For vendors in the market data connectivity business, the Securities and Exchange Commission’s initiative to modernize the public feeds of US equities data is an enticing business proposition. The regulator has finalized a rule that is part of its efforts to, as it says, modernize market structure. The “infrastructure rule” creates a system in which—instead of two securities information processors (Sips) pumping out bid/ask quotes, consolidated from US trading venues to consumers—a decentralized system of providers called competing consolidators (CCs) will gather and disseminate the data.

As I reported back in March, a handful of companies that have various specialties in market data dissemination and connectivity—including McKay Brothers, the Miami Exchange (Miax), Exegy, MayStreet, and NovaSparks—were quick to say they were interested in becoming one of those CCs. For that article, I spoke to companies that had started thinking about how they would differentiate themselves in what they would offer the market—the SEC’s stated goal of paving the way for 12-odd Sips to emerge is to widen choice and competition, after all.

But while they could look at the revenue side, the costs were—and remain—unknown. The governance side of these infrastructure changes is yet unresolved, and these businesses don’t know how much the exchanges are going to charge them to consume the data they will be consolidating.

The current Sips are run under three plans governed by two operating committees. The commission believes these committees to be unduly dominated by the three largest exchanges. Once upon a time, according to the SEC and smaller exchanges like Miax, all exchanges got one vote on the committee, but over the years equity markets consolidation concentrated votes among Nasdaq, the New York Stock Exchange, and Cboe. And so as part of its modernization effort, the SEC ordered the exchanges—known in the regulatory lingo as the self-regulatory organizations (SROs) to come up with a new plan—the CT Plan, as it is known. The SEC ordered the SROs to create a plan that would effectively squash the current three plans into one. It also ordered the SROs to make the CT Plan fairer by including more non-SRO membership. 

The SROs filed their draft CT Plan back in October 2020. It essentially creates a new limited liability company (LLC), which will vote for an operating committee once it’s set up.

“You can think of the exchanges as the owners of this limited liability partnership, the CT Plan. And the purpose of the plan is to administer the various business activities related to the Sips. As part of the process, there is an election of an operating committee,” says Scott Parsons, chief information officer at Exegy, a hardware ticker plant appliance vendor and aspirant CC.

Parsons says the committee is analogous to a board of directors in a company, whose remit it is to set the direction and worry about the day-to-day operation of the LLC.

The operating committee is responsible for then proposing what the fee structure will be for exchange market data. This fee structure has to be complete by November 5.

“The operating committee should have non-SRO members as part of the functional entity. The commission was specific in saying, ‘We’d like to see non-SRO members representing different types of players or groups within the ecosystem’,” Parsons says.

In the CT Plan, while there is more representation of non-SROs, the SROs retain a two-thirds majority of the vote. Smaller exchanges like Miax get more votes within that two-thirds. Once the plan is approved, and the operating committee is set up, then it can decide on the fee structure—the most important piece of this confusing regulatory puzzle for the competing consolidator hopefuls.

“The way the governance structure will work is very important for us because we expect to be a CC,” says Luc Burgun, founder and CEO of NovaSparks, which offers FPGA (field-programmable gate array) ticker plant and feed handler appliances for ultra-low latency applications.

“The future operating committee will be giving us a lot of instruction in the way we will operate the service. They have nine different responsibilities,” including the billing and audit process, developing performance metrics for competing consolidators and assessing the operation of the decentralized consolidation model. “And they will be in charge of how revenues are going to be allocated to the SROs—very important,” Burgun says. “As a CC, you will get money from your customers. But one important part of this money is going to be sent back to the SROs.”

So what’s happened to the CT Plan then? After the SROs filed it, the SEC put it out for public comment, which turned out to be a controversial decision, as the SROs said it introduced undue confusion into the process. Even some of those who think it was a good idea to make the process as transparent as possible think it made it unnecessarily lengthy, especially when the SEC extended its own deadline by three months.

This brings us to Monday, August 9—the deadline for the SEC to decide whether to approve the CT Plan and at least, set the governance machinery in motion.

But it’s by no means a foregone conclusion that the commission will approve the CT Plan. Firstly, while most commenters were broadly supportive of the plan (with the notable and unsurprising exception of some of the SROs), the notice and comment period also produced some concerns and criticisms about how the new Sips will be governed. The commission may decide to take some of these into consideration and postpone the decision yet again.

Burgun is concerned that the CT Plan still gives SROs that majority on the operating committee in the CT Plan. “They will have two-thirds of the vote, which is a lot. Even if the vote of the big three—NYSE, Nasdaq, and Cboe—is a bit diluted by Miax and MEMX and so on,” he says.

“If the plan is to have CCs and self-aggregators distributing the data, they should be more represented than the SROs because, in the end, they are the guys who are going to be doing the groundwork. For me, it would make sense to have a voting structure that was more like, one-third SROs; one-third CCs, including the self-aggregators but no non-SROs; and one-third non-SROs, non-CCs.” 

Another complicating factor in all of this, Burgun says, is that some of the SROs will probably choose to become CCs. Miax, for instance, has already said it is willing to throw its hat in the ring. This makes sense—exchanges already consolidate and disseminate market data, and already have the regulatory backing to do so, under Regulation Systems Compliance and Integrity.

For the potential competing consolidators, however, this is an odd situation because, under the CT Plan, the SROs will also have that role of oversight over the competing consolidators.

“Some of the SROs will become CCs. Which is a strange thing, because it’s someone watching what you’re doing, but also potentially competing with you!” Burgun says.  

Exegy’s Parsons says it’s still unclear how the CT Plan’s operating committee is going to work. “How do we go about selecting who the non-SRO members are? The other members are up to the individual exchanges—the ‘owners’ of this LLC—to elect their director, who they want to sit on the committee. But how does the selection process work for non-SRO members of that committee?” he says.

“Some of the non-SRO voting members are like directors but without the full privilege of ownerships: they get to vote on some things, but they don’t get to vote on other things. It’s going to be interesting to understand where that line is, and how exactly that will work. And particularly when it comes to the idea of the fees.”

It’s the fees that are make-or-break for the competing consolidators—the information that will help them understand if they have viable business propositions, and Parsons says they are waiting with bated breath for Monday’s decision.

It’s never a good idea to make predictions, especially in print. But since you’ve made it so far in this very technical article, I will end with some. Firstly, I predict that the SEC will approve the CT Plan, albeit with some changes. The questions the agency asked during the notice and comment period show that it’s interested in taking on board feedback, and there is a lot of that. I also predict that the SROs—who have already taken the SEC to court to halt the infrastructure rule—will sue again. After all, as MayStreet’s chief policy officer Manisha Kimmel says in a blog post, the exchanges refiled their lawsuit in April, anticipating that the courts would dismiss their original litigation, which they indeed did on June 15.

Whatever happens, it’s definitely safe to predict that the new world of competing consolidators is going to take longer to materialize than these hopefuls would like.