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Monopoly Game

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Will broker/dealers be paying more for market data from now-public securities exchanges? Who owns the market data that is created by market makers and broker/dealers trading for themselves and their customers? What is the value that’s added by the NYSEArca and Nasdaq taking data from brokers on trades–that must, by law, be reported to the exchanges–and spitting that out in the form of a consolidated feed that B/Ds buy to use in trading operations, and Web service providers–like Google, and Yahoo, for example–use to provide real-time quotes to the investing public?

At issue is the public utility function of an exchange versus the pressure of a publicly-owned company to drive profits for shareholders. How should newly public exchanges like NYSEArca and Nasdaq balance what some say are enormous and very fundamental conflicts of interest?

These are some of the questions prompting two very different industry groups–the Securities Industry and Financial Markets Association (SIFMA), representing B/Ds, and NetCoalition–representing Internet service providers, to file briefs petitioning the Securities and Exchange Commission to reexamine its approval of NYSEArca’s request to charge much higher fees for this data.

The Backstory

Last May, NYSEArca proposed to the SEC a rule change that would allow it to charge fees for market data that had been available for free, and the SEC’s Division of Market Regulation approved the rule change in October. NetCoalition then filed a petition asking the SEC to “review and set aside” its approval of NYSEArca’s request. SIFMA filed comments about the NYSEArca data fees proposal and had separately commented to SEC about other market data proposals by Nasdaq and Amex. The SEC granted NetCoalition’s petition for a review of the NYSEArca data fees approval, and ordered a new period for filing statements.

NetCoalition and SIFMA seem to be on the same page, though from two completely different perspectives. “The petition obviously struck a chord with [SIFMA's] membership,” says Markham Erickson, executive director and general counsel at NetCoalition. “Now that many of [SIFMA's] largest members are really no longer on the boards of the exchanges, they are looking at this area and saying, ‘You know, we don’t really want to give the exchanges a blank check to charge whatever fees they want either,’ because what more captive audience is there than the broker/dealer community for these feeds? They, by law, have to buy whatever best, most comprehensive information is available to them. My members and clients don’t have to do that, but they do, and if there’s not an adequate process to ensure that those fees are reasonable, then you’re really just giving the exchanges a blank check to charge whatever they can get away with.”

Both SIFMA and NetCoalition say that the exchanges’ role of consolidating data that’s provided by market makers and B/Ds is important. The objection is “when we’re buying it back and they’re seeking to gouge us for data,” Erickson explains, “there’s something not quite right about that.” There’s no dispute that the exchanges should, for their efforts consolidating the data, cover their expenses and make “a reasonable profit,” according to a SIFMA spokesperson who responded by e-mail. (SIFMA declined repeated requests for an interview for this article).

What’s “Fair and Reasonable”?

SIFMA’s January statement said that NYSE Group reported that its market data revenues for the third quarter of 2006 were up 33.7% from the same period in 2005, and attributed that growth “primarily to the contribution of NYSEArca’s operations following completion of the merger…” SIFMA cites similar issues and commented that “NYSEArca and Nasdaq have not presented any data to the Commission or to the public to show that their rapidly growing market data revenues are ‘fair and reasonable.’ “

The SEC’s NYSEArca approval letter, points out Erickson, says “the fees that are being proposed are reasonable because they’re consistent with the fees that are charged by Nasdaq. We didn’t think there was any legal basis on which to approve a fee based on what another monopoly exchange is charging. If that’s the standard, it really puts the rest of their customers in a very difficult situation, because there’s effectually no cap to those fees.”

As a practical consequence, because of much higher, per-user (instead of flat) fees, NetCoalition’s members have had to regress to delayed data, so investors checking stocks on Yahoo or Google are not getting real-time prices. Erickson compares exchanges’ consolidating data with a cable company providing a “conduit” for TV programs, they don’t say they “own” the programs. “There’s no reason why the exchanges ought to claim an ownership interest either; they’re just providing a conduit function,” he argues. “At the end of the day, [the exchanges] are doing this consolidation role, and they ought to be reimbursed for that, but they’re not creating the fundamental data itself.”