SEC pressures exchanges to justify data fee rises
The US securities regulator has called on stock exchanges to provide more information to justify fee rises for financial market data, increasing the pressure on exchange groups over trading information.
The Securities and Exchange Commission released guidance on Tuesday outlining the kind of detail it expects to see from the likes of the New York Stock Exchange and Nasdaq when they increase the cost of market data. The move follows a landmark SEC decision in October to block fee increases — a rare step given the broad self-regulating powers of US exchanges — citing a failure to justify the higher charges.
Market data provide a vital revenue stream for stock exchanges as they have morphed into hubs of electronic messages over the past two decades. During this time, exchanges have evolved from quasi-utilities into for-profit companies that seek to maximise revenue.
Exchanges must provide detailed information to substantiate fee increases and prove there are competitive forces in the market for exchange data, an SEC spokesman said.
The guidance calls on exchanges to show fees are “reasonable” and do not hurt competition or discriminate against any market participants. The detail required includes measuring down to the microsecond a faster data product and showing the costs of producing data if using this as a basis to justify higher fees.
Market data is increasingly vital to the balance sheets of exchange groups. NYSE made $546m from data and analytics in the first quarter, or almost half of its $1.2bn of overall revenue, while the Nasdaq made $193m, or a third of its overall total.
The guidance opens the door for exchange groups to resubmit market data fee increases. Nasdaq declined to comment on the new guidance and NYSE did not immediately respond to a request for comment.
Detailed guidance from the SEC creates “a more objective process”, said Richard Repetto, an analyst at Sandler O’Neill. “If they turn down a price increase they need a rational way of saying no — creating some objectivity, as long as it’s fair and reasonable, makes sense,” he said.
However stock exchanges may bristle at providing a more granular view of their businesses, Mr Repetto cautioned.
“I don’t think the exchanges want to do a whole cost-benefit analysis” when applying to increase market data fees, he said.
IEX, which has attempted to attract trading activity from the incumbent exchanges by offering its data at a lower price, welcomed the SEC’s move. John Ramsay, chief market policy officer for IEX, said exchange groups “have rightly been criticised for exerting monopoly pricing power” for market data.
“Today marks a major milestone in bringing more transparency in service of investors and their agents,” Mr Ramsay said.
Last week IEX argued the fees charged by the dominant US exchanges were up to 1,500 per cent times the cost of producing the data, when comparing its own cost of producing similar data.
“It’s a big deal,” said Tyler Gellasch, executive director of Healthy Markets Association, a trade group. “It’s the first time the SEC has clearly laid out what it needs to see from the exchanges.”