SEC, Exchanges Clash Over Revised Consolidated Tape Plans

The US Securities and Exchange Commission (SEC) has ignited a war of words between industry groups representing financial firms and exchanges by instructing US equity exchanges and regulatory body Finra to submit plans for a new NMS plan for the equitable distribution of market data that will replace the current US consolidated tapes of equities quote and trade data.

The order, issued on Wednesday, May 7, aims to address concerns about the current tapes’ ability to fulfill their purpose of ensuring the availability of data, and “conflicts of interest inherent in the current governance structure of the existing equity data plans,” said the SEC in a statement, citing the need to protect “Main Street” investors who have invested savings and retirement plans in equities—either directly, or through vehicles such as mutual funds and pension funds.

These conflicts of interest include the fact that the three current consolidated equity tapes—the Consolidated Quote System and Consolidate Trade System operated by NYSE, and the Unlisted Trading Privileges plan operated by Nasdaq—are run by the largest exchange operators, but lag behind their premium, fee-liable proprietary datafeeds.

Exchanges and Finra have 90 days to submit a modernization plan that meets the SEC’s requirements.

The order received a positive response from the Securities Industry and Financial Markets Association (Sifma), which represents trading and investment firms. In a statement, Sifma president and CEO Kenneth E. Bentsen, Jr. said the association “strongly supports” the order, calling it “a positive initial step which addresses current conflicts of interests for exchanges between the SIP data and exchange proprietary feeds, recognizes the importance of ensuring that the SIP is properly maintained, and allows non-SRO market participants the opportunity to be considered in the decision making process for this critical utility.” Sifma also called the timeframe imposed by the SEC “reasonable.”

However, the order prompted a backlash from the exchanges tasked with creating the plan, which potentially stand to lose revenue from proprietary data products if investors can use the consolidated tapes as viable alternatives.

Nasdaq and NYSE both declined to comment directly, but referred inquiries to a statement issued by the Equity Markets Association (EMA), of which both exchanges are members, which called the SEC’s plan unnecessarily risky and “eccentric.”

“The exchanges … have been ordered to revise the currently efficient market system into one that hands over voting power to major financial institutions with conflicting interests. The SEC should not unnecessarily be adding to market risk by introducing eccentric governance changes during times of great volatility. While we welcome a collaborative dialogue to improve the SIP and the operation of our markets, today’s SEC action does little to help retail investors or our economy,” said the EMA statement.

Cboe, though, which is also a member of EMA, went even further and issued its own statement in response to the order, calling it “improper and unfair,” “inappropriate,” “short-sighted,” and “risky,” and claiming the change would cause confusion

A spokesperson for the exchange says in a statement that Cboe is “disappointed” in the SEC’s order. “We believe it is improper and unfair for the SEC to require the re-filing of effective SIP fees that have already gone through the regulatory review required by the Exchange Act,” Cboe says.

“We find it inappropriate that the SEC has rushed out this proposal as a solution to address governance issues when the substantive market data infrastructure proposal, which also requires significant and conflicting governance changes, is still going through the comment process,” the exchange continued, calling SEC’s direction a “short-sighted action that will ultimately add more complexity and confusion for individual investors.”