Nasdaq, User Groups Fire Opening Salvoes in Looming Battle Over SIP Data Fees

In late August, two industry user groups—the Managed Funds Association and the Alternative Investment Management Association—penned a joint letter to US markets regulator the Securities and Exchange Commission, requesting reviews of the fees charged by US exchanges for market data.

Though primarily concerned with the cost of proprietary exchange data, the letter asked the SEC to apply the same principles to governance of the SIP (Securities Information Processor) feeds—the consolidated feeds of US quote and trade data collected and distributed on a utility-like basis by Nasdaq (the UTP program) and NYSE (the Consolidated Tape Association), respectively.

For example, the associations want the SEC to review market data fees to see whether the prices charged correspond with the cost of operation, and to be more rigorous when approving proposed fee changes associated with new products.

In the letter, they describe how regulatory and technological developments have contributed to greater competition, market access and liquidity, more market depth, tighter spreads, and lower costs, but note that while the cost of technology has become cheaper, market data costs continue to rise as exchanges increase fees and unbundle products into separately billable services. At the same time, the usefulness of the SIP feeds has largely been overtaken by direct exchange feeds, which the associations say firms feel a fiduciary obligation to buy in order to obtain the levels of data they need to support their strategies, urging the SEC to reconsider whether firms “can truly meet their best execution obligations relying solely on SIP data feeds.”

So in addition to urging a cost-based review of SIP data, the associations also called for an investigation into the governance structure of the SIP feeds to mitigate any conflicts of interest with the exchanges that contribute to them.

Nasdaq, for its part, says it wants to see “a dialogue between the SEC, exchanges, and the investor community”—and is keen to ensure it has a seat at the table when the SEC is making decisions—to clarify its role and urge the SEC to clarify its position on the vendor display rule, which officials say has created confusion among broker-dealers over when they may use SIP data instead of faster, more comprehensive and more expensive direct exchange feeds.

Shortly after the MFA and AIMA published their letter—though officials say not in direct response, but rather in anticipation of a roundtable discussion on market data and market access being organized by the SEC on Oct. 25 and 26—Nasdaq released its own set of proposals for modernizing the SIP. In addition to the vendor display rule, Nasdaq’s proposals include changing the SIP revenue formula—the model by which contributing exchanges are reimbursed for their data—to incentivize “lit” quotes, and expanding the authority of the SIP Advisory Committee.

“We think the investing public in general benefits from lit quotes. There has been a growth in ‘dark’ trading, and we would like a change in the exchange revenue allocation to recognize that lit quotes enable pre-trade price discovery… and improve the level of pre-trade information out there,” says Oliver Albers, SVP and head of strategic partnerships for Nasdaq’s Global Information Services business.

Continuing its stated aim of supporting the investing public, Albers says its plans to expand the authority of the SIP Advisory Committee are not about giving it free rein to increase fees, but rather about opening up involvement to the investing public.

“We believe there are benefits in having more industry representation at the committee level,” Albers says, though he adds that the specific extent of this involvement would be determined by a broader dialogue with the industry and the SEC.

Here, at least, the parties may be on the same page: As the MFA and AIMA note in their letter, “as non-voting members, the advisory committees have very little authority to influence issues of major impact to retail and institutional investors, broker-dealers and other market participants, such as SIP fee increases and technology upgrades. As a result, the advisory committees to the SIPs are not able to mitigate the conflicts of interest that exist between exchanges charged with overseeing the SIP data feeds, and that in turn sell proprietary market data products and connectivity offerings… that potentially compete with the SIP data feeds.”

But Nasdaq is wary of further structural change to the SIPs’ operation. “A lot of people are advocating for a distributed SIP… which would change our market structure. Nasdaq’s position is that we think the structure of the SIP today works pretty well,” Albers says. “Multiple or distributed SIPs could be confusing and benefit some stakeholders at the expense of the investing public… and may mean a significant increase in costs—who would bear those costs?”