Stock exchanges are stepping up their fight against the Securities and Exchange Commission and its attempt to reform rules about what kinds of market data exchanges must provide to the public and at what prices, and the outcome could have an outsized impact on the trajectory of federal securities regulation in the years and decades ahead, experts say.
Nasdaq Inc. International Continental Exchange subsidiary the New York Stock Exchange and the CBOE Global Markets Inc. have sued the SEC over the regulator’s plans to force exchanges to provide cheap access to not just the most attractive prices on offer to buy and sell stocks, but also data on bids to buy and sell stock at other prices, which can give traders a sense of where the market is headed next.
Nasdaq and ICE did not respond to a request for comment, and CBOE declined to comment.
“Even though this proposal is a little bit about adjudicating between titans, implicit over whether the exchanges win or not is how much power the SEC has to shape the stock market,” said Gabriel Rauterberg, an expert on capital markets at Michigan Law, told MarketWatch.
Large market-makers like Citadel Securities, Virtu Financial Inc. and Two Sigma Securities pay stock exchanges large fees to access comprehensive data on the supply and demand for stocks, and with the proposed change, much of that would be required to be sold at far lower prices.
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The SEC’s plan, approved in December, would also allow third-party technology companies to apply to become competing packagers of this data, on the hope that these new entrants could do it more cheaply or with better-quality service.
“By hastily approving this plan without seeking industry consensus, the SEC is recklessly pursuing an agenda that will make our markets less fair at precisely the moment when they are most needed to help drive our economic recovery,” the Equity Markets Association, a stock-exchange industry group , said in a statement at the time.
A wide coalition of market participants, however, support the move, including retail brokers like Charles Schwab Corp. E-Trade and Fidelity Investments, which claim that the rule change would allow them to provide more granular market data to their customers that would enable retail traders to better compete with the professionals.
“Going back decades, Schwab has challenged the notion that the slow, content-poor data currently provided by the market-data monopolies is sufficient for investor needs,” Jeffrey Brown, senior vice president of legislative and regulatory affairs at Charles Schwab, said in a letter to the SEC last year.
“Faster, more content-rich data is available directly from exchanges, but it is cost-prohibitive to share generally with clients,” he added. “This leaves retail investors with market data inferior to that used by professional traders.”
Stock exchanges have increasingly turned to the courts to block SEC rule-making on market structures that they see as threatening revenue from data, which has become an increasingly important part of their businesses. Revenue that exchanges earn from data services has risen by 62% from 2014 to 2019, to $2.4 billion, according to an analysis by the Committee on Capital Markets Regulation, which is funded in part by large banks and asset managers.
Last summer, ICE and Nasdaq won a ruling in federal court to stop the SEC from retroactively blocking fee increases for data, but the decision did not speak to the SEC’s broader authority to set the rules by which data must be shared among all market participants.
The result of this case could be more precedent-setting, Rauterberg said. “The federal courts are potentially going to be taking a stand on what the SEC’s role is in facilitating the stock market or creatively improve on market outcomes for everyone involved.”