing, and another more general filing. The non-fee filing deals with a slew of important issues that must be defined in terms of the market data infrastructure rule, such as timestamps that must be generated by the exchanges and assessments of competing consolidators. But it’s probably the fee filing that was most awaited—and will be most controversial.

Some among the competing consolidators had high hopes for the new fee structures. After all, the SEC has said that market data fees should be fair and reasonable, and that means they should be tied to what market data costs to produce rather than its value to the subscriber. And, some say, the large exchanges will save millions of dollars per year in operating costs now that they no longer have to run the two Sips (a provision of the infrastructure rule). Why shouldn’t these cost savings be passed on to the competing consolidators?

After all, competing consolidators will have a whole set of new costs, from compliance costs associated with being regulated entities, to paying for connections and normalizing the data from different exchanges. If data is not reduced, their services cannot be competitive.  

The November 5 fee filing proposes pricing for three categories of data—Level 1 core data, including top-of-book quotes and odd-lot information; depth-of-book; and auction information—for professional and non-professional subscribers, and for display and non-display purposes. To determine the value of depth-of-book data, the operating committees reviewed the exchanges’ charges for their proprietary feeds and came up with a multiplier of 3.94, the outcome of comparing what consumers pay for five levels of depth versus full depth. That ratio is applied in the amendments to various professional subscriber fees.

Luc Burgun, CEO of NovaSparks, a vendor that offers field-programmable gate array (FPGA) ticker plant and feed handler appliances for ultra-low latency applications and is a competing consolidator hopeful, says this plan participants’ filing essentially aligns Sip depth-of-book pricing with that of the large exchanges’ prop feeds. However, he says, direct feeds are more valuable than the Sip: Not only do the proprietary feeds offer more than five levels, they aren’t aggregated, offering a view of all levels for different markets.

“It’s a lot more information and for a market maker, that’s more valuable,” Burgun says. “So if the price is more or less the same, a market maker will keep using the direct feeds, and there is no point in its using the Sip. Which means that it’s way too expensive for what it is.”

With the Sip data priced at that level and the extra fees that a competing consolidator must charge to cover its own costs, it’s difficult to see how a competing consolidator could offer competitively priced products, Burgun contends. 

The fee filing in its present form is unworkable, he adds, but he says that he sees it as the opening of a negotiation process, rather than the operating committee’s final say. The SEC must give more guidance to the exchanges on the pricing so the negotiations can wind up quickly, he says.

There will be many among the competing consolidator community who see these filings as a straightforward play by the large exchanges to protect their proprietary data feeds business, using their heft on the Sips operating committees—where they have most of the voting power—to push through an unpopular amendment. Indeed, an extraordinary footnote in the plans makes it clear that the smaller exchanges—IEX, Memx, LTSE and Miax—as well as the Financial Industry Regulatory Authority, while participants in the operating committees that submitted these filings, are not on board with these fee amendments. 

The footnote says that these parties, plus Nasdaq BX, withheld their votes, and that advisors to the committees “believe that Sip data content fees should be universally lower to align with the un-coupling of Sip data content from the Sip exclusive processor, a function to be performed by competing consolidators. The advisors believe that while their input was important in the process, the core principle of fees being fair and reasonable was not achieved.” 

And indeed, Memx—aka, the Members Exchange—filed a comment letter with the SEC on November 8, saying that it disagreed with the amendments, which fail to provide for fair and reasonable fees for market data and would reduce incentives for competing consolidators to enter the market.

On the other hand, the large exchanges have the right to look out for the health of their businesses. The current fee filing may indicate, as Burgun puts it, the beginning of negotiations, rather than representing the exchanges’ protectionism and intransigence. The exchanges had very little time to come up with these fee filings, which could have major implications for them. The SEC’s timelines on implementing the infrastructure rule and the CT Plan have been intentionally aggressive; and six months does not seem to me like enough time to draw up a document that represents a fundamental change to the way they charge for data. These are, after all, only proposals. 

Either way, however, I suspect the competing consolidators won’t see a lot of promise in this fee filing, and will be pinning their hopes on the consultation process.