It’s been about 2.5 years since the US Securities and Exchange Commission (SEC) proposed its ideas for what it sees as a more competitive and fairer system for market data distribution in the US—proposals that ultimately resulted in the Market Data Infrastructure Rule (MDIR). Honestly, it feels like longer than that—the path has been winding and beset on all sides by litigation from the big exchanges, which want to protect their data businesses. But this month sees yet another milestone on that path: September 22 is the date by which the SEC must approve or disapprove the fee schedule the exchanges would use to charge for their market data under the MDIR.

The fee schedule is crucial to the plans of wannabe competing consolidators—vendors that, under the commission’s envisaged new and improved market data system, would replace the two current exclusive securities information processors (Sips) that have consolidated data from the exchanges and pumped it out to subscribers since 2005. The current exclusive Sips don’t pay for market data or deal with subscribers; in contrast, the competing consolidators would buy the data from the exchanges, consolidate it, differentiate the service with their own unique offerings, and sell it to subscribers. So it needs to be clear how much this data is going to cost before any vendor can build a viable business plan.

This necessitated a “fair and reasonable” payment structure, which to the commission meant that prices should be tied to what market data costs to produce rather than its value to the subscriber.

Now, the plans are dominated by the large exchange groups—Nasdaq, the New York Stock Exchange, and Cboe. This is because, according to the SEC, decades of consolidation gave them mightier voices on the operating committees (the committees do include members from other parts of the industry, but their role is advisory and they can’t vote). So when the plans filed the fee schedule with the SEC in November last year, and the commission, in turn, put it out for public comment, competing consolidators said there was no way they could build a profitable business with data at those price points, which, they said, aligned Sip data with the exchanges’ prop feeds pricing. 

These vendors also said they needed to consider that, along with their usual overheads, they would also have to factor in the costs associated with becoming highly regulated entities. Any business registering as as a competing consolidator would be subject to the SEC’s resilience rules.

Indeed, the other, smaller exchanges on the plans—IEX, LTSE, Miax, and MemX—did not approve the decision, and Nasdaq BX withheld its vote. The plan advisory committee added into the fee filing an extraordinary footnote saying that its members did not believe the core principle of “fair and reasonable” had been satisfied.

Since the fee filing was made and the notice and comment deadline come and gone, the commission has extended its own deadline for deciding on the filing. But it’s come to the point where the SEC can’t put it off any further, which brings us to September 22.

So what could happen then? Well, as I have said before, there is no way the regulator can approve the plans’ fee filing. The commission could kick it back to the plans and tell them to come up with something that will create a world where competing consolidators could flourish. That would be my best guess. I could be way off base, but we’ll see soon enough.

The more interesting question, I think, is the more existential one: Whither the competing consolidators? When will we even see a world where they exist, and the exclusive Sips are retired with thanks for their years of faithful service?

If you ask market participants and the kinds of industry observers who have opinions on these issues what they expect in terms of a timeline, you get answers ranging from “maybe, like, 2026” to “never gonna happen.” I think the truth is somewhere in the middle.

I’m not inclined to side with the extreme pessimists: The impetus for the MDIR and its accompanying governance plan, the Consolidated Tape Plan (CT Plan), by all accounts had long-running bipartisan (though by no means unanimous) support within the commission for years before it was introduced as a proposal. And the SEC has emerged (mostly) victorious from legal battles with the big exchanges over the MDIR and CT Plan.

But on the other hand, there are just so many details to be worked out before market data dissemination can switch over from the exclusive Sips to competing consolidators. Firstly, are any vendors interested in still throwing their hats in the ring? MayStreet, for example, possibly the most vocal among the hopefuls back in 2020, has since been acquired by the London Stock Exchange Group (LSEG). The vendor has been in a quiet period while it is absorbed with its new parent, so there’s no indication of its interest either way.

But I would guess that MayStreet has other concerns right now—it must be a ton of work just integrating with the LSEG. Other vendors that could feasibly be competing consolidators have also undergone M&A activity since 2020: Exegy merged with Vela Trading Systems; Options Technology bought Activ Financial. All these businesses have just presumably had more pressing concerns than a business opportunity that remains, at this point, largely hypothetical.

As a quick digression: It seems that the exchanges are going public with their interest in becoming competing consolidators themselves. Nasdaq’s president and CEO Adena Friedman said during the exchange’s Q2 earnings call, “We are considering our role as a consolidator in the multiple consolidator model, because there could be an opportunity for us.” 

But back to the question at hand: I think that if the incentives are there, the vendors will come. The wider reality is that getting to the world laid out in the MDIR is so complex. There are so many details that can’t be worked out, even in the most exhaustive of proposals. It’s not just the pricing aspect, though obviously that’s a major part of getting it up and running.

What if a competing consolidator were to fail during trading hours? Would the commission halt trading for clients of that one consolidator, or the whole market? Who would do all the mundane but very necessary work that the Sips currently do—coordinating testing, for example? How would brokers meet best execution requirements when no one is calculating a canonical best bid and offer? Would the regulator tell a broker that was using one consolidator’s BBO that ended up being a couple milliseconds later than another consolidator’s BBO that it hadn’t met its best execution obligations? These and many other details will take years to hammer out.

What the commission can do now is get a new CT Plan going. The background to the CT Plan is a governance order from the SEC directing the Sips plans to consolidate the existing plans into one. This one plan to rule them all was to set out the governance of the market data system in which the competing consolidators would operate. As part of this governance, the exchange groups’ voting power was to be diluted, firstly by assigning votes by size rather than per medallion, and secondly by giving non-exchange representatives from, for example, investment companies and brokers a vote on the advisory committee. 

The plans did as ordered, but the big exchanges sought to have the CT Plan voided in the DC Circuit Court. Their objection hinged partly on the basis that having these industry representatives on the CT Plan committee was against the intentions of the Exchange Act. The DC court ended up agreeing with the exchanges, but only on that one point. Because that one point was integral to the CT Plan, the court decided to void the CT Plan as a whole. But this was not entirely a loss for the commission, as the court did not void the governance order behind the plan.

So why can’t the SEC just cut and paste a new CT Plan from the ashes of the voided one, just leaving out the bits that dealt with industry voting representation? And once that’s approved, it can get started on bringing it into being—for example, starting the bidding process to find a plan administrator.

I could be completely wrong about how fast the commission could move on this, but what is to stop that being done by the end of this year? I know commission staff have a lot on their plates, with chair Gary Gensler pushing an ambitious reg agenda, but surely it’s something they could get done with relative ease and expedience?

Think I’m right, or way off base, or just want to chat? Email me: joanna.wright@infopro-digital.com