[Federal Register Volume 85, Number 9 (Tuesday, January 14, 2020)]
[Notices]
[Pages 2164-2187]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-00360]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87906; File No. 4-757]
Notice of Proposed Order Directing the Exchanges and the
Financial Industry Regulatory Authority To Submit a New National Market
System Plan Regarding Consolidated Equity Market Data
January 8, 2020.
I. Introduction
As discussed in more detail in the attached proposed order
(``Proposed Order''),\1\ certain market developments have given rise to
concerns about whether--as currently structured--the existing national
market system plans (the ``Equity Data Plans'') \2\ that govern the
public dissemination of real-time, consolidated equity market data for
national market system stocks continue
[[Page 2165]]
to fulfill their statutory purpose under Section 11A of the Securities
Exchange Act of 1934 (``Act'').\3\ To begin the process of addressing
these concerns, and pursuant to Section 11A(a)(3)(B) of the Act,\4\ the
Commission is publishing for comment the attached Proposed Order, which
if ultimately issued by the Commission, would require the participants
in the Equity Data Plans \5\ to propose a single, new equity data plan
(``New Consolidated Data Plan'').
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\1\ See Attachment A.
\2\ The three Equity Data Plans that currently govern the
collection, consolidation, processing, and dissemination of SIP data
are (1) the Consolidated Tape Association Plan (``CTA Plan''), (2)
the Consolidated Quotation Plan (``CQ Plan''), and (3) the Joint
Self-Regulatory Organization Plan Governing the Collection,
Consolidation, and Dissemination of Quotation and Transaction
Information for Nasdaq-Listed Securities Traded on Exchanges on an
Unlisted Trading Privileges Basis (``UTP Plan''). Each of the Equity
Data Plans is an NMS plan under Rule 608 of Regulation NMS. 17 CFR
242.608; see also Securities Exchange Act Release Nos. 10787 (May
10, 1974), 39 FR 17799 (order approving CTA Plan); 15009 (July 28,
1978), 43 FR 34851 (Aug. 7, 1978) (order temporarily approving CQ
Plan); 16518 (Jan. 22, 1980), 45 FR 6521 (Jan. 28, 1980) (order
permanently approving CQ Plan); and 28146 (June 26, 1990), 55 FR
27917 (July 6, 1990) (order approving UTP Plan). The Commission
notes that the options exchanges are participants in the Limited
Liability Company Agreement of Options Price Reporting Authority,
LLC (``OPRA Plan''), an NMS plan under Rule 608 of Regulation NMS,
which governs the collection, consolidation, processing, and
dissemination of last sale and quotation information for listed
options. See Securities Exchange Act Release Nos. 17638 (Mar. 18,
1981), 22 SEC. Docket 484 (Mar. 31, 1981); 61367 (Jan. 15, 2010), 75
FR 3765 (Jan. 22, 2010). The Commission is proposing to take an
incremental approach to addressing governance issues related to NMS
plans and is at this time proposing to address only the governance
of the Equity Data Plans. The Commission may in the future consider
the governance of the OPRA Plan.
\3\ 15 U.S.C. 78k-1.
\4\ 15 U.S.C. 78k-1(a)(3)(B).
\5\ Cboe BYX Exchange, Inc. (``BYX''), Cboe BZX Exchange, Inc.
(``BZX''), Cboe EDGA Exchange, Inc. (``EDGA''), Cboe EDGX Exchange,
Inc. (``EDGX''), Cboe Exchange, Inc. (``Cboe''), Investors Exchange
LLC (``IEX''), Long Term Stock Exchange, Inc. (``LTSE''), Nasdaq BX,
Inc. (``BX''), Nasdaq ISE, LLC (``ISE''), Nasdaq PHLX LLC
(``PHLX''), Nasdaq Stock Market LLC (``Nasdaq''), New York Stock
Exchange LLC (``NYSE''), NYSE American LLC (``NYSE American''), NYSE
Arca, Inc. (``NYSE Arca''), NYSE Chicago, Inc. (``NYSE Chicago''),
NYSE National, Inc. (``NYSE National''), and Financial Industry
Regulatory Authority, Inc. (``FINRA'') (each a ``Participant'' or a
``Self-Regulatory Organization'' (``SRO'') and, collectively, the
``Participants'' or ``the SROs'').
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Based upon input received from a broad range of market participants
(including the SROs), the Commission's Equity Market Structure Advisory
Committee, and its own regulatory oversight of the Equity Data Plans,
the Commission has set forth in the Proposed Order its concerns
regarding the Equity Data Plan's provision of equity market data,\6\
its views regarding issues arising from the current governance
structure of the Equity Data Plans,\7\ and the specific governance
provisions that the Commission preliminarily believes would enable the
New Consolidated Data Plan to address these concerns and issues.\8\ The
Commission seeks public comment on each of these aspects of the
Proposed Order.
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\6\ See Attachment A, Section II.A.
\7\ See Attachment A, Section II.B.
\8\ See Attachment A, Sections II.C & II.D.
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To the extent that the Participants have additional insights into
the concerns and issues discussed in the Proposed Order, or are able to
identify and suggest additional or alternative measures to those that
the Commission has preliminarily set forth in the Proposed Order, the
Commission will consider such information and suggestions, as well as
any other comment on the Proposed Order. The Commission requests that
any alternatives include a comprehensive explanation as to why the
alternative would be effective in addressing the significant issues
discussed in the Proposed Order regarding the current governance and
operation of the Equity Data Plans.
After considering any comments received on the Proposed Order, the
Commission will consider what action to take, including whether to
issue a final order requiring the Participants to file a New
Consolidated Data Plan. If the Commission issues such a final order,
the New Consolidated Data Plan then submitted by the Participants would
be published for public comment, and, after considering any comments
received on the New Consolidated Data Plan filed by the Participants,
the Commission would consider whether to approve the New Consolidated
Data Plan, with any changes or subject to such conditions as the
Commission may deem necessary or appropriate.\9\ Unless or until a New
Consolidated Data Plan has been approved by the Commission, the Equity
Data Plans will continue to govern the collection, processing, and
dissemination of equity market data.
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\9\ See Rule 608 of Regulation NMS, 17 CFR 242.608.
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The Participants have submitted proposed amendments to the existing
Equity Data Plans to (a) make mandatory their current disclosure
policies with respect to conflicts of interest,\10\ and (b) establish a
policy regarding the confidential treatment of any data or information
generated, accessed, transmitted to, or discussed by the operating
committee.\11\ Contemporaneously with the publication of this Notice of
Proposed Order, the Commission is publishing for notice and comment
these proposed amendments to the Equity Data Plans.\12\
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\10\ See Thirtieth Substantive Amendment to the Second
Restatement of the CTA Plan and Twenty-Second Substantive Amendment
to the Restated CQ Plan, dated July 3, 2019, submitted to Vanessa
Countryman, Secretary, Commission; Forty-Fourth Amendment to the UTP
Plan, dated July 3, 2019, submitted to Vanessa Countryman,
Secretary, Commission.
\11\ See Thirty-Third Substantive Amendment to the Second
Restatement of the CTA Plan and Twenty-Fourth Substantive Amendment
to the Restated CQ Plan, dated November 19, 2019, submitted to
Vanessa Countryman, Secretary, Commission; Forty-Seventh Amendment
to the UTP Plan, dated November 19, 2019, submitted to Vanessa
Countryman, Secretary, Commission.
\12\ See Securities Exchange Act Release Nos. 87907 (Jan. 8,
2020) (Notice of Filing of the Thirty-Third Substantive Amendment to
the Second Restatement of the CTA Plan and Twenty-Fourth Substantive
Amendment to the Restated CQ Plan); 87908 (Jan. 8, 2020) (Notice of
Filing of the Forty-Fourth Amendment to the UTP Plan); 87909 (Jan.
8, 2020) (Notice of Filing of the Thirty-Third Substantive Amendment
to the Second Restatement of the CTA Plan and Twenty-Fourth
Substantive Amendment to the Restated CQ Plan); and 87910 (Jan. 8,
2020) (Notice of Filing of the Forty-Seventh Amendment to the UTP
Plan).
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* * * * *
Interested persons are invited to submit written presentations of
views, data, and arguments concerning the Proposed Order, including the
Proposed Order's discussion of concerns with the current provision of
equity market data by the Equity Data Plans, the Proposed Order's
discussion of issues with the current governance structure of the
Equity Data Plans, the specific provisions set forth in the Proposed
Order to address those concerns and issues, and the likely economic
consequences, including those of any proposed alternative provisions.
II. Procedure for Written Comments
All comments should be submitted by February 28, 2020. Comments may
be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to: [email protected]. Please include
File Number 4-757 on the subject line.
Paper Comments
Send paper comments to: Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number 4-757. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the all written statements with respect to the Proposed Order
that are filed with the Commission, and all written communications
relating to the Proposed Order between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for website
viewing and printing in the Commission's Public Reference Room, 100 F
Street NE, Washington, DC 20549 on official business days between the
hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted
without change. Persons submitting comments are cautioned that we do
not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number 4-757
and should be submitted on or before February 28, 2020.
[[Page 2166]]
By the Commission.
Vanessa A. Countryman,
Secretary.
Attachment A
Securities and Exchange Commission
(Release No. 34-)
[Date]
Order Directing the Exchanges and the Financial Industry Regulatory
Authority To Submit a New National Market System Plan Regarding
Consolidated Equity Market Data
Notice is hereby given that, pursuant to Section 11A(a)(3)(B) of
the Securities Exchange Act of 1934 (``Act''),\1\ the Securities and
Exchange Commission (``Commission'') orders the Cboe BYX Exchange, Inc.
(``BYX''), Cboe BZX Exchange, Inc. (``BZX''), Cboe EDGA Exchange, Inc.
(``EDGA''), Cboe EDGX Exchange, Inc. (``EDGX''), Cboe Exchange, Inc.
(``Cboe''), Investors Exchange LLC (``IEX''), Long Term Stock Exchange,
Inc. (``LTSE''), Nasdaq BX, Inc. (``BX''), Nasdaq ISE, LLC (``ISE''),
Nasdaq PHLX LLC (``PHLX''), Nasdaq Stock Market LLC (``Nasdaq''), New
York Stock Exchange LLC (``NYSE''), NYSE American LLC (``NYSE
American''), NYSE Arca, Inc. (``NYSE Arca''), NYSE Chicago, Inc.
(``NYSE Chicago''), NYSE National, Inc. (``NYSE National''), and
Financial Industry Regulatory Authority, Inc. (``FINRA'') (each a
``Participant'' or a ``Self-Regulatory Organization'' (``SRO'') and,
collectively, the ``Participants'' or ``the SROs'') to act jointly in
developing and filing with the Commission a proposed new single
national market system plan (the ``New Consolidated Data Plan''), which
will replace the existing national market system plans (the ``Equity
Data Plans'') \2\ that govern the public dissemination of real-time,
consolidated equity market data for national market system stocks
(``NMS stocks'').\3\ The New Consolidated Data Plan shall be filed with
the Commission pursuant to Rule 608 of Regulation NMS \4\ no later than
[90 days after the order is issued].
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\1\ 15 U.S.C. 78k-1(a)(3)(B).
\2\ See infra note 31 and accompanying text.
\3\ Generally, NMS stocks include any security, other than an
option, for which transaction reports are collected, processed, and
made available pursuant to an effective transaction reporting plan.
See 17 CFR 242.600(b)(47).
\4\ 17 CFR 242.608.
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The public dissemination of consolidated information about quotes
and trades in equity securities is a fundamental component of the
national market system. In creating the national market system,
Congress specifically found that ensuring the availability of this
information is in the public interest and appropriate for the
protection of investors and the maintenance of fair and orderly
markets.\5\ As the Commission has stated, ``one of the Commission's
most important responsibilities is to preserve the integrity and
affordability of the consolidated data stream.'' \6\
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\5\ 15 U.S.C. 78k-1(a)(1)(C).
\6\ Regulation NMS, Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37560 (June 29, 2005) (``Regulation NMS
Release'').
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In the Commission's view, changes in the market \7\ have heightened
an inherent conflict of interest between the Participants' collective
responsibilities in overseeing the Equity Data Plans and their
individual interests in maximizing the viability of proprietary data
products that they sell to market participants. Under the current
governance structure of the Equity Data Plans, the Participants have
exclusive control of the Equity Data Plans. It is the Commission's
belief that the Participants' conflicts of interest, combined with the
concentration within exchange groups of voting power in the Equity Data
Plans, create significant concerns regarding whether the consolidated
feeds meet the purposes for them set out by Congress and by the
Commission in adopting the national market system.\8\ Addressing these
and other issues with the current governance structure of the Equity
Data Plans is a key step in responding to the broader concerns about
the consolidated data feeds.\9\
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\7\ See infra Section II.A. and Section II.B.
\8\ 15 U.S.C. 78k-1(a)(1)-(2).
\9\ See infra Section II.A.
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The Commission further believes that the consolidated data feeds
can be improved by consolidating the three existing, separate Equity
Data Plans into a single New Consolidated Data Plan. A New Consolidated
Data Plan should reduce existing redundancies, inefficiencies, and
inconsistencies between and among the Equity Data Plans and should
simplify plan governance and maintenance. The Commission is therefore
ordering the SROs to develop the New Consolidated Data Plan to address
the governance issues described in this Order and to consolidate the
Equity Data Plans into the single New Consolidated Data Plan. Based
upon input received from a broad range of market participants
(including the SROs), the Commission's Equity Market Structure Advisory
Committee (``EMSAC''), and its own regulatory oversight of the Equity
Data Plans, the Commission has set forth below specific governance
provisions that the Commission believes would enable the New
Consolidated Data Plan to address these issues.
I. Background
In 1975, Congress, through the enactment of Section 11A of the
Act,\10\ directed the Commission to facilitate the establishment of a
national market system for the trading of securities in accordance with
the Congressional findings and objectives set forth in Section
11A(a)(1) of the Act.\11\ Among the findings and objectives of Section
11A(a)(1) are that new data processing and communications techniques
create the opportunity for more efficient and effective market
operations,\12\ and that it is in the public interest and appropriate
for the protection of investors and the maintenance of fair and orderly
markets to ensure the availability of information with respect to
quotations for and transactions in securities.\13\
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\10\ 15 U.S.C. 78k-1.
\11\ 15 U.S.C. 78k-1(a)(1).
\12\ See 15 U.S.C. 78k-1(a)(1)(B). See also H.R. Rep. No. 94-
229, 94th Cong., 1st Sess. 93 (1975) (House Report noting that the
systems for collecting and distributing consolidated market data
would ``form the heart of the national market system.'').
\13\ See 15 U.S.C. 78k-1(a)(1)(C).
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Congress authorized the Commission to prescribe rules to ensure the
``prompt, accurate, reliable, and fair collection, processing,
distribution, and publication of information with respect to quotations
for and transactions in such securities and the fairness and usefulness
of the form and content of such information.'' \14\ In furtherance of
these purposes, the Commission has sought through its rules and
regulations to help ensure that certain ``core data'' \15\ is widely
available for reasonable fees.\16\ The Commission has recognized that
investors must have this core data ``to participate in the U.S. equity
markets.'' \17\
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\14\ 15 U.S.C. 78k-1(c)(1)(B).
\15\ See infra note 27 and accompanying text (defining ``core
data'').
\16\ See 17 CFR 242.603; see also e.g., Regulation NMS Release,
supra note 6, 70 FR at 37560 (stating that ``[i]n the Proposing
Release, the Commission emphasized that one of its primary goals
with respect to market data is to assure reasonable fees that
promote the wide public availability of consolidated market
data.'').
\17\ Id. at 37560.
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Section 11A of the Act also authorizes the Commission, by rule or
order, to authorize or require the SROs to act jointly with respect to
matters as to which they share authority under the Act in planning,
developing, operating, or regulating a facility of the national market
system.\18\ Pursuant to this authority, the Commission adopted
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Regulation NMS.\19\ Rule 608 of Regulation NMS authorizes two or more
SROs, acting jointly, to file with the Commission a national market
system plan (``NMS plan'') or a proposed amendment to an effective NMS
plan.\20\ And Rule 603 of Regulation NMS requires the SROs to act
jointly pursuant to NMS plans to ``disseminate consolidated
information, including a national best bid and national best offer, on
quotations for and transactions in NMS stocks.'' \21\ The purpose of
the Equity Data Plans, adopted pursuant to Regulation NMS, is to
facilitate the collection and dissemination of core data so that the
public has ready access to a ``comprehensive, accurate, and reliable
source of information for the prices and volume of any NMS stock at any
time during the trading day.'' \22\ Widespread availability of timely
market data promotes fair and efficient markets and facilitates the
ability of brokers and dealers to provide best execution to their
customers.\23\
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\18\ See 15 U.S.C. 78k-1(a)(3)(B).
\19\ 17 CFR 242.600-612; see also Regulation NMS Release, supra
note 6, 70 FR at 37560.
\20\ See 17 CFR 242.608.
\21\ 17 CFR 242.603(b).
\22\ Concept Release on Equity Market Structure, Securities
Exchange Act Release No. 61358 (Jan. 14. 2010), 75 FR 3593, 3600
(Jan. 21, 2010) (``Equity Market Structure Concept Release'').
\23\ See In the Matter of the Application of Bloomberg L.P.,
Securities Exchange Act Release No. 83755 at 3 (July 31, 2018),
available at https://www.sec.gov/litigation/opinions/2018/34-83755.pdf (``Bloomberg Order''); SEC Concept Release: Regulation of
Market Information Fees and Revenues, Securities Exchange Act
Release No. 44208 (Dec. 9, 1999), 64 FR 70613, 70615 (Dec. 17, 1999)
(stating that the distribution of core data ``is the principal tool
for enhancing the transparency of the buying and selling interest in
a security, for addressing the fragmentation of buying and selling
interest among different market centers, and for facilitating the
best execution of customers' orders by their broker-dealers'').
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Under Regulation NMS and the Equity Data Plans, the SROs are
required to provide certain quotation \24\ and transaction data \25\
for each NMS stock to an exclusive securities information processor
(``SIP''),\26\ which consolidates this market data and makes it
available to market participants on the consolidated tapes, as
described below. For each NMS stock, the Equity Data Plans provide for
the dissemination of top-of-book (``TOB'') data, generally defining
consolidated market information (or ``core data'') as consisting of:
(1) The price, size, and exchange of the last sale; (2) each exchange's
current highest bid and lowest offer, and the shares available at those
prices; and (3) the national best bid and offer (``NBBO'') (i.e., the
highest bid and lowest offer currently available on any exchange).\27\
In addition to disseminating core data, the SIPs collect, calculate,
and disseminate certain regulatory data--including information required
by the National Market System Plan to Address Extraordinary Market
Volatility (``LULD Plan''),\28\ information relating to regulatory
halts and market-wide circuit breakers, and information regarding the
short-sale price test pursuant to Rule 201 of Regulation SHO.\29\ They
also collect and disseminate other NMS stock data and disseminate
certain administrative messages. Together with core data, the
Commission refers to this broader set of data for purposes of this
Order as ``SIP data.'' \30\
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\24\ See 17 CFR 242.602.
\25\ See 17 CFR 242.601.
\26\ See 15 U.S.C. 78c(22)(A) (defining securities information
processor). Rule 603(b) of Regulation NMS requires that every
national securities exchange on which an NMS stock is traded and
national securities association act jointly pursuant to one or more
effective NMS plans to disseminate consolidated information on
quotations for and transactions in NMS stocks, and that such plan or
plans provide for the dissemination of all consolidated information
for an individual NMS stock through a single SIP. See 17 CFR
242.603(b).
\27\ See Bloomberg Order, supra note 23, at 3; see also
Securities Exchange Act Release No. 87193 (Oct. 1, 2019), 84 FR
54794, 54795 (Oct. 11, 2019) (``Effective-Upon-Filing Release'').
\28\ The LULD Plan is available at http://www.luldplan.com.
\29\ 17 CFR 242.201(b)(3).
\30\ Broker-dealers rely on SIP data disseminated by the Equity
Data Plans to comply with a number of regulatory requirements. See
infra notes 64-67 and accompanying text.
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The three Equity Data Plans that currently govern the collection,
consolidation, processing, and dissemination of SIP data are (1) the
Consolidated Tape Association Plan (``CTA Plan''), (2) the Consolidated
Quotation Plan (``CQ Plan''), and (3) the Joint Self-Regulatory
Organization Plan Governing the Collection, Consolidation, and
Dissemination of Quotation and Transaction Information for Nasdaq-
Listed Securities Traded on Exchanges on an Unlisted Trading Privileges
Basis (``UTP Plan'').\31\ Pursuant to the Equity Data Plans, three
separate networks disseminate consolidated data for equity securities:
(1) Tape A for securities listed on the NYSE; (2) Tape B for securities
listed on exchanges other than NYSE and Nasdaq; and (3) Tape C for
securities listed on Nasdaq. The CTA Plan governs the collection,
consolidation, processing, and dissemination of last sale information
for Tape A and Tape B securities. The CQ Plan governs the collection,
consolidation, processing, and dissemination of quotation information
for Tape A and Tape B securities. And the UTP Plan governs the
collection, consolidation, processing, and dissemination of last sale
and quotation information for Tape C securities.
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\31\ Each of the Equity Data Plans is an NMS plan under Rule 608
of Regulation NMS. 17 CFR 242.608; see also Securities Exchange Act
Release Nos. 10787 (May 10, 1974), 39 FR 17799 (order approving CTA
Plan); 15009 (July 28, 1978), 43 FR 34851 (Aug. 7, 1978) (order
temporarily approving CQ Plan); 16518 (Jan. 22, 1980), 45 FR 6521
(Jan. 28, 1980) (order permanently approving CQ Plan); and 28146
(June 26, 1990), 55 FR 27917 (July 6, 1990) (order approving UTP
Plan).
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As discussed further below, the structure of the equity markets and
the corporate structure of exchanges have changed dramatically since
the adoption of Regulation NMS in 2005.\32\ While a substantial amount
of trading in 2005 was conducted on relatively slow manual markets,\33\
and was concentrated for any given stock on its listing exchanges,\34\
nearly all trading now occurs on fast electronic markets (where even
small degrees of latency affect trading strategies) and is dispersed
among a wide range of competing market centers.\35\ Furthermore, most
exchanges have converted from entities mutually owned by their members
to demutualized entities that are owned by shareholders
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and that also offer proprietary market data products.\36\ Finally,
``exchange groups'' (multiple exchanges operating under one corporate
umbrella) have emerged, consolidating much of the voting power and
control of the Equity Data Plans.\37\
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\32\ See infra Sections II.A, II.B.1, and II.B.2.
\33\ See Equity Market Structure Concept Release, supra note 22,
75 FR at 3594 (``NYSE-listed stocks were traded primarily on the
floor of the NYSE in a manual fashion until October 2006. At that
time, NYSE began to offer fully automated access to its displayed
quotations.''). In contrast to NYSE, stocks listed on Nasdaq traded
in a highly automated fashion at many different trading centers
following the introduction of SuperMontage in 2002. See Securities
Exchange Act Release No. 46429 (Aug. 29, 2002), 67 FR 56862 (Sept.
5, 2002). See also Steven Quirk, Senior Vice President, Trader
Group, TD Ameritrade, Testimony before the U.S. Senate Committee on
Homeland Security and Governmental Affairs, Permanent Subcommittee
on Investigations, Hearing on ``Conflicts of Interest, Investor Loss
of Confidence, and High Speed Trading in U.S. Stock Markets'' (June
17, 2014), available at https://www.hsgac.senate.gov/imo/media/doc/STMT%20-%20Quirk%20-%20TD%20Ameritrade%20(June%2017%202014).pdf%20
(citing statistics that average execution speed has improved by 90%
since 2004--from 7 seconds to 0.7 seconds in 2014). Today, trading
speed is measured in microseconds and is moving towards nanoseconds.
See, e.g., Wall Street Journal, Trading Tech Accelerates Toward
Speed of Light (Aug. 8, 2016), available at https://www.wsj.com/articles/trading-tech-accelerates-toward-speed-of-light-1470559173;
Wall Street Journal, NYSE Aims to Speed Up Trading With Core Tech
Upgrade (Aug. 5, 2019), available at https://www.wsj.com/articles/nyse-aims-to-speed-up-trading-with-core-tech-upgrade-11565002800.
\34\ See Securities Exchange Act Release No. 59039 (Dec. 2,
2008), 73 FR 74770, 74782 (Dec. 9, 2008) (File No. SR-NYSEArca-2006-
21) (NYSE's reported market share of trading in NYSE-listed stocks
declined from 79.1% in January 2005 to 30.6% in June 2008.).
\35\ See Equity Market Structure Concept Release, supra note 22,
75 FR at 3598 (``The registered exchanges all have adopted highly
automated trading systems that can offer extremely high-speed, or
`low-latency,' order responses and executions.'').
\36\ See infra Section II.B.1.
\37\ See infra Section II.B.2.
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In the Commission's view, these market developments have heightened
conflicts of interest between the exchanges' commercial interests and
their regulatory obligations under the Act and the Equity Data Plans to
produce and provide core data. The Commission believes that the current
governance structure of the Equity Data Plans is inadequate to respond
to these changes or to the evolving needs of investors and other market
participants. The SIPs have significant market power in the market for
core and aggregated market data products and are monopolistic providers
of certain market information.\38\ But the operation of the Equity Data
Plans has not kept pace with the efforts of the exchanges to expand the
content of--and to employ technology to reduce the latency and increase
the throughput of--certain proprietary data products. For example, the
exchanges have developed depth-of-book (``DOB'') products that provide
greater content (e.g., information about orders resting on the order
book and order imbalance information for opening and closing auctions)
at lower latencies, relative to the SIPs, for one segment of the data
market.\39\ The exchanges have also developed proprietary TOB products
that provide data that is generally limited to the highest bid and
lowest ask and last sale price information at a lower price for another
segment of the data market that is less sensitive to latency.\40\ By
contrast, the Participants of the Equity Data Plans have not taken
comparable measures to update the SIPs to reflect new innovations in
market data in response to evolving markets and the changing needs of
investors (e.g., those that use low-latency DOB products versus those
that use TOB products).\41\
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\38\ See, e.g., Bloomberg Order, supra note 23, at 4. Although
some proprietary market data products are comparable to core data
and could be used by some core data subscribers as substitutes for
core data in certain situations, these products are not exact
substitutes and are not viable substitutes across all use cases. For
example, some third-party data aggregators buy direct depth-of-book
feeds from the exchanges and aggregate them to produce products
similar to core data; these products, however, do not provide market
information that is critical to some subscribers and available only
through the SIPs. See Transcript of Day One, Roundtable, at 126:20-
129:8 (Oct. 25, 2018) (``Day One Transcript'') (statement of Mark
Skalabrin, Redline Trading Solutions), available at https://www.sec.gov/spotlight/equity-market-structure-roundtables/roundtable-market-data-market-access-102518-transcript.pdf.
Additionally, some exchanges offer TOB data feeds, which may be
considered by some to be viable substitutes for core data for
certain applications, however, broker-dealers typically obtain core
data provided by the SIP to fulfill their obligations under Rule 603
of Regulation NMS, which requires a broker-dealer to show a
consolidated display of market data in a context in which a trading
or order routing decision can be implemented. 17 CFR 242.603; see
also infra note 67 and accompanying text.
\39\ See, e.g., Nasdaq Global Data Products, available at http://www.nasdaqtrader.com/Trader.aspx?id=DPSpecs (last accessed Nov. 16,
2019) (describing low-latency DOB data products); Real-Time--NYSE
Proprietary Market Data, available at https://www.nyse.com/market-data/real-time (last accessed Nov. 16, 2019) (describing low-latency
DOB data products); Cboe Equities Exchanges Market Data Product
Offerings, available at https://markets.cboe.com/us/equities/market_data_services/ (last accessed Nov. 16, 2019) (describing low-
latency DOB data products). Particularly when aggregated,
proprietary DOB market data products provide a consolidated view of
the market with greater content and lower latency. See infra Section
II.A.
\40\ Examples of such proprietary TOB products include NYSE BBO
(https://www.nyse.com/market-data/real-time/bbo), NASDAQ Basic
(https://business.nasdaq.com/intel/GIS/nasdaq-basic.html), and CBOE
One Feed (https://markets.cboe.com/us/equities/market_data_services/cboe_one). NYSE BBO provides TOB data. Nasdaq Basic and Cboe One's
Summary Feed provide TOB and last sale information. Nasdaq Basic
also provides Nasdaq Opening and Closing Prices and other
information, including Emergency Market Condition event messages,
System Status, and trading halt information. Cboe One, however, also
offers a Premium Feed that includes DOB data. Each of these products
is sold separately by the relevant exchange group. See Letter from
Matthew J. Billings, Managing Director, Market Data Strategy, TD
Ameritrade (Oct. 24, 2018), at 5-9, available at https://www.sec.gov/comments/4-729/4729-4560068-176205.pdf (``TD Ameritrade
Letter'') (stating that the lower cost of exchange TOB products,
coupled with costs associated with the process to differentiate
between retail professionals and non-professionals imposed by the
SIP Plans, and associated audit risk, favors retail broker-dealer
use of exchange TOB products).
\41\ See infra notes 57-62 and accompanying text.
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The Commission believes that, under the current governance
structure of the Equity Data Plans, improvements to the SIPs to
adequately address important product, performance and pricing
differentials between the SIPs and proprietary data products have not
occurred.\42\ Also, the Commission does not believe that having
multiple Equity Data Plans, which need to be separately maintained and
operated, is necessary or efficient. The Commission believes the Equity
Data Plans should be consolidated into a New Consolidated Data Plan. In
the Commission's view, this would streamline operation of the SIP
feeds, leading to greater efficiency in meeting the purposes of Section
11A of the Act, including ensuring the prompt, accurate, reliable, and
fair collection, processing, distribution, and publication of quotation
and transaction information, as well as the fairness and usefulness of
the form and content of such data.\43\ As discussed in more detail
below, the Commission believes that the Participants should develop a
New Consolidated Data Plan that: (i) Operates pursuant to a governance
structure that takes into account the evolving nature of business and
trading relationships among exchanges, their members, and investors;
(ii) is designed to ensure the usefulness of core data to market
participants and to ensure that core data is provided on terms that are
fair and reasonable, consistent with Section 11A of the Act and the
rules thereunder; \44\ and (iii) replaces the three Equity Data Plans
to eliminate redundancies, inefficiencies, and duplicative costs. As
noted above, the Commission believes that consolidating the Equity Data
Plans into a single New Consolidated Data Plan should result in a more
efficient governance structure for operation of the SIPs.\45\
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\42\ See infra notes 84-86, 112 and accompanying text.
\43\ See 15 U.S.C. 78k-1(c)(1)(B).
\44\ 15 U.S.C. 78k-1; Rules 601-603 of Regulation NMS, 17 CFR
242.601-603.
\45\ See, e.g., Nasdaq Total Markets: A Blueprint for a Better
Tomorrow (Apr. 2019), at 17 (``Nasdaq Total Markets Paper''),
available at https://www.nasdaq.com/docs/Nasdaq_TotalMarkets_2019_2.pdf (characterizing the three Equity Data
Plans as ``three bureaucratic, government-mandated monopolies, each
with arcane rules and governance, designed in a drastically
different time in the evolution of exchanges'').
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II. Discussion
In recent years, the Commission has received, and in certain
instances, solicited a substantial amount of comment on the current
provision of SIP data by the Equity Data Plans and on the governance
model of the Equity Data Plans. In 2015, the EMSAC was established and
tasked with providing the Commission with diverse perspectives on the
structure and operations of the U.S. equities markets, as well as
advice and recommendations on matters related to equity market
structure.\46\ In 2018, the Commission's
[[Page 2169]]
Division of Trading and Markets held a Roundtable on Market Data and
Market Access (``Roundtable'') that included panelists representing
exchanges, institutional and retail broker-dealers, academics, and
other market participants.\47\ The Commission has also received several
petitions for rulemaking from market participants concerning the
provision of SIP data and the governance structure of the Equity Data
Plans.\48\
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\46\ See EMSAC Charter (Feb. 9, 2015), available at https://www.sec.gov/spotlight/emsac/equity-market-structure-advisory-committee-charter.pdf. Under the EMSAC Charter, committee membership
was required to include at least one representative of retail
investors, institutional investors, exchanges or other self-
regulatory organizations, broker-dealers and other market
participants, as well as industry consultants and academics. See id.
Although not all exchanges were members of the EMSAC, the EMSAC held
a number of public meetings at which other parties, including
representatives of exchange groups that were not members of the
EMSAC, shared their views. See Equity Market Structure Advisory
Committee Archives, available at https://www.sec.gov/spotlight/emsac/emsac-archives.htm (last accessed Nov. 16, 2019).
\47\ The Roundtable agenda and list of panelists are available
on the Commission's website at https://www.sec.gov/agendas/agenda-roundtable-market-data-market-access.
\48\ See, e.g., Petition for Rulemaking Concerning Market Data
Fees (Dec. 6, 2017) (SEC 5-716), available at https://www.sec.gov/rules/petitions/2017/petn4-716.pdf (petition undersigned by twenty-
four firms, including Bloomberg, Citadel, Fidelity Investments,
Morgan Stanley, Charles Schwab, Vanguard, and Virtu) (``Patomak
Petition''); Petition to Address Conflicts of Interests, Complexity,
and Costs Related to Market Data (Jan. 17, 2018) (SEC 4-717),
available at https://www.sec.gov/rules/petitions/2018/petn4-717.pdf
(``Healthy Markets Petition''); Petition for Rulemaking Regarding
Market Data Fees and Request for Guidance on Market Data Licensing
Practices; Investor Access to Market Data (Aug. 22, 2018) (SEC 4-
728), available at https://www.sec.gov/rules/petitions/2018/petn4-728.pdf (``MFA Petition'').
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Based on this input from a broad range of market participants and
its own regulatory experience,\49\ the Commission believes that the
current governance structure of the Equity Data Plans no longer
adequately serves to ensure that the Equity Data Plans provide for the
``prompt, accurate, reliable, and fair collection, processing,
distribution, and publication of information with respect to quotations
for and transactions in such securities and the fairness and usefulness
of the form and content of such information.'' \50\ As will be
discussed next, the Commission believes that the SROs should propose a
single New Consolidated Data Plan, with a governance structure that
incorporates a broad array of market participant perspectives and
reduces administrative and operational inefficiencies and redundancies,
to more effectively administer the dissemination of SIP data.
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\49\ In addition to the Commission's review of proposed
amendments filed by the Equity Data Plans, the Commission staff
attends the operating committee and subcommittee meetings, with the
exception of discussions protected by attorney-client privilege, and
conducts examinations of the Equity Data Plans.
\50\ 15 U.S.C. 78k-1(c)(1)(B).
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A. The Commission's Concerns Regarding the Equity Data Plans' Provision
of Equity Market Data
Under the Equity Data Plans, the earliest of which dates from the
1970s,\51\ market data for each NMS stock is collected, consolidated,
and disseminated to investors and market participants through one of
two exclusive SIPs. These SIPs, which collect market data for the NMS
stock transmitted from the dispersed SRO data centers, then consolidate
the data and distribute the data to end-users.\52\ Several market
developments, however, have given rise to proprietary data feeds that
are offered--along with connectivity services that enable low-latency
transmission--directly by the various exchanges. The emergence of these
proprietary products, along with the core data feeds that are
distributed pursuant to the Equity Data Plans, have created a two-
tiered market-data environment.
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\51\ See supra note 31.
\52\ NYSE is the administrator of the SIP for the CTA Plan and
CQ Plan, which covers Tape A and Tape B and is located in Mahwah,
New Jersey. NYSE's affiliate, Securities Industry Automation
Corporation (``SIAC''), serves as the processor for Tapes A and B.
Nasdaq is both the administrator and the processor for the UTP Plan,
which covers Tape C and is located in Carteret, New Jersey.
---------------------------------------------------------------------------
Technological advances, as well as the order routing and trading
strategies that have followed, have greatly increased the speed and
automation of both markets and trading strategies. These changes, along
with the provisions adopted in Regulation NMS that allow for the sale
of proprietary data products,\53\ have created incentives for exchanges
to develop enhanced proprietary data products that they sell to the
same market participants that are subscribers to core data feeds
provided by the SIPs.
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\53\ See infra note 71 and accompanying text.
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Generally, proprietary data feeds that offer DOB data are designed
for automated trading systems and are faster and more content rich, as
well as more expensive, than the core data distributed by the SIPs.
Other proprietary data feeds that offer TOB data are designed largely
for the non-automated segment of the market (e.g., retail investors and
wealth managers who look at market information on a screen) and are
less content rich (but also less expensive) than the core data
distributed by the SIPs.\54\ Thus, the exchanges offer proprietary data
products in both of these significant segments of the market for data.
The exchanges also offer connectivity products and services (e.g., co-
location, fiber connectivity, wireless connectivity) that provide low-
latency access to these proprietary data products, especially DOB
products.\55\ Even though the exchanges' proprietary data products are
not exact substitutes for the core data provided by the SIPs,\56\ users
of the low-latency access provided by the exchanges for their DOB
proprietary data products have a speed advantage over users of the core
data because of the higher latency of the SIP data feeds.
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\54\ See also supra note 40 and accompanying text.
\55\ See supra notes 39-40. Various forms of connectivity are
integral to the latency and throughput benefits associated with
proprietary market data products, especially DOB products. For
example, co-location is a service that enables exchange customers to
place their servers in close proximity to an exchange's matching
engine in order to help minimize network and other types of
latencies between the matching engine of the exchange and the
servers of market participants. Data connections that use fiber
optic cable transmit data more slowly than data connections that use
wireless microwave transmissions, though microwave connections are
susceptible to interruption by weather conditions and are therefore
less reliable than fiber connections. Subscribers of wireless data
connections need to establish backup connectivity to account for
interference from weather conditions. See also infra note 76 and
accompanying text.
\56\ See supra note 38.
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Over the past several years, a number of market participants have
raised concerns about how the differences between the SIPs and
proprietary DOB data feeds affect their ability to use core data to be
competitive in today's markets and provide best execution to their
customers.\57\ According to certain market participants, the current
speed of core data is no longer sufficient for them to trade
competitively. One Roundtable panelist stated that broker-dealers do
not have the option to forgo buying the proprietary data in meeting
their clients' needs because the SIPs are slower and not as
expansive.\58\ This panelist stated that, ``[i]f our brokers are not
aligned in that manner to use the most direct, the fastest, the most
robust feeds they can get their hands on, then we will trade with
someone else.'' \59\ Another
[[Page 2170]]
Roundtable panelist stated that, ``broker-dealers are compelled to
purchase exchanges' proprietary data feeds, both to provide competitive
execution services . . . and to meet our best execution obligations due
to the content of the information contained in the proprietary data
fees as well as the latency differences between them. . . .'' \60\
Another commenter stated that ``most broker-dealers require the faster
and deeper information to participate effectively in the market and
provide customers with the competitive order routing quality.'' \61\
This commenter also stated, ``While business for proprietary market
data innovated, the SIP utilities did not keep pace. Investment in the
SIPs lagged, causing material latencies to develop between the top of
book and last sale data available from the SIP as compared to the data
offered privately by the market centers.'' \62\
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\57\ See, e.g., Letter from Theodore R. Lazo, Managing Director
and Associate General Counsel, SIFMA (Oct. 24, 2014), at 8,
available at https://www.sec.gov/comments/s7-02-10/s70210-422.pdf
(``SIFMA Letter I''); Letter from Theodore R. Lazo, Managing
Director and Associate General Counsel, SIFMA (Mar. 29, 2017), at
11, available at https://www.sec.gov/comments/265-29/26529-1674696-149276.pdf (``SIFMA Letter II''); Letter from Melissa MacGregor,
Managing Director and Associate General Counsel, Theodore R. Lazo,
Managing Director and Associate General Counsel, SIFMA (Oct. 24,
2018), at 6, available at https://www.sec.gov/comments/4-729/4729-4559181-176197.pdf (``SIFMA Letter III'').
\58\ See Day One Transcript, supra note 38, at 65:8-66:10
(statement of Mehmet Kinak, T. Rowe Price). See also Letter from
Mehmet Kinak, Vice President--Global Head of Systematic Trading &
Market Structure, Jonathan D. Siegel, Vice President--Senior Legal
Counsel, T. Rowe Price Associates, Inc. (Jan. 10, 2019), at 2,
available at https://www.sec.gov/comments/4-729/4729-4844471-177204.pdf.
\59\ Day One Transcript, supra note 38, at 66:7-10 (statement of
Mehmet Kinak, T. Rowe Price); see also id. at 136:5-16 (statement of
Simon Emrich, Norges Bank Investment Management) (stating that,
``the use cases for SIP data over the years [have] . . . decreased
substantially'' and ``brokers can't really be . . . using the SIP.
They need to have the full depth of book.'').
\60\ Day One Transcript, supra note 38, at 198:24-199:6
(statement of Joseph Wald, Clearpool Group); see also Letter from
Joe Wald, Chief Executive Officer, Clearpool Group (Oct. 23, 2018),
at 3, available at https://www.sec.gov/comments/4-729/4729-4555206-176185.pdf. The Commission recognizes that, as a practical matter,
market participants may utilize proprietary market data products to
execute orders. However, the Commission has determined that broker-
dealers are not required to purchase ``non-core'' data, such as DOB
data, to satisfy their duty of best execution. See In the Matter of
the Application of Securities Industry and Financial Markets
Association, Securities Exchange Act Release No. 84432 at 33, n.174
(Oct. 16, 2018), available at https://www.sec.gov/litigation/opinions/2018/34-84432.pdf (``SIFMA Order''). See also Shengwei
Ding, John Hanna, and Terrence Hendershott, How Slow Is the NBBO? A
Comparison with Direct Exchange Feeds, The Financial Review, Issue
49 (2014) (313-332) (comparing the NBBO from the SIP and the NBBO of
exchange proprietary data feeds and finding benefits of the faster
proprietary data feeds over the SIP), available at http://utpplan.com/latency_chartshttp://faculty.haas.berkeley.edu/hender/NBBO.pdf; Michael Lehr, The Latency Differences Between Depth of
Book and BBO Feeds (Aug. 8, 2016) (comparing relative latency of
proprietary DOB and TOP data feeds), available at http://maystreet.com/api/files/mst_drive/public/TheLatencyDifferenceBetweenDepthAndBBO-MayStreet.pdf; CTA Latency
Charts (providing statistics measuring latency from the inception of
the Participant matching engine event (e.g., order execution, top of
book update) to the point of dissemination from the CTA SIP),
available at https://www.ctaplan.com/latency-charts (last accessed
Dec. 12, 2019); UTP Realized Latency Charting (providing statistics
measuring latency from the inception of the Participant matching
engine event (e.g., order execution, top of book update) to the
point of dissemination from the UTP SIP), available at http://utpplan.com/latency_charts (last accessed Dec. 12, 2019).
\61\ SIFMA Letter III, supra note 57, at 6.
\62\ SIFMA Letter I, supra note 57, at 8; see also Day One
Transcript, supra note 38, at 64:4-15 (statement of Brad Katsuyama,
IEX) (``Anyone who cares cannot use the SIP from a speed standpoint
. . . if full information and speed are important, which it is for
the majority of large players maintaining their own electronic
trading platform, then I would not say the SIP serves much of a
purpose for them.''); at 64:4-15 (statement of Douglas A. Cifu,
Virtu) (``Anyone who cares, or is . . . making machine-level
decisions cannot use the SIP just from a speed standpoint. But I do
think if you improve the information on the SIP, it can certainly be
valuable to a host of people now. . . . But if full information and
speed become important, which it is for a majority of large players
maintaining their own electronic trading platform, then I would not
say the SIP serves much of a purpose to them.''). See also infra
notes 80-82 and accompanying text (describing certain improvements
made to aggregation latency in the SIP feeds).
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Broker-dealer panelists at the Roundtable stated that they are
compelled to purchase SIP data for various reasons, including to
receive LULD Plan price bands, to perform checks required by Rule 15c3-
5 under the Act (the ``market access rule''),\63\ and for redundancy
purposes.\64\ Some broker-dealers use SIP data to comply with the
requirements of Rule 611 of Regulation NMS \65\ to prevent trade-
throughs and to meet their best execution obligations for customer
orders. Also, under Rule 603(c) of Regulation NMS,\66\ known as the
``Vendor Display Rule,'' if a broker-dealer displays any information
with respect to quotations for or transactions in an NMS stock in a
context in which a trading or order-routing decision can be
implemented, it must also provide a consolidated display for that
stock. Broker-dealers typically meet this regulatory requirement by
using core data and paying the attendant fees.\67\
---------------------------------------------------------------------------
\63\ 17 CFR 240.15c3-5.
\64\ See, e.g., Day One Transcript, supra note 38, at 138:23-
139:3, 169:12-24 (statements of Adam Inzirillo, Bank of America
Merrill Lynch); at 184:14-185:2 (statement of Michael Friedman,
Trillium).
\65\ 17 CFR 242.611.
\66\ 17 CFR 242.603(c).
\67\ See Patomak Petition, supra note 48, at 1 (``As required by
the SEC's Display Rule, vendors and broker-dealers are required to
display consolidated data from all the market centers that trade a
stock. In order to comply with the Display Rule, such vendors and
broker-dealers must purchase and display consolidated data feeds
distributed by securities information processors (`SIPs'), which are
owned by the exchanges and operated pursuant to NMS plans. The fees
charged by SIPs are distributed as income to each of the
participating exchanges.'').
---------------------------------------------------------------------------
The differences between the SIP data feeds and proprietary data
feeds have the effect of increasing the demand for, and marketability
of, proprietary data products to the financial benefit of the
exchanges. And the Commission believes that this conflict of interest,
combined with the Equity Data Plans' current governance structure,
perpetuates disincentives for the Equity Data Plans to invest in
certain improvements to enhance the distribution of core data or the
content of the core data itself. In particular, lagging investment in
updating and maintaining the operations of the SIPs has resulted in
meaningful latency and content differentials between core data and the
exchanges' proprietary market data products that have become
consequential to market participants.\68\
---------------------------------------------------------------------------
\68\ For example, and as described further above, many broker-
dealers have represented to the Commission that they are effectively
compelled to purchase and rely primarily upon the low-latency
proprietary data feeds in order to meet their regulatory obligations
and to compete in the equity markets. See supra notes 59-62 and
accompanying text.
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For example, the implementation of decimalization in 2001 \69\
reduced the minimum price increment from $0.0625 (1/16 of a dollar) to
$0.01. Because this significantly increased the number of price points
over which trading interest could be expressed, it had the ancillary
effect of reducing the TOB liquidity that is displayed and disseminated
as part of core data. And commenters on Regulation NMS stated that this
reduction of TOB liquidity, in turn, increased the importance of
information regarding DOB liquidity to market participants.\70\
---------------------------------------------------------------------------
\69\ See Commission Notice: Decimals Implementation Plan for the
Equities and Options Markets (July 24, 2000), available at https://www.sec.gov/rules/other/decimalp.htm.
\70\ See, e.g., Regulation NMS Release, supra note 6, 70 FR at
37529 (noting a comment from the Consumer Federation of America
concerning ``complaints that decimal pricing has reduced price
transparency because of the relatively thin volume of trading
interest displayed at the best bid and offer''). See also Letter
from Craig S. Tyle, General Counsel, Investment Company Institute
(Nov. 20, 2001), available at https://www.ici.org/policy/comments/01_SEC_SUBPENNY_COM (stating in response to the Commission's Concept
Release on the Effects of Decimal Trading in Subpennies in 2001,
that ``the reduction in quoted market depth as the minimum quoting
increment has narrowed to a penny has adversely affected
institutional investors' ability to execute large orders. . . .
Preliminary data has shown that, post-decimalization, it has become
more difficult for large institutional orders to be filled entirely
at the inside.'') (internal citations omitted).
---------------------------------------------------------------------------
In adopting Regulation NMS in 2005, the Commission nonetheless
determined not to require that DOB quotations be included in core data,
reasoning that investors who needed DOB data would be able to obtain
that data from markets or third-party vendors.\71\ In making that
determination, the Commission stated that this would be ``a
competition-driven outcome [that] would benefit investors and the
markets in general.'' \72\ And, after the adoption of Regulation NMS in
2005,\73\ exchanges began to sell
[[Page 2171]]
their proprietary data products separately from the core data required
by Rule 603(b) of Regulation NMS.\74\ But, as the markets have evolved
and DOB data has become more important, the exchanges have continued to
improve their proprietary data feeds without similar improvements to
the SIPs to reflect this market evolution.
---------------------------------------------------------------------------
\71\ See Regulation NMS Release, supra note 6, 70 FR at 37567.
\72\ Id. at 37530.
\73\ See Regulation NMS Release, supra note 6.
\74\ See supra notes 39-40 and accompanying text.
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Another issue flows from the centralized consolidation model of the
Equity Data Plans and the SIPs. The centralized consolidation model has
at least three specific sources of latency disadvantage relative to the
exchanges' proprietary data feeds: geographic latency, aggregation
latency, and transmission latency. Geographic latency, as used herein,
refers to the time it takes for data to travel from one physical
location to another, which must also take into account that data does
not always travel between two locations in a straight line. Aggregation
latency, as used herein, refers to the amount of time a SIP takes to
aggregate the multiple sources of SRO market data into core data and
includes calculation of the NBBO.\75\ And transmission latency, as used
herein, refers to the time interval between when data is sent (e.g.,
from an exchange) and when it is received (e.g., at a SIP and/or at the
data center of the subscriber).\76\ The Commission understands that
geographic latency is typically the most significant component of the
additional latency that core data feeds experience compared to
proprietary data feeds.\77\ Because each SIP must collect data from
geographically dispersed SRO data centers, consolidate the data, and
then disseminate it from its location to end-users, which are often in
other locations, this hub-and-spoke form of centralized consolidation
creates additional latency. For example, information about quotes and
trades on Nasdaq for NYSE-listed securities incurs latency as it
travels from Nasdaq's data center in Carteret approximately 34.5 miles
to the CTA/CQ SIP in Mahwah, and then back to Carteret.\78\
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\75\ Each SIP must collect data from the dispersed SRO data
centers, consolidate the data, and then disseminate the core data
from their locations to end-users. See Equity Market Structure
Concept Release, supra note 22, 75 FR at 3611 (``Given the extra
step required for SROs to transmit market data to plan processors,
and for plan processors to consolidate the information and
distribute it to the public, the information in the individual data
feeds of exchanges and ECNs generally reaches market participants
faster than the same information in the consolidated data feeds.'').
As discussed further in the Order, aggregation latency continues to
remain at inferior levels at the CTA/CQ SIP as compared to the UTP
SIP. See infra notes 81-82 and accompanying text. Furthermore,
market participants that use proprietary data feeds for their
electronic trading tools and that use certain common order types
(e.g., intermarket sweep orders, or ``ISOs'') must also aggregate
proprietary data feeds to create an NBBO to comply with Rule 611 of
Regulation NMS. Thus, aggregation latency can also be a factor for
users of proprietary data feeds and is not unique to the SIPs.
\76\ The transmission latency between two fixed points is
determined by the transmission communications technology through
which the data is conveyed (e.g., fiber optic cables, microwave
networks, laser transmission). The modes of transmission for core
data are typically slower than the modes of transmission used for
proprietary data. In general, the Equity Data Plans rely on fiber
optic cables for connectivity. For example, the NYSE, as the
operator of the CTA/CQ SIP, requires that access to the CTA/CQ SIP
be through the use of the NYSE's IP local area network. At the same
time, NYSE, which owns SIAC, the CTA/CQ SIP, offers non-SIP
proprietary data transmission to end-users via faster microwave
networks. See, e.g., ICE Global Network: Chicago--New Jersey,
available at https://www.theice.com/market-data/connectivity-and-feeds/wireless/chicago-to-new-jersey (last accessed Sept. 16, 2019)
(describing ICE's microwave route between the Chicago metro trading
hub to Nasdaq's data center in Carteret, NJ); ICE Global Network:
New Jersey Metro, available at https://www.theice.com/market-data/connectivity-and-feeds/wireless/new-jersey-metro (last accessed
Sept. 16, 2019) (describing ICE's laser and millimeter wave route
between ICE's Mahwah data center and the Carteret and Secaucus data
centers).
\77\ See, e.g., Letter from Michael Blaugrund, Head of
Transactions, NYSE (Oct. 24, 2018), at 1, available at https://www.sec.gov/comments/4-729/4729-4559383-176200.pdf (stating that, as
``processing time approaches zero, it is clear that the time
required for trade and quote data to travel from Participant
datacenter -> SIP datacenter -> Recipient datacenter, or `geographic
latency,' is a larger portion of the total latency'').
\78\ See Day One Transcript, supra note 38, at 127:12-24
(statement of Mark Skalabrin, Redline Trading Solutions) (stating
that customers cannot be competitive using SIP data due to
geographic latency, explaining ``[i]f you're sitting at Secaucus and
you get a direct feed tick from BATS, it shows up in a few
microseconds from when they publish it. That same tick for the SIP
for Nasdaq-listed symbols goes to Carteret, for NYSE-listed symbols
they go to Mahwah and they come back again. The real numbers are,
for one, about 350 microseconds and the other about close to a
millisecond in latency for those to show up for someone using the
SIP to get the BATS tick. So this is just an architectural--an
obsolete architecture for an automated trading system in today's
world. . . . You can't be competitive with those kind of latencies
compared to just getting it directly from the exchange.'').
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But these disadvantages are not inherent to the SIPs' role and
operation in the markets, nor are they insurmountable. In recent years
and in the face of ongoing public criticism,\79\ the SIP operating
committees have made some improvements to aspects of the SIPs and
related infrastructure.\80\ For example, from the second quarter of
2016 to the second quarter of 2019, Tapes A and B reduced average quote
feed aggregation latency from 490 microseconds to 69 microseconds, and
average trade feed aggregation latency from 340 microseconds to 139
microseconds.\81\ As another example, Tape C reduced its average quote
feed aggregation latency during the same period from 777.8 microseconds
to 16.9 microseconds, and its average trade feed aggregation latency
from 604.8 microseconds to 17.5 microseconds.\82\ As shown by these
latency statistics, however, aggregation latency for the CTA/CQ SIP
data continues to be meaningfully greater than that of UTP SIP data,
despite these improvements.\83\
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\79\ For example, following the UTP SIP outage on August 22,
2018 that led to a multiple hour, market-wide halt in trading of
Nasdaq-listed securities (``UTP SIP Outage''), market participants
raised concerns about the adequacy of the SIP infrastructure. See,
e.g., USA TODAY, Outage Slams Nasdaq's Reputation (Aug. 22, 2013),
available at https://www.usatoday.com/story/money/markets/2013/08/22/nasdaq-trading-freeze-reputation/2686883/; Wall Street Journal,
Panel to Review Nasdaq Data-Feed Outage (Aug. 28, 2013), available
at https://www.wsj.com/articles/panel-to-review-nasdaq-datafeed-outage-1377715288; Wall Street Journal, Nasdaq Shutdown Bares Stock
Exchange Flaws (Aug. 24, 2013), available at https://www.wsj.com/articles/nasdaq-shutdown-bares-stock-exchange-flaws-1377382817?tesla=y.
\80\ Following the UTP SIP Outage--and a meeting between the
equities and options exchanges, FINRA, DTCC, and the Options
Clearing Corporation and the then-Chair of the Commission--the
Equity Data Plans' operating committees discussed with Commission
staff the operating committees' plans for the SIPs ``designed to
improve operational resiliency, strengthen interoperability
standards and disaster recovery capabilities, enhance governance,
accountability, and establish a clear testing framework for the
industry.'' See Self-Regulatory Organizations Response to SEC for
Strengthening Critical Market Infrastructure (Nov. 12, 2013),
available at https://ir.theice.com/press/press-releases/all-categories/2013/11-12-2013. See also SIP Operating Committee
Statement, supra note 75 (``In the last three years, the SIP
Operating Committees have invested in the technology that powers
them, increasing resiliency and redundancy while reducing
latency.''). See also Letter from NYSE at 3 (Oct. 24, 2018),
available at https://www.sec.gov/comments/4-729/4729-4559414-176201.pdf (``NYSE Group Letter'') (stating that, ``exchanges have
invested significantly in the operation of the [SIPs], resulting in
improved resilience and reduced latency, all while managing
increased volumes'').
\81\ See Key Operating Metrics of Tape A & B U.S. Equities
Securities Information Processor (CTA SIP), available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/Q2%202019%20CTA%20SIP-Subscribers%20Metrics%20Report.pdf.
\82\ See UTP Q3 2019--July Tape C Quote and Trade Metrics,
available at http://www.utpplan.com/DOC/UTP_website_Statistics_Q3-2019-July.pdf. These latencies are perceived to be at or near
competitive market standards. See also Day One Transcript, supra
note 38, at 106:14-22 (statement of Oliver Albers, Nasdaq) (``There
have been vast improvements in SIP data in recent years, even as SIP
revenue to exchanges has fallen. The Nasdaq SIP has an average
latency of just 16 millionths of a second. . .. The Nasdaq SIP can
also handle 10 billion messages per day, 20 times more than a decade
ago, and significant cybersecurity and fraud prevention investments
by Nasdaq and other operators have increased the overall market
efficiency and resiliency.'').
\83\ See Nasdaq Total Markets Paper, supra note 45, at 19, n.19
(stating that the CTA SIP ``currently operates with over 100
microseconds of latency, which is not up to the standard that
investors have come to expect in the modern markets''). The
Commission notes that the aggregation latency incurred by market
participants that consolidate the exchanges' proprietary data feeds
for their own or their customers' use is not publicly available,
making it difficult to compare the aggregation latency of the SIP
feeds and the aggregated proprietary feeds.
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[[Page 2172]]
And as numerous new product offerings have been introduced by
individual exchanges to reduce the latency of proprietary data
products,\84\ the Equity Data Plans, which are operated jointly by the
SROs (including those offering proprietary data products), have not
made--or have been slow to make \85\--the investments that are
necessary to comprehensively address these concerns.\86\ For example,
proprietary data products offered by the exchanges often rely on low-
latency wireless connections,\87\ whereas the Equity Data Plans rely on
fiber optic cable.\88\ The Commission understands that these fiber
networks, which the exchanges use to transmit data from their matching
engines to the SIPs, are meaningfully slower than the wireless networks
operated by the same exchanges for the transmission of proprietary data
over the same routes.
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\84\ See, e.g., Nasdaq Trade Management Services--Wireless
Connectivity Suite (last accessed on Nov. 13, 2019), available at
http://n.nasdaq.com/WirelessConnectivitySuite (describing low-
latency wireless network technology to deliver market data); ICE
Global Network--Wireless (last accessed on Nov. 13, 2019), available
at https://www.theice.com/market-data/connectivity-and-feeds/wireless (describing low-latency wireless connectivity options
between trading hubs).
\85\ See, e.g., supra note 62.
\86\ See, e.g., SIFMA Letter II, supra note 57, at 8-9; SIFMA
Letter III, supra note 57, at 12; Letter from John Ramsay, Chief
Market Policy Officer, IEX, at 3 (Sept. 24, 2019) (``IEX Letter''),
available at https://www.sec.gov/comments/4-729/4729-6190352-192448.pdf.
\87\ Some of these services are solely offered by exchanges
within the facility of an exchange (e.g., co-location connectivity
at NYSE's data center in Mahwah and NASDAQ's co-location at its
datacenter in Carteret) and some are offered by both exchanges and
other third party providers (e.g., fiber and wireless connectivity
between data centers). See, e.g., supra note 84.
\88\ See supra note 76.
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As a potential measure to help the SIPs' data products better
respond to the needs of users, some market participants, including
exchanges, have suggested that geographic latency issues could be
addressed through a ``distributed SIP'' model.\89\ Under a distributed
SIP model, each exclusive SIP could place an additional processor in
other major data centers, which would separately aggregate and
disseminate consolidated market data for its respective tape. The SROs
would submit their quotations and trade information directly to each
SIP location in each data center, and each SIP location would
consolidate and disseminate its respective consolidated market data
feeds to subscribers at those data centers. As a result, consolidated
market data would not have to travel from an exchange at one location
to a centralized SIP at a second location for consolidation and
dissemination prior to traveling yet again to a subscriber that may be
at a third location, significantly reducing geographic latency. But,
despite consideration by the dedicated subcommittee established by one
of the Equity Data Plans,\90\ none of the Equity Data Plans' operating
committees has yet addressed the SIPs' geographic latency
disadvantages.
---------------------------------------------------------------------------
\89\ See Day One Transcript, supra note 38, at 99:2-4 (statement
of Stacey Cunningham, NYSE) (``There is debate the NYSE brought to
the SIP Committee a long time ago to talk about the nature of a
distributed SIP and that is something we should explore.''); at
117:7-10 (statement of Michael Blaugrund, NYSE) (recommending that
the Commission undertake an analysis of the cost and benefits to the
industry of a shift to a distributed SIP model); at 228:3-9
(statement of Chris Isaacson, Cboe) (``we're open to discussion
about distributed SIPs''); at 231:23 (statement of Vlad Khandros,
UBS) (stating that ``having a distributed SIP has a lot of merit to
solve for the latency differences that are inherent in the current
structure.''). See also Nasdaq Total Markets Paper, supra note 45,
at 19 (``Distributed SIPs would reduce time spent transmitting quote
information between an exchange (and firm) located in one data
center and a SIP (and other firms) located in a different
center.''); and SIFMA Letter II, supra note 57, at 3. See also NYSE
Group Letter, supra note 84.
\90\ The Commission's understanding that the Distributed SIP
subcommittee has considered and continues to consider potential
improvements to address geographic latency disadvantages is based on
information obtained by the Commission or its staff as part of the
Commission's oversight of the Equity Data Plans.
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The Commission recognizes that, as discussed above, the SROs have
made certain improvements to the SIPs over the past several years,
including upgrades that resulted in meaningful reductions in the time
required to calculate and consolidate the NBBO. The Participants have
also enhanced the content of the SIP feeds, including reports of odd-
lot trades.\91\ The Participants have also requested comment on a
proposal to include odd-lot quotation information in response to the
rise in odd-lot activity in the U.S. equity markets.\92\ In addition,
Nasdaq migrated its SIP to a new technology platform in 2016 and stated
that the update ``significantly improves the efficiency, resiliency,
and reliability of the SIP in a meaningful and measurable way.'' \93\
And NYSE has publicly stated that it has undertaken two projects to
enhance the SIP: (1) Building a new, dedicated network for SIP data to
provide faster subscriber access to SIP data, and (2) migrating its SIP
data feed engine to the NYSE's Pillar technology platform to reduce
processing time and enhance resilience.\94\
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\91\ See, e.g., Securities Exchange Release Nos. 70793 (Oct. 31,
2013), 78 FR 66788 (Nov. 6, 2013) (order approving Amendment No. 30
to the UTP Plan to require odd-lot transactions to be reported to
consolidated tape); 70794 (Oct. 31, 2013), 78 FR 66789 (Nov. 6,
2013) (order approving Eighteenth Substantive Amendment to the
Second Restatement of the CTA Plan to require odd-lot transactions
to be reported to consolidated tape).
\92\ See Equity Data Plan Odd Lot Proposal (announced Oct. 2,
2019), available at https://www.ctaplan.com/publicdocs/CTA_Odd_Lots_Proposal.pdf and http://www.utpplan.com/DOC/Odd_Lots_Proposal.pdf. See NYSE Sharing Data-Driven Insights--Stock
Quotes and Trade Data: One Size Doesn't Fit All (Aug. 22, 2019),
available at https://www.nyse.com/equities-insights#20190822 (last
accessed Nov. 16, 2019) (``NYSE Insights'').
\93\ Securities Information Processor (SIP) Migrates to the
Nasdaq Financial Framework and INET Technology (Oct. 24, 2016),
available at https://www.globenewswire.com/news-release/2016/10/24/882097/0/en/Securities-Information-Processor-SIP-Migrates-to-the-Nasdaq-Financial-Framework-and-INET-Technology.html (last accessed
on Nov. 18, 2019).
\94\ See NYSE Insights, supra note 92.
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Despite these changes, the SIPs have continued to meaningfully lag
behind the proprietary data products and their related infrastructure
with respect to content and speed. And while the Equity Data Plans'
operating committees have discussed several ideas that could result in
significant improvements to the SIPs both in terms of content and
speed--ideas that could further reduce performance gaps when compared
with proprietary data and its infrastructure \95\--these potential
upgrades have failed to garner the support by Participants necessary
for action.\96\ Thus, market participants that choose to pay for some
or all of the DOB proprietary data feeds can consolidate those feeds
and receive more comprehensive market data, and can receive it faster,
than those who rely on the SIP feeds.\97\ As a result, significant
information asymmetries persist between users of core data and users of
proprietary DOB data, as well as potential disadvantages for market
participants who do not access the
[[Page 2173]]
additional content included in proprietary data.\98\
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\95\ See supra note 89 and accompanying text.
\96\ See, e.g., NYSE Insights, supra note 92 (proposing to
replace the SIP feeds with three tiered levels of service, including
certain DOB data, based on the needs of specific types of
investors); Nasdaq Total Markets Paper, supra note 45, at 22
(discussing a single processor alternative and stating, ``Now that
all exchanges trade all listed stocks, there no longer exists a
bank, brokerage or rational basis for maintaining separate network
processors and administrators based on historical listings
decisions.''); supra note 89 and accompanying text (describing
discussions regarding a distributed SIP model.). See also discussion
accompanying note 116, infra (discussing proposal to add auction
data to the SIP feeds).
\97\ The fees for data and connectivity can be substantial and
the fees for proprietary DOB products and connectivity have
increased significantly in recent years. See SIFMA Order, supra note
60, at 46-49 (providing examples of exchange proprietary market data
fee increases).
\98\ See, e.g., supra notes 80-82 and accompanying text. See,
e.g., supra note 89 and accompanying text. A petition for rulemaking
submitted to the Commission before the Roundtable emphasized the
inherent conflict of interest in the exchanges' proprietary feeds
competing with the SIPs, arguing that the greater the latency
between the SIPs and the proprietary data feeds, the greater the
market value of the exchange's proprietary feeds. See Healthy
Markets Petition, supra note 48, at 6.
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As discussed further below, the Commission believes that, under the
current governance structure of the Equity Data Plans, improvements to
the SIPs to adequately address important product, performance and
pricing differentials between the SIPs and proprietary data products
have not occurred.\99\ This failure contributes to the divergence in
the usefulness of core data provided by the SIPs for some market
participants compared to the proprietary data feeds. The Commission
also believes that addressing these governance issues is an important
first step in responding to concerns about the consolidated data feed.
---------------------------------------------------------------------------
\99\ See infra notes 110-119 and accompanying text.
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B. Conflicts of Interest Inherent in the Governance Model and Structure
of the Equity Data Plans
The Equity Data Plans provide the regulatory framework for the
administration of SIP data. When it adopted Regulation NMS in 2005, the
Commission contemplated that exchanges would offer proprietary market
data feeds with greater content than the SIP feeds and that market
participants might elect to purchase those feeds.\100\ However, since
the adoption of Regulation NMS in 2005,\101\ the structure of the
equity markets and the corporate structure of exchanges have changed
dramatically.
---------------------------------------------------------------------------
\100\ See Regulation NMS Release, supra note 6, 70 FR at 37569.
\101\ See Regulation NMS Release, supra note 6.
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In addition to the technological developments already discussed,
changes in the ownership structure of exchanges--in particular the
demutualization of the exchanges and the rise of ``exchange groups''--
have created conflicts between the SROs' business interests and the
need to ensure prompt, accurate, reliable, and fair dissemination of
core data through the jointly administered Equity Data Plans consistent
with their obligations as SROs under the national market system.\102\
As noted above, the Commission believes that these changes, combined
with the Equity Data Plans' current governance structure, have
exacerbated the exchanges' lack of incentives to improve the SIPs. And,
as described further below, the Commission's views on the effect of
conflicts of interest on the exchanges' incentives are informed by
input received over the course of a number of years from a broad range
of market participants--including industry trade associations, broker-
dealers (both those with a retail customer base and those with an
institutional investor customer base), and the SROs themselves--through
their participation in Commission-sponsored forums (i.e., the EMSAC
\103\ and the Roundtable \104\) and through the submission of comment
letters \105\ and petitions for rulemaking.\106\
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\102\ See 15 U.S.C. 78k-1(c)(1)(B) (stating that the Commission
shall prescribe ``rules and regulations as necessary and appropriate
in the public interest, for the protection of investors, to assure
the prompt, accurate, reliable, and fair collection, processing,
distribution, and publication of information with respect to
quotations for and transactions in such securities and the fairness
and usefulness of the form and content of such information'').
\103\ See supra note 46 and infra notes 121 and 136.
\104\ See supra note 47.
\105\ See comments on Roundtable on Market Data and Market
Access, available at https://www.sec.gov/comments/4-729/4-729.htm;
comments on EMSAC, available at https://www.sec.gov/comments/265-29/265-29.shtml.
\106\ See supra note 48.
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1. The Transformation of the Exchanges Into Publicly Owned Companies
When the Equity Data Plans were created, U.S. equity exchanges were
member owned, not-for-profit organizations. The members that owned the
exchanges were registered broker-dealers, and those members had a voice
in exchange decisions through their voting power on the governing
bodies of the exchanges, including with respect to Equity Data Plan
matters.
When the exchanges demutualized, representation on exchange boards
of directors broadened to require including non-industry
representatives,\107\ thereby diluting exchange member representation,
and the majority of the exchanges became part of publicly held
companies seeking to maximize shareholder value. With this
transformation, and following the adoption of Regulation NMS, many of
the exchanges began to more actively pursue commercial interests that
did not necessarily further the regulatory objective to ``preserve the
integrity and affordability of the consolidated data stream,'' \108\
which is necessary to ensure that there is a ``comprehensive, accurate,
and reliable source of information for the prices and volume of any NMS
stock at any time during the trading day.'' \109\
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\107\ See, e.g., Securities Exchange Act Release Nos. 49098
(Jan. 16, 2004), 69 FR 3974, 3979 (Jan. 27, 2004) (SR-PHLX-2003-73)
(approving demutualization of Philadelphia Stock Exchange under by-
laws providing for 11 non-industry governors and ten industry
governors, of which five would be on-floor governors); 51149 (Feb.
8, 2005), 70 FR 7531, 7534 (Feb. 14, 2005) (SR-CHX-2004-26)
(approving demutualization of Chicago Stock Exchange under bylaws
that provided that half of the board must be public directors, with
the remaining directors to be the exchange's CEO and participant
directors); 53963 (June 8, 2006), 71 FR 34661, 34671 (June 15, 2006)
(SR-NSX-2006-03) (approving demutualization of the National Stock
Exchange under bylaws that provided for at least 50% independent
directors and at least 20% directors representing exchange trading
permit holders); and Securities Exchange Act Release No. 58375 (Aug.
18, 2008), 73 FR 49498, 49500 (Aug. 21, 2008) (Application of BATS
Exchange, Inc. for Registration as a National Securities Exchange;
Findings, Opinion, and Order of the Commission) (stating that the
non-industry directors will exceed the number of industry and member
directors and that at least 20% of the directors will be member
directors).
\108\ Regulation NMS Release, supra note 6, 70 FR at 37503.
\109\ Equity Market Structure Concept Release, supra note 22, 75
FR at 3600.
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An important example of this divergence of interest has been the
development by certain exchanges of proprietary data products with
reduced latency and expanded content (i.e., proprietary DOB data
products), without the exchanges, in their role as Participants,
similarly enhancing the data products offered by the Equity Data Plans.
As discussed above, these DOB products have evolved to be considered
competitive necessities for many market participants and are offered at
significant premiums to SIP products.\110\ Another example of the
divergence between commercial interests and regulatory goals has been
the development by certain exchanges of limited TOB data products,\111\
which are offered at a discount compared to the SIP and marketed to a
more price-sensitive segment of the market, without corresponding
development by the Equity Data Plans of a less expensive SIP product
for the price-sensitive segment of the market.\112\ The exchanges have
continued to develop and enhance their proprietary market data
businesses--which generate
[[Page 2174]]
revenues that, unlike Plan data revenues, do not have to be shared with
the other SROs--while remaining fully responsible for the governance
and operations of the Plans, including content, infrastructure, and
pricing, as well as data consolidation and dissemination.
---------------------------------------------------------------------------
\110\ See supra notes 57-62 and accompanying text.
\111\ See supra note 40 and accompanying text (describing
examples of exchange TOB products).
\112\ The use of TOB products has expanded among retail and
professional investors, who typically use TOB data via visual
displays. However, these feeds do not show the full NBBO and
therefore cannot be used to comply with the Vendor Display Rule. The
Vendor Display Rule requires vendors and broker-dealers to display
consolidated data from all the market centers that trade a stock in
a context in which a trading or order routing decision can be
implemented. In order to comply with the Vendor Display Rule,
vendors and broker-dealers typically purchase and display
consolidated data distributed by the SIPs. See 17 CFR 242.603. See
supra notes 26, 38.
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Many non-SRO Roundtable panelists, commenters, and petitioners
identified these circumstances as constituting an inherent conflict of
interest in that the exchanges oversee the Equity Data Plans while
selling their own proprietary feeds and connectivity services.\113\ One
commenter stated that the ``exchanges maintain tight control of SIP
governance to protect their lucrative market data revenue (plus
associated SIP connectivity costs). . . .'' \114\ This commenter also
stated that ``[g]iven conflicts of interest when a market competitor is
also a regulator, it is critical that broker-dealers and asset managers
have representation on SIP Operating Committees to ensure
accountability and to promote initiatives to better develop market data
products.'' \115\ One exchange stated that, in addition to an
exchange's proprietary data products, other circumstances in which an
exchange's conflicts of interest may affect the work of the Equity Data
Plans' operating committees include consideration of whether auction
data should be added to the SIPs and competition among the SROs for the
role of processor.\116\ In contrast, another exchange maintained that
selling exchange proprietary market data was contemplated under
Regulation NMS and that doing what Regulation NMS contemplates does not
itself create a conflict of interest.\117\
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\113\ See, e.g., Transcript of Day Two, Roundtable (Oct. 26,
2018), available at https://www.sec.gov/spotlight/equity-market-structure-roundtables/roundtable-market-data-market-access-102618-transcript.pdf (``Day Two Transcript''), at 117:14-22 (statement of
Richard Ketchum, Former CEO of FINRA); at 121:3-17 (statement of
Michael Mason, Citigroup); 138:1-4 (statement of Kevin Cronin,
Invesco); SIFMA Letter III, supra note 57, at 7 (stating that
``exchanges offer their own proprietary feeds, some of which are
designed to compete with the SIPs, while at the same time the
exchanges operate the SIPs and control the SIP operating
committees''); Letter from Theodore R. Lazo, Managing Director and
Associate General Counsel, SIFMA (Sept. 18, 2019), at 3-4, available
at https://www.sec.gov/comments/4-729/4729-6148210-192292.pdf
(``SIFMA Letter IV'') (stating that the current SIP governance
structure ``impedes the SIP from competing with the exchanges'
proprietary data feeds.''); Letter from CTA/UTP Advisory Committee
(Oct. 23, 2018), at 2, available at https://www.sec.gov/comments/4-729/4729-4553088-176181.pdf (``CTA/UTP Letter'') (``A perceived
conflict is the lack of separation between CTA/UTP and proprietary
data interests. An information barrier between CTA/UTP and
exchanges' proprietary offering does not work in practice as the
same individuals may represent both CTA/UTP and exchange proprietary
data products.''); Letter from Tyler Gellasch, Executive Director,
Healthy Markets Association (Oct. 23, 2018), at 11, available at
https://www.sec.gov/comments/4-729/4729-4554022-176182.pdf
(``Healthy Markets Letter'') (``One of the most direct conflicts of
interest is that the exchanges effectively control the public market
data stream while also competing with it.''); Healthy Markets
Petition, supra note 48, at 6 (noting that the greater the latency
between the SIPs and the proprietary data feeds, the greater the
market value of the exchange's proprietary feeds); IEX Letter, supra
note 86; Patomak Petition, supra note 48, at 1 (``Exchanges exercise
complete control over key aspects of NMS plan governance, including
setting fees, and this governance structure exacerbates conflicts of
interest and allows exchanges to promulgate rules unilaterally to
the detriment of broker-dealers and buy-side representatives.'');
MFA Petition, supra note 48, at 13 (``SIP governance model under
Regulation NMS does not effectively mitigate conflicts of
interest.'').
\114\ Letter from Marcy Pike, SVP, Enterprise Infrastructure,
Krista Ryan, VP, Associate General Counsel, Fidelity Investments
(Oct. 26, 2018), at 4, available at https://www.sec.gov/comments/4-729/4729-4566044-176136.pdf (``Fidelity Letter'').
\115\ Id.
\116\ See, e.g., Day Two Transcript, supra note 113, at 123:14-
127:3 (statement of John Ramsay, IEX) (``For over a year I've been
pushing to try to get auction data added to the SIP that would make
it more useful . . . . [but] there is at least one or more exchanges
that will say, well, it requires unanimity, and therefore it's not
going to happen.'').
\117\ See NYSE Group Letter, supra note 84, at 19.
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Moreover, the Equity Data Plans are currently administered by two
of the exchanges,\118\ which gives employees of those exchanges access
to confidential data subscriber information of potentially significant
commercial value, including subscriber audit information. The
Commission notes that concerns have been raised about the exchange
administrators' use of market data and associated customer information
obtained through their role as Equity Market Data Plan administrators
for their proprietary data feed businesses.\119\
---------------------------------------------------------------------------
\118\ Currently, NYSE operates as the administrator for the CTA
Plan and the CQ Plan, while Nasdaq serves as the administrator for
the UTP Plan.
\119\ See, e.g., Letter from Tyler Gellasch, Executive Director,
Healthy Markets Association (Dec. 12, 2018), available at https://www.sec.gov/comments/4-729/4729-6413383-198487.pdf. In addition,
commenters have expressed concerns with the burdens imposed by the
SIPs' subscriber audits and have stated that these burdens create an
incentive to purchase exchange TOB products. See infra notes 164-165
and accompanying text.
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Consequently, the Commission believes that the exchanges'
commercial interests in their proprietary data businesses, as well as
the exchange administrators' access to confidential subscriber
information, have created conflicts of interest that could influence
decisions as to the Equity Data Plans' operation and thereby impede
their ability to ensure the ``prompt, accurate, reliable, and fair
collection, processing, distribution, and publication of information
with respect to quotations for and transactions in such securities and
the fairness and usefulness of the form and content of such
information.'' \120\
---------------------------------------------------------------------------
\120\ 15 U.S.C. 78k-1(c)(1)(B).
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2. The Emergence of Exchange Groups
In addition to the demutualization of the exchanges and the rise of
proprietary data feeds, another significant change in the SRO landscape
has been the emergence of exchange groups. As acknowledged by the EMSAC
\121\ and echoed by Roundtable participants,\122\ the proliferation of
exchange groups has had a significant effect on the allocation and
concentration of voting power among certain SROs serving on the Equity
Data Plans' operating committee.
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\121\ See, e.g., Transcript of EMSAC Meeting (Apr. 26, 2016), at
0106:8-24 (statement of Richard Ketchum, Former CEO of FINRA),
available at https://www.sec.gov/spotlight/emsac/emsac-042616-transcript.txt (``EMSAC Transcript'').
\122\ See, e.g., Day Two Transcript, supra note 113, at 148:5-18
(statement of Kevin Cronin, Invesco).
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Under the Equity Data Plans, each Participant is entitled to cast
one vote, but the exchanges within each exchange group vote as a block.
Currently, 14 of the 17 total votes are controlled by three exchange
groups: (1) CBOE Holdings, Inc. has five votes (BYX, BZX, Cboe, EDGA,
and EDGX); (2) Intercontinental Exchange Group, Inc. (``ICE'') has five
votes (NYSE, NYSE American, NYSE Arca, NYSE Chicago, and NYSE
National); and (3) Nasdaq, Inc. has four votes (BX, ISE, Nasdaq, and
PHLX).\123\ As a result, the votes of only two exchange groups are
sufficient to command a majority of votes and thereby control
significant Equity Data Plan actions, including decisions that affect:
(a) The capacity of the Equity Data Plans to transmit SIP data,\124\
(b) investments in infrastructure that could in turn affect performance
and latency of Plan processors, (c) the fees charged for SIP data,\125\
and (d) the selection of individuals that participate in advisory
committees.\126\
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\123\ In addition to these three exchange groups, each of the
three unaffiliated SROs (FINRA, IEX, and LTSE) currently has one
vote, resulting in a total of 17 Participant votes in Equity Data
Plan matters.
\124\ See, e.g., Section IV.(a) and Exhibit A of the CTA Plan.
\125\ See, e.g., Section IV.(b)(iii) of the CTA Plan.
\126\ See, e.g., Section XII.(b)(iii) of the CTA Plan.
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The Commission believes that the consolidation of most of the
exchange SROs into exchange groups has altered the relative voting
power of Equity Data Plan Participants so that exchange groups now have
greater voting power with respect to Plan governance matters.
Correspondingly, the relative voting power of unaffiliated Equity Data
Plans'
[[Page 2175]]
Participants has been diluted over time. Exchanges that historically
had only one vote have now been consolidated into exchange groups under
common management that can control blocks of four or five votes.\127\
Consequently, any two exchange groups can now command a majority of
votes on the Equity Data Plans' operating committee, while the relative
voting power of unaffiliated Equity Data Plan Participants has been
diluted over time. Notably, as the primary producers of exchange
proprietary data products, these exchange groups' voting power on the
Equity Data Plans exacerbates the conflicts between their business
interests and their regulatory obligations.\128\ Accordingly, the
Commission believes that the current voting structure may not promote
the goals of Section 11A of the Act \129\ with respect to equity market
data.
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\127\ For example, for years the NYSE held a single exchange
license and therefore had only one vote on the Equity Data Plans'
operating committees, despite having approximately 80% of the
trading volume in NYSE-listed securities. Today, the NYSE group of
SROs as a whole has approximately 30% market share of trading in
NYSE-listed securities, but because the NYSE group holds five
exchange licenses, it has five votes and significantly more
influence over Equity Data Plans' decisions than before. See Cboe
U.S. Equities Volume Data, available at https://markets.cboe.com/us/equities/market_share/ (last accessed Aug. 11, 2019) (month-to-date
volume summary as of Aug. 9, 2019).
\128\ Specifically, the three exchange groups, which represent
14 of the 17 votes on the operating committees of the Equity Data
Plans, sell proprietary data products that are significant sources
of revenues for these exchanges. Consequently, the Commission
believes that they may not be incentivized to adequately improve the
latency of the SIPs, as making SIP latency comparable to the
proprietary feeds could decrease revenues earned from certain
proprietary data products. See, e.g., Clearpool Group Viewpoints
Rethinking the Current Market Structure (Sept. 2019), at 7 (stating,
``Currently, SIP Plans are governed by SROs that have conflicts of
interest in the provision of market data (i.e., the exchanges,
excluding FINRA) as they are selling market data products that
directly compete with the SIPs. These SROs therefore have a
disincentive to either invest in the SIPs or to make SIPs
competitive products to their proprietary data products, and it is
unlikely that they would vote to make needed changes to the SIP
Plans.''), available at https://cdn2.hubspot.net/hubfs/1855665/Clearpool%20Group%20Viewpoints%20-%20September%202019%20FINAL.pdf.
See also IEX Letter, supra note 86, at 3 (``SIP governance is still
under the control of exchanges that have no reason to want the SIPs
to be competitive with their own lucrative feeds. Some exchanges
even overtly market their own data as a better alternative to the
SIPs. The conflicts of interest are obvious and acute.'').
\129\ 15 U.S.C. 78k-1.
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C. The Governance Structure of the New Consolidated Data Plan
As discussed below, the Commission believes that the existing
Equity Data Plans should be replaced by a single New Consolidated Data
Plan with a modernized governance structure.
1. Exchange Group Voting Power
Several interested parties have suggested various ways to realign
Participants' voting power. In response to the Roundtable,\130\ several
panelists and commenters recommended that SRO voting rights be limited
to one vote per exchange group,\131\ which they believe would increase
the voting representation of unaffiliated exchanges.\132\ Panelists and
one commenter also supported having voting provisions that reflect
market size, so that the SROs with greater market share would have
increased voting power.\133\ One commenter recommended capping the
voting control permissible for any single exchange group.\134\ One
panelist supported maintaining the current voting construct and
highlighted the importance of protecting the voting rights of the
unaffiliated SROs that have just one vote on the operating
committee.\135\ In addition, the EMSAC recommended that the existing
one-vote-per-exchange model should be replaced with an allocation of
voting rights at the exchange group level--resulting in one vote per
exchange group.\136\ The EMSAC recommended that an exchange group
receive two votes, however, when the exchange group has consolidated
market share of at least 10% in the particular market relevant to the
Equity Data Plan.
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\130\ See https://www.sec.gov/spotlight/equity-market-structure-roundtables.
\131\ The recommendation of one vote per exchange group was also
included in a pre-Roundtable petition for rulemaking that was
submitted to the Commission. See Healthy Markets Petition, supra
note 48, at 6 (supporting ``one vote per exchange group'').
\132\ See, e.g., Day Two Transcript, supra note 113, at 148:5-12
(statement of Kevin Cronin, Invesco), available at https://www.sec.gov/spotlight/equity-market-structure-roundtables/roundtable-market-data-market-access-102618-transcript.pdf; at
150:12-14 (statement of Hubert de Jesus, Blackrock); at 152:23-153:2
(statement of John Ramsay, IEX); Fidelity Letter, supra note 114, at
3 (recommending that NMS plan voting rights be limited to one vote
per exchange group); Healthy Markets Letter, supra note 113, at 40.
\133\ See, e.g., Day Two Transcript, supra note 113, at 150:17-
21 (statement of Richard Ketchum, Former CEO of FINRA); at 152:6-10
(statement of Michael Masone, Citigroup); SIFMA Letter IV, supra
note 113, at 4.
\134\ See SIFMA Letter IV, supra note 113, at 4.
\135\ See, e.g., Day Two Transcript, supra note 113, at 149:1-13
(statement of Emily Kasparov, Chicago Stock Exchange, Inc. (n/k/a
NYSE Chicago)).
\136\ See EMSAC Recommendations Regarding Enhanced Industry
Participation in Certain SRO Regulatory Matters (``EMSAC Governance
Recommendations''), July 8, 2016, available at https://www.sec.gov/spotlight/emsac/recommendations-enhanced-industry-participation-sro-reg-matters.pdf; EMSAC Recommendations Relating to Trading Venues
Regulation, April 12, 2016, available at https://www.sec.gov/spotlight/emsac/emsac-trading-venues-subcommittee-recommendations-041916.pdf.
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NYSE and Nasdaq objected to the EMSAC recommendation to reallocate
votes among Equity Data Plan Participants by exchange group.\137\ In
particular, Nasdaq argued that it would be inconsistent for the
Commission not to provide each SRO with a vote when, in Nasdaq's view,
the Commission has consistently held that each SRO is individually
approved by the Commission and must have its own systems, rules,
operations, and members.\138\
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\137\ See Letter from Elizabeth K. King, General Counsel and
Corporate Secretary, NYSE (May 13, 2016), available at https://www.sec.gov/comments/265-29/26529-66.pdf (``NYSE Letter''); and
Letter from Joan Conley, Senior Vice President and Corporate
Secretary, Nasdaq (May 24, 2016), available at https://www.sec.gov/comments/265-29/26529-71.pdf (``Nasdaq Letter'').
\138\ See Nasdaq Letter, supra note 137, at 7. Nasdaq also
argued that the Commission has prevented exchange operating
companies from offering ``cross-SRO'' products that bundle products
from multiple exchanges, and Nasdaq believes that consolidating
voting rights for purposes of the Equity Data Plans would contradict
this past treatment of exchange groups by the Commission. See id.
For the Commission's response to Nasdaq's argument, see infra notes
148-151 and accompanying text.
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The Commission believes that the New Consolidated Data Plan should
modify the current voting allocation structure to address the issues
described above.\139\ Consistent with the EMSAC recommendation, the
Commission believes that voting rights in the New Consolidated Data
Plan should be allocated so that each unaffiliated SRO \140\ and
exchange group has one vote on the operating committee--with a second
vote provided if the exchange group or unaffiliated SRO has a market
center or centers that trade more than a designated percentage of
consolidated equity market share.\141\
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\139\ See supra notes 127-130 and accompanying text. The
Commission notes that the one-vote-per-exchange governance model for
NMS plans is not compelled by statute or regulation.
\140\ For purposes of this Order, an unaffiliated SRO means an
SRO that is not part of the same corporate ownership group as other
SROs. The currently unaffiliated SROs are FINRA, IEX, and LTSE.
\141\ For purposes of this Order, the Commission considers
``consolidated equity market share'' to mean the average daily
dollar equity trading volume of an exchange group or unaffiliated
SRO as a percentage of the average daily dollar equity trading
volume of all of the SROs, as reported by the Equity Data Plans.
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However, the Commission believes that the threshold percentage
should be 15%, rather than the 10% threshold recommended by the EMSAC.
The EMSAC's recommendation to the Commission concedes that there was no
``magic'' in selecting 10% as its
[[Page 2176]]
suggested threshold amount,\142\ and, based on the current size of the
exchange groups in terms of both exchange licenses and trading volume,
the Commission believes that using the 10% threshold recommended by the
EMSAC for obtaining a second vote on New Consolidated Data Plan matters
would suggest that a third vote would be appropriate at 20% of
consolidated equity market share. Given that the existing consolidated
market share of the largest exchange groups generally ranges from 17%
to 23% \143\--as of December 4, 2019, the figures for the CBOE, Nasdaq,
and NYSE exchange groups were 17.03%, 19.58%, and 23.05%, respectively
\144\-- setting the threshold for additional votes at 10% intervals
would create the reasonable likelihood that exchange groups might
receive a third vote, which would lead to a continuing concentration of
voting power.
---------------------------------------------------------------------------
\142\ See, e.g., EMSAC Transcript, supra note 121, at 0106:25-
0107:1 (statement of Richard Ketchum, Former CEO of FINRA).
\143\ See Cboe U.S. Equities Volume Data, available at https://markets.cboe.com/us/equities/market_share/ (last accessed Dec. 4,
2019). The consolidated market share of these three exchange groups
has remained roughly comparable over the past three years, remaining
above 15% and below 25%. As of August 16, 2016, the NYSE exchange
group had approximately 23% consolidated market share, the Nasdaq
exchange group had approximately 16%, and the Cboe exchange group
had approximately 21%. As of August 15, 2017, the NYSE exchange
group had approximately 23% consolidated market share, the Nasdaq
exchange group had approximately 18%, and the Cboe exchange group
had approximately 20%. As of August 16, 2018, the NYSE exchange
group had approximately 23% consolidated market share, the Nasdaq
exchange group had approximately 19%, and the Cboe exchange group
had approximately 18%. See Cboe U.S. Equities Volume Data, available
at https://markets.cboe.com/us/equities/market_share/ (last accessed
Aug. 16, 2019).
\144\ Id.
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Accordingly, the Commission believes that setting the threshold for
a second vote at 15%, and limiting the total votes available to an
exchange group or unaffiliated exchange to two votes, would provide
greater relative voting power for the three exchange groups that
currently have the highest trading volumes--the CBOE, Nasdaq, and NYSE
exchange groups would each get two votes. The Commission believes that
a 15% threshold for a second vote on the operating committee would thus
provide an exchange group or unaffiliated exchange with extra voting
power in recognition of its responsibility as an SRO for the operations
of a trading platform that generates a greater share of equity market
data. Under this approach, FINRA would not be eligible for a second
vote on the operating committee, because, despite facilitating a
significant proportion of trade reporting, it does not produce
quotations or operate a market center.\145\
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\145\ The Commission notes, however, that while the voting
allocation contemplated herein would not give a second vote to
FINRA, it would effectively increase FINRA's voting power in that
FINRA's vote on all matters would constitute approximately 11.1% of
the SRO vote, and 7.4% of all votes on the operating committee,
rather than its current 5.9% of all votes on the operating
committees of the Equity Data Plans.
---------------------------------------------------------------------------
The Commission further believes that an exchange group or an
unaffiliated exchange should be granted a second vote only if it has
maintained consolidated equity market share of at least 15% for at
least four of the six calendar months preceding a vote of the operating
committee. While exchange group market share has remained relatively
steady over the past several years,\146\ competition for order flow
among the exchanges and the registration of new national securities
exchanges that trade equities may lead to more significant changes in
market share. The Commission believes that using a look-back period of
at least four of the six calendar months preceding a vote of the
operating committee for determining whether an exchange group or an
unaffiliated exchange has met the threshold for a second vote would
allow the voting structure of the New Consolidated Data Plan to adapt
over time to changing trading volume among exchanges while avoiding
frequent changes in vote allocations as a result of short-term changes
in activity.\147\
---------------------------------------------------------------------------
\146\ See supra note 143.
\147\ The Commission notes that it adopted a similar look-back
period in the adoption of Regulation ATS for determining whether an
alternative trading system (``ATS'') has reached trading volume
thresholds that trigger certain requirements. See Rule 301 of
Regulation ATS, 17 CFR 242.301(b)(3), (providing that, ``[a]n
alternative trading system shall comply with the requirements set
forth in paragraph (b)(3)(ii) of this section, with respect to any
NMS stock in which the alternative trading system . . . [d]uring at
least 4 of the preceding 6 calendar months, had an average daily
trading volume of 5 percent or more of the aggregate average daily
share volume for such NMS stock as reported by an effective
transaction reporting plan.''). See also Securities Exchange Act
Release No. 40760 (Dec. 8, 1998), 63 FR 70844 (Dec. 22, 1998)
(Regulation of Exchanges and Alternative Trading Systems).
---------------------------------------------------------------------------
As noted above, Nasdaq has argued that an approach that limits
exchange groups to only one vote would be inconsistent with the
Commission's prior action to prevent exchange operating companies from
offering ```cross-SRO' products that bundle products from multiple
exchanges.'' \148\ The Commission believes, however, that a meaningful
distinction exists between, on one hand, examining whether an
exchange's proposed rule change unfairly discriminates between market
participants and, on the other hand, regulating the actions of multiple
SROs in collectively operating critical market systems.\149\ Under
Section 6 of the Act,\150\ the Commission oversees individual
exchanges, not exchange groups, regarding, among other things, their
obligations to not engage in disparate treatment of their members. In
contrast, Section 11A and Rule 608 address the joint responsibilities
of multiple SROs to the national market system as a whole, including
operating a central utility for market data that has a broader class of
stakeholders. Moreover, as discussed above, the Commission believes
that, given the current structure of the market for NMS securities,
allocating votes on the operating committees for critical market
systems simply on an exchange-by-exchange basis--and thereby permitting
exchanges under common ownership to collectively vote the interests of
their corporate parent and to therefore command a majority of votes on
the operating committees--does not facilitate representation of the
interests of all stakeholders and no longer supports the integrity and
affordability of SIP data.\151\
---------------------------------------------------------------------------
\148\ Nasdaq Letter, supra note 137. See also supra note 138 and
accompanying text.
\149\ See, e.g., Securities Exchange Act Release No. 73639 (Nov.
19, 2014), 79 FR 72251, 72271-72 (Dec. 5, 2014) (Regulation Systems
Compliance and Integrity adopting release) (designating the SIPs as
``critical SCI systems'' because ``consolidated market data is
central to the functioning of the securities markets.'').
\150\ 15 U.S.C. 78f.
\151\ See supra notes 130-141 and accompanying text. The
Commission notes that the one-vote-per-exchange voting model
precedes the demutualization of the exchanges and the emergence of
exchange groups. See, e.g., Order temporarily approving CQ Plan,
supra note 31, 43 FR at 34852.
---------------------------------------------------------------------------
Finally, to ensure that only those SROs that are contributing to
the generation or collection of the core data disseminated by the New
Consolidated Data Plan have a vote on New Consolidated Data Plan
decisions, the Commission believes that the New Consolidated Data Plan
should provide that if an exchange ceases operation as an equity
trading venue, or has yet to commence operation as an equity trading
venue, that exchange should not have a vote on Plan matters.\152\
---------------------------------------------------------------------------
\152\ Both ISE and Cboe have been inactive as equities exchanges
for several years but continue to retain full voting rights on the
Equity Data Plans. ISE ceased trading equities on December 23, 2008.
See Securities Exchange Act Release No. 80873 (June 4, 2017), 82 FR
27094 (June 13, 2017). Cboe stopped trading equities on April 30,
2014. See Securities Exchange Act Release No. 71880 (Apr. 4, 2014),
79 FR 19950 (Apr. 10, 2014).
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[[Page 2177]]
2. Non-SRO Participation
In 2005, when the Commission adopted Regulation NMS,\153\ it
amended the Equity Data Plans to establish non-voting advisory
committees to give interested parties an opportunity to express their
views on Equity Data Plan business before any decision by the operating
committees.\154\ Those advisory committees are made up of at least one
representative from each of the following categories: (1) A broker-
dealer with a substantial retail investor customer base, (2) a broker-
dealer with a substantial institutional investor customer base, (3) an
ATS, (4) a data vendor, and (5) an investor. As the Commission
explained, the creation of the advisory committees was ``a useful first
step toward improving the responsiveness of Plan participants and the
efficiency of Plan operations.'' And the Commission said that it would
``continue to monitor and evaluate Plan developments to determine
whether any further action is warranted.'' \155\ After monitoring the
activities of the Equity Data Plans over many years, the Commission
believes that non-SROs are important stakeholders in the operation of
the Equity Data Plans. The Commission now believes that the governance
structure of the New Consolidated Data Plan should provide for non-SROs
to participate as full members of the operating committee, rather than
in an advisory capacity.
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\153\ See Regulation NMS Release, supra note 6.
\154\ See Regulation NMS Release, supra note 6, 70 FR at 37561
(``Expanding the participation of interested parties other than SROs
in Plan governance should increase the transparency of Plan
business, as well as provide an established mechanism for
alternative views to be heard by the Plans and the Commission.
Earlier and more broadly based participation could contribute to the
ability of the Plans to achieve consensus on disputed issues . . . .
The Commission particularly believes that the Plans should give full
consideration to the views of industry participants on steps that
would streamline the administrative procedures and burdens of the
three Plans. Enhanced participation of advisory committee members in
Plan affairs should help further this process.'').
\155\ See Regulation NMS Release, supra note 6, 70 FR at 37561.
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Under the current governance structure of the Equity Data Plans,
the SROs retain substantial influence over the advisory committees.
Members of the advisory committees are selected by the majority vote of
the SROs,\156\ and each SRO has the right to select an additional
member of the advisory committee.\157\ Members of the Equity Data
Plans' advisory committees are currently permitted to attend Plan
meetings, receive certain information distributed to the operating
committee relating to Plan matters, and submit their views prior to
Plan decisions.\158\ Members of the Equity Data Plan advisory
committees, however, may not vote on Equity Data Plan matters; can be
excluded from substantive discussions, including, for example,
discussions about potential amendments to the Equity Data Plans (e.g.,
discussions in ``executive sessions''); and can be denied access to
critical information, such as cost and detailed revenue
information.\159\ Thus, under the Equity Data Plans' current governance
structure, the operating committees, which make decisions regarding
Equity Data Plans' actions, such as expenditures for technology
upgrades and programming updates (including those to address latency
issues), changes to fees, and amendments, are controlled exclusively by
SRO representatives, and no other market constituency has voting
rights.
---------------------------------------------------------------------------
\156\ See, e.g., Day Two Transcript, supra note 113, at 91:13-
19, 136:17-19, 137:8-12 (statements of Hubert de Jesus, Blackrock)
(stating that advisors should be selected in an independent fashion
to avoid Participants potentially choosing not to renew an advisor,
or removing an advisor who does not support SRO interests).
\157\ See Regulation NMS Release, supra note 6, 70 FR at 37610
(Text of amendments to the Equity Data Plans, Governance Amendment
(b)(2)).
\158\ See, e.g., Section III(e)(iii) of the CTA Plan, supra note
31 (``Members of the Advisory Committee shall have the right to
submit their views to CTA on Plan matters, prior to a decision by
CTA on such matters. Such matters shall include, but not be limited
to, any new or modified product, fee, contract, or pilot program
that is offered or used pursuant to the Plan.''); Section III(e)(iv)
of the CTA Plan (``Members of the Advisory Committee shall have the
right to attend all meetings of CTA and to receive any information
concerning Plan matters that is distributed to CTA; provided,
however, that CTA may meet in executive session if, by affirmative
vote of a majority of the Participants entitled to vote, CTA
determines that an item of Plan business requires confidential
treatment.'').
\159\ See id.
---------------------------------------------------------------------------
Although advisory committee representatives currently have no
voting power in the Equity Data Plans and have limited access to non-
public information on Equity Data Plan matters,\160\ they have
substantial interests at stake in the Equity Data Plans' decision-
making process. Market participants who use SIP data--including
investors, broker-dealers, data vendors, and others--are required to
pay the fees charged by the Equity Data Plans. Retail investors that
access core data through their broker-dealers can also be affected by
data fees in that the fees charged to their broker-dealers can impact
investors' ready access through their broker-dealers to full NBBO
market information.\161\ The Commission has previously stated that
investors must have core data to participate in the U.S. equity
markets.\162\ And many market participants, including all broker-
dealers, must have access to SIP data to meet their regulatory
obligations.\163\
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\160\ Advisory Committee members may have access to non-public
drafts of amendments to the Equity Data Plans and public statements;
however, they do not have access to plan cost and detailed revenue
information. See Patomak Petition, supra note 48, at 4-5
(``Currently, however, exchanges' disclosures related to their
equity market data fees and expenses are inadequate, making it
difficult for market participants to make informed comments and the
Commission to make reasoned findings. Although exchanges recently
have begun to modestly enhance their disclosures related to market
data fees, they remain inadequate.''). The Commission notes that the
CTA/CQ Plans and the Nasdaq/UTP Plan currently publicly disclose, on
a quarterly basis (with a 60-day lag), the percentage of revenue
earned by fee type. See, e.g., Q4 2018 CTA Quarterly Revenue
Disclosure, available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/Q4%202018%20CTA%20Quarterly%20Revenue%20Disclosure.pdf; Q4 2018 UTP
Quarterly Revenue Disclosure, available at http://www.utpplan.com/DOC/UTP_Revenue_Disclosure_Q42018.pdf. The fee types currently
identified in the public disclosures are: Professional subscribers,
non-professional subscribers, non-display, quote query, and
``other.'' Although the current disclosures break down the revenue
earned for certain fee types, the current disclosures are not broken
down by each line item in the Equity Data Plans' fee schedule. For
example, both the CTA/CQ Plans and the Nasdaq/UTP Plan group certain
fee types under the general ``other'' category. The ``other''
category for the CTA/CQ Plans includes data feed access fees,
redistribution fees, and TV ticker fees. The ``other'' category for
the Nasdaq/UTP Plan includes data feed access fees, annual
administrative fees, redistributor fees, voice port fees, and cable
TV ticker fees. As another example, the CTA/CQ Plans and the Nasdaq/
UTP Plan have more than one type of non-display fees and access
fees, which are not separately identified in the current revenue
disclosures. In addition, the current disclosures by the CTA/CQ
Plans and Nasdaq/UTP Plan do not include the revenue recovered from
audits or any other methods of recovery.
\161\ Some broker-dealers provide customers with market
information from exchange proprietary TOB data feeds as substitutes
for core data in certain applications. This proprietary TOB data may
be cheaper than core data, but may contain information from only one
exchange or one exchange group. See Effective-Upon-Filing Release,
supra note 27, 84 FR at 54798 n.39.
\162\ See Bloomberg Order, supra note 23, at 4.
\163\ See Effective-Upon-Filing Release, supra note 27, 84 FR at
54798.
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Roundtable panelists also stated that there are substantial burdens
associated with the Equity Data Plans' audits of their firms'
subscriber data usage and fee payment.\164\ A retail broker-dealer,
[[Page 2178]]
for example, has stated that compliance with the requirement to
differentiate between the professional and non-professional status of
their customers can be costly for a retail broker in terms of both time
and manpower needed to complete the audit, and that these burdens are a
factor favoring broker-dealer use of the exchanges' proprietary TOB
products.\165\ Exchanges have also acknowledged the administrative
burden associated with determining the professional and non-
professional status of broker-dealers' customers.\166\
---------------------------------------------------------------------------
\164\ See, e.g., Day One Transcript, supra note 38, at 112:21-24
and 114:2-9 (statements of Matt Billings, TD Ameritrade) (``The
plans regularly audit brokers for compliance with their overly
complex rules, which are not harmonized across the CTA and UTP
Plans, and are a cause for misinterpretation. . . . The question
ultimately becomes, at what point does a retail broker move away
from the NMS plans . . . to avoid . . . the audit risk liability
that currently exists under the plans.''); Day Two Transcript, supra
note 113, at 196:20-197:7 (statement of Marcy Pike, Fidelity
Investments) (``Most large brokerage firms or asset managers that
are consuming this data have significant staffs that are counting
and reporting the usage of this data . . . . There is a whole group
of folks that have entered into the industry to help facilitate
audits for the exchanges . . . .'').
\165\ See TD Ameritrade Letter, supra note 40, at 5-8 (stating
that the lower cost of proprietary TOB products, coupled with costs
associated with the process to differentiate between retail
professionals and non-professionals imposed by the Equity Data
Plans, and associated audit risk, favors retail broker-dealer use of
proprietary TOB products). See also Fidelity Letter, supra note 114,
at 9 (``Exchanges spend considerable resources auditing broker-
dealers to ensure that subscriber status categories are correctly
applied. Why? Because it is in their commercial interest to do so--
Professional subscriber market data rates are significantly higher
than Non-professional subscriber rates. We question whether exchange
resources used to audit member firms might be better deployed to
reduce SIP costs.''). Under their respective policies, the Equity
Data Plans deem data recipients to be professionals unless
demonstrated to be a non-professional (a non-professional being a
natural person who receives market data solely for his/her personal,
non-business use, and who further does not fall into certain other
categories). See, e.g., CTA Plan Nonprofessional Subscriber Policy,
available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/Policy%20-%20Non-Professional%20Subscribers%20-%20CTA.pdf (last accessed Nov. 9,
2019); UTP Plan, Exhibit 2 (Fees for UTP Services), Section (b)(2),
available at http://www.utpplan.com/DOC/Nasdaq-UTPPlan_after_43rd_Amendment-Excluding_21st_36th_38th_42nd_Amendments.pdf (last accessed Nov. 9,
2019).
\166\ See, e.g., NYSE Insights, supra note 92 (``Subscribers pay
different rates for the product based on whether the individual
viewing the data is deemed a `professional' or `non-professional'
user. This is a policy that has provided steep discounts for Main
Street investors, but has created complex administrative burdens for
brokers.''); Nasdaq Total Markets Paper, supra note 45, at 4
(stating that the distinctions between ``professional'' and ``non-
professional'' users ``have become arbitrary and more complex than
is necessary and create undue administrative burden to manage. We
should modernize the user definitions to achieve the same general
goals while streamlining the administrative burden.''). See also Day
Two Transcript, supra note 113, at 258:19-25 (statement of Kevin
Carrai, Cboe) (highlighting a compliance tool developed by the CTA
Plan to determine whether an individual should be charged
professional or non-professional rates for the receipt and use of
the plan's market data).
---------------------------------------------------------------------------
During the Roundtable, many panelists expressed support for
expanding the role of advisory committees in the governance of Equity
Data Plans and for providing the advisory committees with the right to
a formal vote on the operating committees.\167\ One panelist stated
that current members of the advisory committees could initially serve
as the pool of candidates from which to draw non-SRO representatives
with voting power and that once the non-SRO representatives are
appropriately constituted, they may be able to select among themselves
their successors.\168\ Exchange panelists were not unified in their
views during the Roundtable, however. One exchange panelist expressed
support for full voting representation by brokers, traders, and
investors on the operating committees of the Equity Data Plans.\169\
Several exchange panelists suggested a willingness to add an additional
non-SRO vote, but only after consideration of the obligations attached
to the voting right.\170\ Another exchange, NYSE, argued in its comment
letter that, before providing advisory committee members with a vote,
the Commission would need to take into consideration their conflicts of
interest and to place obligations on the advisory committee members
similar to those placed on the exchanges.\171\
---------------------------------------------------------------------------
\167\ See, e.g., Day Two Transcript, supra note 113, at 91:13-
19, 136:17-19, 137:8-12 (statements of Hubert de Jesus, Blackrock)
(advocating for advisory committee members to have equitable voting
representation--a 50:50 balanced voting representation--and that
advisors should be selected in an independent fashion to avoid
Participants potentially choosing not to renew an advisor, or
removing an advisor who does not support SRO interests); at 87:17-
20, 118:14-20, 133:2-14 (statements of Richard Ketchum, Former CEO
of FINRA) (supported advisory committee votes, but stressed that
having a fiduciary responsibility tied to enforceable accountability
for both Participants and advisors is important and could benefit
from Commission action); at 122:17-20, 129:16-19 (statements of
Michael Masone, Citigroup) (recommended a minimum of two additional
advisory committee votes--specifically an asset manager and a
broker-dealer--to be represented on the NMS plans); at 127:23-128:6
(statement of John Ramsay, IEX).
\168\ See, e.g., Day Two Transcript, supra note 113, at 128:7-16
(statement of John Ramsay, IEX).
\169\ See, e.g., Day Two Transcript, supra note 113, at 128:17-
23 (statement of John Ramsay, IEX).
\170\ See, e.g., Day Two Transcript, supra note 113, at 134:21-
135:8 (statement of Emily Kasparov, Chicago Stock Exchange, Inc. (n/
k/a NYSE Chicago)); at 136:4-16 (statement of Bryan Harkins, Cboe);
at 251:16-25 (statement of Jeff Davis, Nasdaq).
\171\ See NYSE Group Letter, supra note 116, at 19 (stating that
``absent the same regulatory obligations as the exchanges, Advisory
Committee members would not have an incentive to cast votes
consistent with the terms of the [Equity Data Plans]''). See also
NYSE Letter, supra note 137, at 9 (stating that ``broker-dealers and
other industry participants are free to and do act entirely in their
own commercial interests unfettered by statutory or public interest
concerns'').
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Many Roundtable commenters expressed support for permitting the
Equity Data Plans' advisory committee members to have votes.\172\ In
particular, one commenter suggested that the governance structure
should call for a board and operating committees with equal non-SRO
voting membership, including user, vendor, and public investor
participation.\173\ One commenter asserted that giving voting
representation on the operating committee to broker-dealers and asset
managers would mitigate potential conflicts of interest.\174\ One
commenter supported equal voting power between the SROs and industry
representatives on the Equity Data Plans and replacing those
representatives every two to four years.\175\ Another commenter stated
that meaningful governance of the Equity Data Plans cannot be
accomplished unless user and vendor representatives have a voice in
their operations.\176\
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\172\ See, e.g., SIFMA Letter III, supra note 57, at 7 (``SIP
governance (and that of all other NMS Plans) should include voting
representation by both broker-dealers and asset managers.''); SIFMA
Letter IV, supra note 113, at 4 (stating that the SIP operating
committees should provide equal voting rights to industry
representatives from: (1) Institutional broker-dealers; (2) retail
broker-dealers; (3) buy-side firms; (4) data vendors; (5) ATSs; and
(6) an individual with significant and reputable regulatory
expertise); Fidelity Letter, supra note 114, at 3 (recommending that
the Commission improve SIP governance by providing broker-dealers
and asset managers a vote on all matters before the operating
committees to provide alternative views, and to promote initiatives
to better develop core data).
\173\ See CTA/UTP Letter, supra note 113, at 2.
\174\ See SIFMA Letter III, supra note 57, at 7.
\175\ See SIFMA Letter IV, supra note 113, at 4-5.
\176\ See TD Ameritrade Letter, supra note 40, at 9 (``TD
Ameritrade also believes that meaningful governance of the Equity
Data Plans cannot be accomplished unless user and vendor
representatives have a true voice in their operation. The governance
structure should allow for fair and equitable voting rights for
exchanges and for members of the CTA/UTP Advisory Committee.'').
Similarly, another commenter supported equitable voting
representation from investment advisers, broker-dealers, and data
vendors. See Healthy Markets Letter, supra note 113, at 40.
---------------------------------------------------------------------------
In one of its comment letters on the Roundtable, Nasdaq recommended
expanding the authority and responsibilities of the advisory
committees, particularly on fees and policy-related matters, and
supported providing the general investing public a voice on the
advisory committees.\177\ Nasdaq further stated that increased
authority for the advisory committees should be coupled with ``a fair
and transparent mechanism'' to address conflicts of interest among
advisory committee members.\178\ In addition,
[[Page 2179]]
Nasdaq has expressed support for establishing a partnership between the
exchanges and industry participants for Equity Data Plans' governance,
specifically suggesting that industry participants have two votes on
the plans' operating committees, to be split among the six members of
the Equity Data Plans' advisory committee members.\179\ Nasdaq further
supported requiring non-SRO voting members to ``adhere to existing
conflicts of interest and confidentiality policies, such as those that
require exchanges and their affiliates to recuse themselves when they
might receive a unique benefit not shared with other exchanges.'' \180\
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\177\ See Letter from Thomas Wittman, Executive Vice President,
Head of Global Trading and Market Services, and CEO, Nasdaq (Oct.
25, 2018), at 12, available at https://www.sec.gov/comments/4-729/4729-4562784-176135.pdf (``Nasdaq 2018 Letter'').
\178\ Id. See also Nasdaq Letter, supra note 137, at 7 (stating
that, ``other than ensuring their own compliance with the securities
laws and rules of SROs, broker-dealers must be expected to act in
their own commercial interests.'').
\179\ See Nasdaq Total Markets Paper, supra note 45, at 22-23.
\180\ See id. at 23.
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The Commission also received petitions for rulemaking that
requested that the Commission improve the Equity Data Plans' governance
by including voting representation from investment advisers and broker-
dealers,\181\ and that the Commission conduct a review of the equity
market data fee structure \182\ and study the governance of the U.S.
equity market data regulatory framework with respect to proprietary
market data and the consolidated data processor model.\183\ The EMSAC
also recommended that the advisory committee have the right to a formal
vote to express its views before consideration of any matter on which
the operating committee votes.\184\
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\181\ See Healthy Markets Petition, supra note 48, at 6.
\182\ See Patomak Petition, supra note 48, at 8-9 (``Based on
this review, the SEC should consider whether any additional
regulatory changes related to market data are warranted, potentially
including . . . reforming NMS plan governance to allow voting
representation from stakeholders such as broker-dealers and buy-side
representatives.'').
\183\ See MFA Petition, supra 48, at 13.
\184\ See EMSAC Governance Recommendations, supra note 136, at
2. The EMSAC also recommended that, if the operating committee
approves any action that was opposed by a majority of the advisory
committee, the operating committee should explain and document its
reasons for proceeding contrary to advisory committee input and
that, in the event that the matter is the subject of a rule filing,
the operating committee should also summarize and explain the
results of the operating committee and advisory committee votes in
the filing submitted to the Commission. See id.
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NYSE and Nasdaq, however, expressed concern with enhancing advisory
committee involvement in Equity Data Plan governance.\185\ NYSE argued
in its comment letter that the current non-voting advisory committee
structure is ``working as intended'' and that Section 11A of the Act
and Rule 608 of Regulation NMS enable only SROs to become official
voting members or participants of the Equity Data Plans, consistent
with the SROs' regulatory obligations.\186\ In particular, NYSE stated
that, ``[i]f the advisors of the NMS Plans were allowed effectively to
interfere with the actions of the operating committees of the Plans,
the advisors might be able to block or slow down changes the SROs felt
were necessary to discharge their statutory obligations.'' \187\ Nasdaq
similarly asserted that non-SROs have a ``strong voice in the operation
of NMS Plans through the significant participation of advisory
committees'' and expressed concern that enhanced industry participation
in the Equity Data Plans could frustrate the regulatory obligations
that attach to the SROs as Participants.\188\ Nasdaq also stated that
expanding the role of advisory committees to include voting rights
``would need to be accomplished through an amendment to Rule 608 of
Regulation NMS and to the NMS plans to ensure proper and consistent
application.'' \189\
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\185\ See supra note 137 and accompanying text.
\186\ NYSE Letter, supra note 137, at 9.
\187\ Id. at 9.
\188\ Nasdaq Letter, supra note 137, at 7.
\189\ Id. at 22.
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Since the Commission took the step of establishing non-voting
advisory committees in Regulation NMS, the equity markets have seen a
number of important changes, which as discussed above include the
demutualization of exchanges--and the resulting divergence of the
interests of the exchanges and their members--and the conflicts of
interests that have emerged as exchanges have developed a variety of
proprietary data products and marketed them to the subscribers of core
data disseminated by the SIPs. Moreover, while non-SROs bear
significant burdens from subscriber audits, those market participants
have no role in selecting or overseeing the plan administrator that is
responsible for the audit process. Thus, in light of the critical
importance of disseminating SIP data to a broad range of market
participants, the important role that the Equity Data Plans play in the
national market system, and the financial \190\ and operational burdens
\191\ that the Equity Data Plans' decisions frequently place on non-SRO
market participants--as well as the comments the Commission has
received supporting voting rights for non-SROs on the Equity Data
Plans' operating committees.\192\ The Commission believes that, to help
ensure that the New Consolidated Data Plan addresses the needs of all
market participants, broader participation in the governance of the New
Consolidated Data Plan would be beneficial.\193\ Consequently, the
Commission believes that the New Consolidated Data Plan should include
provisions that permit non-SRO representatives reflecting a diverse
range of affected market participants to participate as voting members
of the New Consolidated Data Plan operating committee.\194\
---------------------------------------------------------------------------
\190\ The total revenues derived from Equity Data Plans' fees
are substantial. For example, total revenue for the three Equity
Data Plans totaled more than $430 million in 2017, based on their
audited financial statements. Moreover, while non-SROs bear
significant burdens from subscriber audits, see supra notes 164-165
and accompanying text, those market participants have no role in
selecting or overseeing the plan administrator that is responsible
for the audit process.
\191\ Any changes in the data feeds, connectivity options, and
policies and procedures of the Equity Data Plans often require
responsive technology changes by each subscriber.
\192\ See supra notes 172-176 and accompanying text.
\193\ See supra note 159 and accompanying text.
\194\ The Commission understands that previous efforts to amend
the Equity Data Plans to provide votes on the operating committees
to non-SROs have not been successful due, in part, to the
significant hurdle of satisfying the plans' unanimity requirements
before an amendment to any of the plans may be proposed. See Letter
from Eric Swanson, General Counsel, Bats Global Markets, Inc. (Aug.
17, 2016), available at https://www.sec.gov/comments/265-29/26529-83.pdf (``In early 2015, Bats submitted proposals to the UTP and
CTA/CQ Plans' Operating Committees to allow one broker-dealer and
one investment advisor representative as full voting members. These
proposals were not designed to be a final recommendation; but to
rather act as a strawman to facilitate further discussions on how to
increase participation by industry participants in the governance of
the UTP and CTA/CQ Plans. Bats was unable to obtain sufficient
support from the Operating Committee to move that initiative forward
. . . .'').
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Broader participation in the governance of the New Consolidated
Data Plan should be beneficial in providing more meaningful inclusion
of key stakeholders' views in New Consolidated Data Plan decision
making, and the Commission believes that the New Consolidated Data Plan
should provide for separate voting member representatives of an
institutional investor (e.g., an asset management firm), a broker-
dealer with a predominantly retail investor customer base, a broker-
dealer with a predominantly institutional investor customer base, a
securities market data vendor, an issuer of NMS stock, and a retail
investor. The representatives on the New Consolidated Data Plan would,
therefore, closely mirror the categories of representatives on the
advisory committees of the Equity Data Plans. However, because the
Commission believes that ATSs and institutional broker-dealers serve
similar roles in the markets, as they both operate as over-
[[Page 2180]]
the-counter trading venues, the Commission believes that the New
Consolidated Data Plan operating committee should not include a
designated ATS representative.\195\ To further ensure that non-SRO
members reflect a diversity of perspectives, the Commission believes
that the New Consolidated Data Plan should not permit a person
affiliated with an SRO or a broker-dealer to serve as the
representative of an ``issuer,'' a ``retail investor,'' or a ``market
data vendor.''
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\195\ As noted above, the advisory committees of the Equity Data
Plans currently have representatives from the following categories:
(1) A broker-dealer with a substantial retail investor customer
base; (2) a broker-dealer with a substantial institutional investor
customer base; (3) an ATS; (4) a data vendor; and (5) an investor.
The Commission notes that the individual representing an ATS on the
Equity Data Plans advisory committee has, for several years, been
from a large institutional broker.
---------------------------------------------------------------------------
The Commission also believes that the extent of the SROs' current
involvement in the Equity Data Plans' advisory committees--from
selection of the members to selection of their own representatives on
the advisory committees--limits the ability of the advisory committee
members to be fully independent and to provide alternative views to be
heard by the Equity Data Plans and the Commission, as contemplated when
the advisory committees were created.\196\ Therefore, the Commission
believes that the SROs should not be permitted to select the non-SRO
members of the New Consolidated Data Plan operating committee. The
Commission believes that the operating committee should provide for a
process to publicly solicit, and make available for public comment,
nominations for non-SRO members.
---------------------------------------------------------------------------
\196\ See Regulation NMS Release, supra note 6, 70 FR at 37561
(``Expanding the participation of interested parties other than SROs
in Plan governance should increase the transparency of Plan
business, as well as provide an established mechanism for
alternative views to be heard by the Plans and the Commission.'').
---------------------------------------------------------------------------
Further, the Commission believes that the initial non-SRO operating
committee members should be selected by the current members of the
Equity Data Plans' advisory committees, excluding advisory committee
members who were selected by a Participant to be its representative,
and subsequent non-SRO members should be selected solely by the then-
serving non-SRO members of the New Consolidated Data Plan operating
committee.\197\ Additionally, the Commission believes that, to enhance
the ability of non-SRO members to obtain sufficient experience with the
operation of the New Consolidated Data Plan, and to make informed
contributions as members of the operating committee, the New
Consolidated Data Plan should provide that non-SRO members serve for a
term of two years, which is the current term of advisory committee
members of the Equity Data Plans.\198\ The Commission further believes
that to ensure that a diversity of viewpoints are reflected among the
non-SRO members of the operating committee, the New Consolidated Data
Plan should provide for reasonable term limits for non-SRO
members.\199\
---------------------------------------------------------------------------
\197\ A list of current members of the CTA Plan advisory
committee is available at https://www.ctaplan.com/advisory-committee
(last accessed on Nov. 13, 2019). The Equity Data Plans all share
the same advisory committee members. See also supra notes 156 and
168.
\198\ Section III.(e)(2) of the CTA Plan; Section IV.E.(b) of
the UTP Plan.
\199\ For example, one commenter recommended that non-SRO
members should nominate individuals to replace then-serving non-SRO
members every two to four years. See supra note 175.
---------------------------------------------------------------------------
The Commission further believes that the current membership of the
Equity Data Plans' advisory committees, excluding exchange
representatives, should, to the extent possible, be maintained through
the transition to the New Consolidated Data Plan to facilitate
continuity. The Commission believes that the current advisory committee
members' experience with, and expertise in, the operation of the Equity
Data Plans will be valuable in selecting the initial non-SRO operating
members (as discussed in more detail below) and will thus support the
stable transition of operations from the Equity Data Plans to the New
Consolidated Data Plan. Therefore, until the initial non-SRO members
have been selected, the Commission believes that the Participants
should renew the expiring terms of all members of the Equity Data
Plans' advisory committees (other than those selected to represent a
Participant) who remain willing to serve in that role.
As noted above, certain exchanges have expressed concerns regarding
extending voting rights on the Equity Data Plans to non-SROs.\200\ The
Commission recognizes that the SROs have special legal obligations and
responsibilities under the Act, including with regard to operating the
Equity Data Plans.\201\ However, neither the Act nor the applicable
rules thereunder, including Rule 608 of Regulation NMS, prohibit non-
SROs from participating in the governance of any NMS plan or from
having voting rights in the administration of NMS plans. Therefore, the
Commission believes that it is not necessary to amend Rule 608 of
Regulation NMS in order for the New Consolidated Data Plan to include
voting rights for non-SROs. The Commission believes that providing non-
SROs with voting rights in the New Consolidated Data Plan should help
to further ensure that SIP data is available for the benefit of the
public interest, by incorporating input from a range of stakeholders,
consistent with the findings and goals of Section 11A of the Act.\202\
Moreover, the Commission believes that votes can be provided to non-
SROs in a manner that results in the SROs retaining the voting power
necessary to act jointly on behalf of the plan pursuant to the
requirements of Section 11A of the Act \203\ and Rule 608 of Regulation
NMS.\204\
---------------------------------------------------------------------------
\200\ See supra notes 170-171, 185-189 and accompanying text.
\201\ 15 U.S.C. 78k-1(a)(3)(B).
\202\ 15 U.S.C. 78k-1(a)(1).
\203\ 15 U.S.C. 78k-1
\204\ 17 CFR 242.608.
---------------------------------------------------------------------------
Specifically, the Commission believes that the New Consolidated
Data Plan should provide the SROs in aggregate with two-thirds of the
voting power on the operating committee--and non-SRO members of the
operating committee in aggregate with one-third of the voting power--
with proportionate fractional votes allocated to non-SRO members of the
operating committee as necessary to preserve this ratio. To ensure that
the SROs retain primary control of the New Consolidated Data Plan, the
Commission believes that this ratio should be maintained at all times,
including when a member of the operating committee is not present or
unable to vote for any reason. In addition, the relative value of non-
SRO votes should be adjusted as necessary to account for new exchange
registrations and consolidations to continually ensure that the ratio
between aggregate SRO voting power and aggregate non-SRO voting power
remains the same.
Thus, under the provisions that the Commission believes should be
part of the New Consolidated Data Plan regarding the allocation of
votes among the SROs and non-SROs, as applied to the current number and
ownership structure of the SROs, there would be nine aggregate SRO
votes \205\ (two-thirds) and four and one-half aggregate non-SRO votes
(one-third) on the New Consolidated Data Plan operating committee.
Because there would be six non-SRO operating committee members eligible
to vote in the New Consolidated Data Plan, but only four and one-half
non-SRO votes in the aggregate, each
[[Page 2181]]
non-SRO member's vote would be worth three-quarters of one vote (4.5 /
6 = \3/4\).
---------------------------------------------------------------------------
\205\ The NYSE exchange group would have two votes; the Nasdaq
exchange group would have two votes; the Cboe exchange group would
have two votes; and IEX, FINRA, and LTSE would each have one vote--
totaling nine votes.
---------------------------------------------------------------------------
Further, the Commission believes that action by the operating
committee of the New Consolidated Data Plan should require an
``augmented majority vote,'' meaning a two-thirds majority of all votes
on the operating committee, provided that this vote also includes a
majority of the SRO votes, which will ensure that the SROs have
sufficient voting power to act jointly on behalf of the plan pursuant
to the requirements of Section 11A of the Act \206\ and Rule 608 of
Regulation NMS.\207\ For example, under the current number and
ownership structure of the SROs, there would be nine SRO votes and four
and one-half non-SROs votes. For an ``augmented majority vote,'' nine
votes of the operating committee would be required for a two-thirds
majority, and five SRO votes would be required for an SRO majority
vote. Five SRO votes would be necessary to obtain a majority of SRO
votes as well as a two-thirds majority vote of the operating committee.
There would not be a situation in which a two-thirds majority would not
also include a majority of the SRO votes. However, the number of the
SROs may not remain static. If in the future another SRO joined the New
Consolidated Data Plan, there would then be ten SRO votes, and the non-
SRO operating committee members would then have five votes. Under those
circumstances, a two-thirds majority could be obtained without a
majority of the SRO votes--in other words, if five SROs and five non-
SROs vote in favor of a motion, and five SROs vote against the motion,
two-thirds of the operating committee voted in favor, but a majority of
SROs did not. Therefore, this would not constitute an augmented
majority vote and the motion would fail.
---------------------------------------------------------------------------
\206\ 15 U.S.C. 78k-1.
\207\ 17 CFR 242.608.
---------------------------------------------------------------------------
Finally, the Commission believes that the New Consolidated Data
Plan should include provisions to address circumstances in which a
member is unable to attend an operating committee meeting or to cast a
vote.
3. Voting Requirements for Changes to the New Consolidated Data Plan
Under the current governance model, certain actions by the Equity
Data Plans' operating committees require the unanimous vote of all
Participants.\208\ While the majority of actions under the Equity Data
Plans require only a majority vote, unanimity is required, for example,
to propose amendments to the provisions of the Plans,\209\ to amend
contracts between the Equity Data Plans' processor and vendors,\210\
and to terminate a Plan processor.\211\ The EMSAC, however, recommended
that unanimity not be required for NMS plan votes, stating that
limiting the use of unanimity requirements would ``prevent undue
friction or delay in Plan voting matters.'' \212\
---------------------------------------------------------------------------
\208\ See Section IV.(b) of the CTA Plan; Section IV.(c) of the
CQ Plan; Section IV.C.1 of the UTP Plan.
\209\ See Section IV.(b)(i) of the CTA Plan; Section IV.(c)(i)
of the CQ Plan; Sections IV.C.1.a. and XVI of the UTP Plan.
\210\ See, e.g., Section IV.C.1(b) of the UTP Plan.
\211\ See, e.g., Section IV.C.1(c) of the UTP Plan.
\212\ See EMSAC Governance Recommendations, supra note 136.
---------------------------------------------------------------------------
The Commission believes that, because unanimous voting provides
each exchange, despite the conflicts of interest it may face, with an
effective veto over certain significant Equity Data Plans' matters, the
requirement for unanimous voting can enable a single exchange to
obstruct improvements to the collection (e.g., connectivity),
processing (e.g., aggregation or consolidation), and distribution
(e.g., transmission) of SIP data that the other SROs support. To
address the concerns that arise from the Equity Data Plans' requirement
for unanimous voting, the Commission believes that the submission of
amendments to the New Consolidated Data Plan to the Commission, like
other actions by the operating committee as described above,\213\
should be approved by an augmented majority vote, defined above, rather
than a unanimous vote. As noted above, the Commission believes that
requiring an augmented majority vote for changes to the New
Consolidated Data Plan would provide non-SRO members with a voice in
New Consolidated Data Plan governance, while also ensuring that the
SROs have sufficient voting power to act jointly on behalf of the New
Consolidated Data Plan.
---------------------------------------------------------------------------
\213\ See supra Section II.C.2.
---------------------------------------------------------------------------
One Roundtable panelist and one commenter raised the concern that
eliminating the current Equity Data Plans' requirements regarding
unanimous voting would reduce the influence of FINRA and the
unaffiliated exchanges.\214\ The Commission, however, believes that the
voting allocation described above for the New Consolidated Data Plan--
coupled with the existing requirement that NMS plan amendments (except
those put into effect upon filing) \215\ must be published for comment
and subject to approval by the Commission to become effective--should
help to address this concern.\216\ Actions by the Equity Data Plans
would no longer be subject to veto by a single SRO or exchange group,
and substantive New Consolidated Data Plan amendments would continue to
be subject to review by the Commission and public notice and comment,
and would not become effective unless the Commission finds them to be
consistent with the Act.
---------------------------------------------------------------------------
\214\ See, e.g., Day Two Transcript, supra note 113, at 113:24-
114:9, 149:1-13, 24 (statements of Emily Kasparov, Chicago Stock
Exchange, Inc. (n/k/a NYSE Chicago)); Healthy Markets Letter, supra
note 113, at 10 (``In recent years, the CTA Plan has modified its
procedures to permit votes by less than unanimity. This severely
limits the ability of FINRA or an independent exchange to block CTA
Plan actions, arguably granting much greater power to the dominant
exchange operators.'').
\215\ See 17 CFR 242.608(b)(3).
\216\ See also supra note 145 (noting FINRA's proportional
voting power would increase under the provisions of the New
Consolidated Data Plan as contemplated by this Order).
---------------------------------------------------------------------------
In addition, unanimous voting is not a requirement for NMS plans.
In fact, the most-recently approved NMS plan, which governs the
facility for a consolidated audit trail (``CAT''), requires the
affirmative vote of a two-thirds supermajority of all members of the
operating committee for plan amendments.\217\ In the adopting release
for Rule 613 under the Act,\218\ which required the creation of the CAT
Plan, the Commission stated that ``an alternate approach'' to voting
involving ``the possibility of a governance requirement other than
unanimity, or even super-majority approval, for all but the most
important decisions'' should be considered, as it ``may be appropriate
to avoid a situation where a significant majority of plan sponsors--or
even all but one plan sponsor--supports an initiative but, due to a
unanimous voting requirement, action cannot be undertaken.'' \219\
---------------------------------------------------------------------------
\217\ See Limited Liability Company Agreement of CAT NMS, LLC
(effective Jan. 10, 2018), available at https://www.catnmsplan.com/wp-content/uploads/2018/01/CAT-NMS-Plan-Current-as-of-1.10.18.pdf;
Securities Exchange Act Release No. 79318 (Nov. 15, 2016), 81 FR
84696 (Nov. 23, 2016) (Order Approving the National Market System
Plan Governing the CAT or ``CAT Plan''). See also Section 12.3 of
the CAT Plan.
\218\ 17 CFR 242.613.
\219\ See Securities Exchange Act Release No. 67457 (July 18,
2012), 77 FR 45722, 45787 (Aug. 1, 2012).
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The Commission believes that the proposed reallocation of voting
rights among the SROs--combined with the provision of formal voting
power to non-SROs, the provision of a two-thirds majority of votes
allocated to the SROs, and the provision of an augmented majority vote
rather than unanimous vote for amendments to the New Consolidated Data
Plan--would further the objectives of Section 11A of the
[[Page 2182]]
Act.\220\ Together, these provisions would promote the prompt,
accurate, reliable, and fair dissemination of core data \221\ by
providing for meaningful input from a broad range of stakeholders while
also ensuring that the SROs retain sufficient voting power to act
jointly on behalf of the plan pursuant to the requirements of Section
11A of the Act and Rule 608 of Regulation NMS.\222\ The Commission also
believes that broader representation on the New Consolidated Data Plan
operating committee would help to ensure that decisions relating to New
Consolidated Data Plan operations support the prompt, accurate,
reliable, and fair dissemination of core data.\223\
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\220\ 15 U.S.C. 78k-1.
\221\ See supra note 102.
\222\ 15 U.S.C. 78k-1 and 17 CFR 242.608.
\223\ See 15 U.S.C. 78k-1(c)(1)(B).
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4. Consolidating the Three Equity Data Plans Into a Single New
Consolidated Data Plan
Although the Equity Data Plans are structured as three separate NMS
plans--which reflects the less integrated equity markets at the time
the Equity Data Plans were organized and approved--the three Equity
Data Plans now have identical operating committees that hold joint
meetings to oversee the collection, processing, and distribution of SIP
data in today's tightly integrated equity markets. Additionally, the
three Equity Data Plans have the same advisory committee members, who
function as one advisory committee for all three Equity Data Plans. The
three Equity Data Plans also have overlapping administrative and
regulatory functions and share the same revenue distribution formula,
legal representation, and other professional services. The Commission
believes that maintaining three separate Equity Data Plans is
inefficient and creates redundant efforts on the part of the operating
and advisory committee members that unnecessarily burden ongoing
improvements to the SIPs and that contribute to certain duplicative
costs. These redundant efforts include, among other things, maintaining
accounting for three sets of legal and auditor fees, maintaining books
and records for the Equity Data Plans' businesses, filing separate
amendments regarding some aspects of the Equity Data Plans with the
Commission, and devoting personnel resources to coordinate and
facilitate three separate Equity Data Plans.
The Commission therefore believes that there should be one New
Consolidated Data Plan to promote the application of consistent
policies, procedures, terms, fees, and conditions that would be more
transparent and easily understood across all data products offered and
that reflect the provisions that are the subject of this Order. The
Commission also believes that replacing the three existing Equity Data
Plans with a single New Consolidated Data Plan with the governance
structure discussed above would simplify the process of making future
enhancements to the Equity Data Plans' operations so that core data
meets on a continuing basis the needs of market participants and
furthers the objectives of Section 11A of the Act.\224\
---------------------------------------------------------------------------
\224\ 15 U.S.C. 78k-1. The Commission notes that, recently, as
part of a comprehensive recommendation on reforming the U.S. equity
markets, Nasdaq recommended consideration of consolidating the NMS
plans for disseminating equity market data. See Nasdaq Total Markets
Paper, supra note 45, at 21.
---------------------------------------------------------------------------
Finally, the Commission believes that the terms of the New
Consolidated Data Plan should provide for the orderly transition of
functions and responsibilities from the three Equity Data Plans to the
New Consolidated Data Plan. The Commission believes that the
Participants, because of their significant experience in the operations
of NMS plans, are well positioned to propose an efficient and orderly
transition as part of the New Consolidated Data Plan they file with the
Commission.
D. The Operation of the New Consolidated Data Plan
Given the importance of core data to the national market system, as
recognized by both Congress and the Commission, and consistent with
Rule 608 of Regulation NMS,\225\ the Commission believes that the
terms, policies, and procedures of the New Consolidated Data Plan
should promote the joint work of the SRO members (i.e., members that
represent an exchange group or an unaffiliated SRO) and non-SRO members
of the operating committee to ensure the prompt, accurate, reliable,
and fair dissemination of core data.\226\ The Commission has set forth
below certain governance provisions that the Commission believes would
enable the New Consolidated Data Plan to address these issues.
---------------------------------------------------------------------------
\225\ 17 CFR 242.608.
\226\ See supra note 102.
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1. The Role and Responsibilities of the Operating Committee
The Commission believes that the New Consolidated Data Plan should
set forth the role and responsibilities of the operating committee. The
Commission believes that the duties of the operating committee should
include, at a minimum, the provisions described below.
The New Consolidated Data Plan should state that the operating
committee should be responsible for proposing amendments to the New
Consolidated Data Plan or implementing other policies and procedures,
as necessary, to ensure the prompt, accurate, reliable, and fair
collection, processing, distribution, and publication of information
with respect to quotations for and transactions in NMS stocks and the
fairness and usefulness of the form and content of that information,
consistent with the goals of Section 11A of the Act.\227\ While each of
the Equity Data Plans includes a general provision stating that the
operating committees will propose changes to the Equity Data Plans
through amendments, the Commission believes that the New Consolidated
Data Plan should specifically provide that the responsibilities of the
operating committee include proposing amendments to ensure that SIP
data is distributed consistent with these statutory goals. The
Commission believes that such a provision would encourage the operating
committee to actively examine New Consolidated Data Plan operations and
propose to change provisions of the New Consolidated Data Plan (or
policies and procedures thereunder) that are no longer effective in
carrying out the objectives of the Act.
---------------------------------------------------------------------------
\227\ 15 U.S.C. 78k-1; see supra note 102.
---------------------------------------------------------------------------
The Commission believes that the New Consolidated Data Plan
operating committee's role should also include selecting, overseeing,
specifying the role and responsibilities of, and evaluating the
performance of, an independent plan administrator,\228\ plan
processors, a firm to examine and assess data usage reports and fee
payments by subscribers (``auditor''),\229\ and other professional
service providers. While the Equity Data Plans provide that the
performance of the processor must be reviewed,\230\ the Commission
believes that this obligation should be expanded to cover other
professional service providers that have a significant role in the
operations of the New Consolidated Data Plan to ensure that the non-SRO
members of the New Consolidated Data Plan operating committee have a
voice in these matters.
---------------------------------------------------------------------------
\228\ See infra note 234 and accompanying text.
\229\ See supra note 164 and accompanying text.
\230\ See Section V.(d) of the CTA Plan; Section V.(d) of the CQ
Plan; Section V.A. of the UTP Plan.
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With respect to reviewing the performance of the New Consolidated
[[Page 2183]]
Data Plan's processor(s), the Commission believes that the operating
committee's role should include ensuring the public reporting of the
performance of the processor(s) and other metrics and information about
the processor(s). The CTA Plan requires the operating committee to
periodically review whether ``the Processor has failed to perform its
functions in a reasonably acceptable manner in accordance with the
provisions of [the] CQ Plan,'' whether ``its reimbursable expenses have
become excessive and are not justified on a cost basis,'' and whether
``the Processor should continue in such capacity or should be
replaced.'' \231\ The CTA Plan also states that, in reviewing the
performance of the processor, the operating committee shall consider
factors such as ``experience, technological capability, quality and
reliability of service, relative costs, back-up facilities, and
regulatory considerations.'' \232\
---------------------------------------------------------------------------
\231\ Section V.(d) of the CTA Plan.
\232\ Id.
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The Commission believes that the provisions in the New Consolidated
Data Plan regarding the review of the processor(s) should also include
a requirement that the results of the performance evaluation be made
public, along with the metrics used to evaluate the processor(s) and
other pertinent information about the processor(s). The Commission
believes that making this information public would provide all market
participants with a view of how well or poorly a processor is
performing across various metrics, which would allow market
participants to provide meaningful input to the operating committee and
to the Commission. Further, the Commission believes that, if
performance metrics are made public, the operating committee of the New
Consolidated Data Plan would have enhanced incentives to ensure that
the processor is functioning well and that the New Consolidated Data
Plan is providing prompt, accurate, and reliable publication of
information with respect to quotations for and transactions in NMS
stocks.\233\
---------------------------------------------------------------------------
\233\ See 15 U.S.C. 78k-1(c)(1)(B).
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The Commission further believes that the administrator of the New
Consolidated Data Plan should be independent, meaning that the
administrator should not be owned or controlled by a corporate entity
that separately offers for sale a market data product, either directly
or via another subsidiary. As discussed above, the Commission believes
that an entity that acts as the administrator while also offering its
own proprietary data products faces a substantial, inherent conflict of
interest, because it would have access to sensitive customer
information.\234\ While conflict-of-interest and confidentiality
provisions of the New Consolidated Data Plan, or of the administrator,
may serve to mitigate conflicts to some extent, the Commission believes
the conflicts of interest faced by a non-independent administrator are
so great that these conflicts cannot be sufficiently alleviated through
policies and procedures.
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\234\ As noted above, NYSE and Nasdaq currently act as
administrators of the Equity Data Plans, which provides certain
employees of these exchanges, through the subscriber audit process,
with access to confidential data subscriber information. See supra
note 52. Under the independence provision discussed above, NYSE and
Nasdaq would be excluded from operating as plan administrators,
although they would not be excluded from continuing to act as SIPs.
There is precedent in other NMS plans for the roles of administrator
and processor to be performed by different entities. As an example,
for the NMS plan that governs the collection, consolidation,
processing, and dissemination of last sale and quotation information
for listed options--the Limited Liability Company Agreement of
Options Price Reporting Authority, LLC Plan--Cboe Exchange, Inc.
serves as the plan administrator and SIAC serves as the processor.
The Commission notes that there would be some loss of revenue to the
exchange groups currently acting as administrators to the Equity
Data Plans if they are excluded from acting as plan administrator
for the New Consolidated Data Plan.
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The Commission also believes that a requirement that the New
Consolidated Data Plan administrator be independent would address
concerns that have been raised about the burdens imposed by the current
audit process for the Equity Data Plans.\235\ Specifically, the
Commission believes that the oversight of an independent plan
administrator would help to ensure that the burdens imposed by the
audit process are fair, that they are reasonably related to ensuring
that data subscribers pay the amounts properly due for their data
usage, and that they are not designed in a manner that affects the
decision making of subscribers when determining whether to purchase
proprietary TOB data feeds.
---------------------------------------------------------------------------
\235\ See supra notes 164-165 and accompanying text.
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Additionally, the Commission believes that the New Consolidated
Data Plan should provide that any expenditures for professional
services--including for example, legal counsel, public relations, and
accounting services--that are paid for using New Consolidated Data Plan
revenues must be for activities consistent with the terms of the New
Consolidated Data Plan and must be authorized by an augmented majority
of the operating committee. Because the New Consolidated Data Plan's
governance structure would be designed to represent the interests of a
broad range of market participants--who may at times hold diverging
views about how the New Consolidated Data Plan should operate--the
Commission believes that requiring that professional services engaged
by the New Consolidated Data Plan be consistent with the terms of the
New Consolidated Data Plan and be authorized by an augmented majority
vote would help ensure that New Consolidated Data Plan resources are
expended in furtherance of the purposes of the New Consolidated Data
Plan and that both SRO and non-SRO members of the operating committee
have input into this important aspect of New Consolidated Data Plan
operations.
Further, the Commission believes that the New Consolidated Data
Plan should include provisions to ensure that the operating committee
is responsible for assessing the marketplace for equity market data
products and ensuring that SIP data offerings are priced in a manner
that is fair and reasonable and are designed to ensure the widespread
availability of SIP data \236\ that is useful to a broad range of
investors and other market participants.\237\ Imposing a direct
responsibility on the operating committee of the New Consolidated Data
Plan to keep abreast of changes in the marketplace regarding demands
for and pricing of equity market data, and to ensure that SIP data
meets those demands and are widely distributed at fair and reasonable
prices, should help ensure that the SIPs' data feeds support the
findings and goals of Section 11A of the Act.\238\
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\236\ See supra note 16.
\237\ See 15 U.S.C. 78k-1(c)(1)(C) (providing that the
Commission shall assure the usefulness of the form and content of
information with respect to quotations for and transactions in
securities).
\238\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------
Finally, the Commission believes that the New Consolidated Data
Plan operating committee's role should include designing and
maintaining a fair and reasonable revenue allocation formula for
distributing plan revenues to be applied by the independent plan
administrator, and overseeing, reviewing and revising that formula as
needed. Over the past several years, market participants have suggested
updating the market data revenue allocation.\239\ For example, during
the
[[Page 2184]]
Roundtable, one panelist recommended that the Commission undertake
rulemaking to simplify the revenue allocation formula.\240\ Another
panelist highlighted work done to increase transparency on the revenue
allocation formula, including publishing a ``plain-language version of
the revenue allocation formula'' on the Equity Data Plans'
websites.\241\ In addition, Nasdaq has stated that the revenue
allocation formula needs improvement as certain exchanges have ``skewed
the expected allocation of revenue by attracting displayed quotations
without executing a commensurate number of trades.'' \242\ Nasdaq has
expressed support for modifying the revenue allocation formula to
reward displayed quotes where investors receive an execution.\243\ The
Commission believes that the operating committee of the New
Consolidated Data Plan, with the broader representation of market
participants contemplated by this Order, would be well situated to
address issues such as these regarding Equity Data Plans' revenue
allocation.
---------------------------------------------------------------------------
\239\ See, e.g., Transcript of EMSAC Meeting (Apr. 5, 2017), at
0037:5-11 (statement of Adam Nunes, Hudson River Trading), available
at https://www.sec.gov/spotlight/equity-market-structure/emsac-transcript-040517.txt (``We had people splitting all their trades up
into hundred-share lots to maximize their revenue share. And now, we
look today with . . . quote-sharing where . . . you see a massive
disparity between exchanges' quote share and their market share. So,
I do think that that's something that should be addressed.'');
Letter from David M. Weisberger, President, Exquam LLC (Mar. 24,
2017), at 4-5, available at https://www.sec.gov/comments/265-29/26529-1666811-148978.pdf (stating that the ``quote based calculation
in the rule is . . . flawed'' and recommending that the allocation
formula be based ``on the value of trades in each stock resulting
from interaction with a displayed quote.'').
\240\ See Day One Transcript, supra note 38, at 117:1-2
(statement of Michael Blaugrund, NYSE) (recommending that the
Commission undertake rulemaking to simplify the revenue allocation
formula).
\241\ Day Two Transcript, supra note 113, at 90:13-16 and 97:16-
22 (statements of Emily Kasparov, Chicago Stock Exchange, Inc. (n/k/
a NYSE Chicago)).
\242\ See Nasdaq Total Markets Paper, supra note 45, at 22. See
also Day Two Transcript, supra note 113, at 174:25-175:10 (statement
of John Yetter, Nasdaq); Nasdaq 2018 Letter, supra note 177, at 5.
\243\ See id. (``If the goal of consolidated data is to improve
market quality, the revenue allocation formula should aim to improve
the quality of quotes on public exchanges, where available liquidity
is always on display and an execution can be accomplished.'').
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2. Executive Session Policy
In response to requests for improving the transparency of the use
of executive session (i.e., meetings from which members of the advisory
committee are excluded),\244\ the Equity Data Plans have implemented an
executive session policy under which the following topics are
appropriate for consideration or action in executive session: Fees that
require discussion of non-public financial information; subscriber
audit findings; discussions requiring the disclosure of material non-
public information; financial reports containing non-public financial
information; the portion of a discussion or evaluation of administrator
and processor performance that includes confidential information;
contract negotiations, awards, and revocations that contain
confidential information; advisory committee member selection;
litigation matters; and confidential, non-public discussions with the
Commission and its staff.\245\ While the Commission believes that the
New Consolidated Data Plan would have no need to provide for an
advisory committee,\246\ the Commission expects that the SROs will
continue to hold executive sessions that will exclude non-SRO members
of the operating committee. Thus, the Commission believes the New
Consolidated Data Plan should include an executive session policy.
---------------------------------------------------------------------------
\244\ See, e.g., EMSAC Governance Recommendations, supra note
136, at 2.
\245\ The Commission's understanding of the executive session
policies of the Equity Data Plans is based on information obtained
by the Commission or its staff as part of the Commission's oversight
of the Equity Data Plans.
\246\ See infra note 253.
---------------------------------------------------------------------------
During the Roundtable, exchanges pointed to progress on limiting
the use of executive sessions by the SROs.\247\ One exchange commenter
highlighted recent improvements in transparency that have resulted from
shifting more discussions about SIP operations from executive sessions
to the general sessions.\248\ Another exchange commenter expressed a
willingness to increase public transparency of SIP operations and limit
time spent in executive sessions.\249\ Other panelists, however, raised
continuing concerns.\250\ For example, one industry panelist stated
there should be a ``litmus test'' for determining if a matter deserved
executive session consideration.\251\
---------------------------------------------------------------------------
\247\ Day Two Transcript, supra note 113, at 141:3-18 (statement
of Emily Kasparov, Chicago Stock Exchange, Inc. (n/k/a NYSE
Chicago)). One exchange commenter highlighted meeting minutes that
showed SIP Participants spending little time in executive sessions.
See Nasdaq 2018 Letter, supra note 177, at 21 (``The executive
session minutes reveal that the SIP Participants spend very little
time in executive session, as little as 12 minutes in the last
meeting.''). This commenter also stated that ``[g]overnance of the
SIPs is substantially more transparent than it once was'' and that
advisory committee members ``enjoy access to information that is
nearly coextensive with that of the SIP Participants.''
\248\ See NYSE Letter, supra note 137, at 19 (``Among other
things, the Operating Committees have shifted most discussions about
SIP operations from its Executive Sessions, which are not attended
by the Advisory Committee, to the General Sessions, which are. The
Operating Committee also provides transparency into why an agenda
item is confidential and should be included in the Executive Session
and requires a vote by the Plan participants before an agenda item
is moved to the Executive Session.'').
\249\ See Letter from Oliver Albers, SVP, Head of Global
Partnerships, Nasdaq (Oct. 24, 2018), at 9, available at https://www.sec.gov/comments/4-729/4729-4560081-176209.pdf.
\250\ Day Two Transcript, supra note 113, at 143:16-21
(statement of John Ramsay, IEX) (``I have witnessed cases where
matters end up in executive session because they're sensitive, in
the sense that the committee members might come under criticism from
folks in the industry, rather than it's really so much a direct
conflict of the type that really should require executive
session.''); id. at 144:8-19 (statement of Hubert de Jesus,
Blackrock) (expressing concern for the carve-outs permitting use of
executive session).
\251\ See Day Two Transcript, supra note 113, at 145:11-15
(statement of Kevin Cronin, Invesco).
---------------------------------------------------------------------------
The Commission believes that, by permitting the SROs to hold
discussions and make decisions in executive session without the
advisory committee members present, the Equity Data Plans have limited
the ability of advisory committee members to influence the operation of
the Equity Data Plans.\252\ While the Commission recognizes there may
be circumstances in which deliberation by the SROs alone may be
appropriate, any overuse of executive session limits transparency on
Equity Data Plans' governance and has the potential to impede the
advisory committee's ability to exercise its voice in key decisions.
---------------------------------------------------------------------------
\252\ See Fidelity Letter, supra note 114, at 4 (``SIP Operating
Committees typically meet in an executive session for formal votes.
SIP Advisory Committee members act in a consultative role on select
issues that the Operating Committees choose to bring to them, and
Advisory Committee members are not invited to, nor do they have a
vote on, matters discussed in the Operating Committees.''); SIFMA,
Proposal for the Creation of Competing Market Data Aggregators, at
13 (attached to SIFMA Letter III, supra note 57) (``Advisory
committee members are given no substantive voice in the operation of
the SIPs, and the SROs conduct all of the meaningful business of the
SIPs in executive session, from which advisory committee members are
excluded.'').
---------------------------------------------------------------------------
The Commission acknowledges that the current Equity Data Plans'
executive session policies provide some specificity regarding the
subject matters eligible for executive session. The Commission
believes, however, that the list of eligible items for executive
session under the New Consolidated Data Plan should be more limited,
particularly given that, as contemplated by this Order, the membership
of the New Consolidated Data Plan operating committee would include
non-SRO members.\253\ Therefore, the Commission believes that the New
Consolidated Data Plan should include an executive session policy that
permits the SROs to hold executive sessions only in circumstances when
it is appropriate to
[[Page 2185]]
exclude non-SRO members of the operating committee, such as, for
example, discussions regarding matters that exclusively affect the SROs
with respect to the Commission's oversight of the New Consolidated Data
Plan (including attorney-client communications relating to such
matters). The Commission also believes that, in furtherance of greater
transparency, the New Consolidated Data Plan should require that a
request to enter into an executive session be included on the written
agenda along with a clearly stated rationale for each matter to be
discussed and be approved by a majority vote of the SRO members of the
operating committee.
---------------------------------------------------------------------------
\253\ As noted above, the Commission believes that non-SRO
members should have voting rights on the New Consolidated Data Plan
operating committee, and therefore the New Consolidated Data Plan
would not need to provide for an advisory committee. See supra note
155 and accompanying text.
---------------------------------------------------------------------------
3. Conflicts of Interest Policy
Several Roundtable panelists discussed imposing a disclosure-based
policy to address conflicts of interest concerns,\254\ including one
exchange that supported greater disclosure--for both the SROs and
advisory committee members.\255\ Another exchange stated that the
operating committees of the Equity Data Plans should not have exchange
representatives who have a ``direct-line responsibility for proprietary
data.'' \256\ Other commenters and one panelist observed that the
advisory committee members are not immune to conflicts of interest
\257\ and recommended that the Equity Data Plans establish a conflict-
of-interest identification and management provision, as well as
enforcement mechanisms, for both the SROs and advisory committee
members.\258\
---------------------------------------------------------------------------
\254\ See, e.g., Day Two Transcript, supra note 113, at 117:24-
118:7 (statement of Richard Ketchum, Former CEO of FINRA).
\255\ See Day Two Transcript, supra note 113, at 108:3-20
(statement of Bryan Harkins, Cboe).
\256\ Day Two Transcript, supra note 113, at 125:15-18
(statement of John Ramsay, IEX).
\257\ See, e.g., Day Two Transcript, supra note 113, at 117:22-
23 (statement of Richard Ketchum, Former CEO of FINRA) (``Industry
members obviously have conflicts in a variety of ways.'').
\258\ See Healthy Markets Letter, supra note 113, at 16 (``These
`appointed' members may dominate the committee's membership and may
also have loyalties and business interests that may conflict with
sound governance practices. This concern may be exacerbated if
Advisory Committee members remain on the committee for extended
periods of time, or if the leadership of the committee does not
rotate.''); id. at 40 (recommending that the Commission
``[e]stablish clear conflicts of interest identification and
management provisions and enforcement mechanisms for both Operating
Committee and Advisory Committee members''); Nasdaq 2018 Letter,
supra note 177, at 20 (``Expanding the authority of the advisory
committees magnifies potential conflicts of interest that must be
acknowledged, controlled, and coupled with increased obligations to
promote public transparency. For example, market participants that
operate their own `dark pools' are simultaneously SIP customers, SIP
revenue recipients, and SRO competitors.''); NYSE Group Letter,
supra note 116, at 19 (``[A]bsent the same regulatory obligations of
exchanges, Advisory Committee members would not have an incentive to
cast their votes consistent with the terms of the Plan.'').
---------------------------------------------------------------------------
The Commission believes that the New Consolidated Data Plan should
include a comprehensive conflicts of interest policy. As discussed
above, in the Commission's view, conflicts of interest are inherent to
the Equity Data Plans' current governance structure because some
exchange Participants have a dual role as both an SRO jointly
responsible for the operation of the Equity Data Plans and part of a
publicly held company that offers proprietary data products.\259\
Moreover, an SRO representative on the operating committee may have
direct responsibility for some or all of an exchange's proprietary data
business. Recognizing that non-SRO representatives in the New
Consolidated Data Plan may also have dual roles as voting members of
the operating committee and employees of businesses that utilize core
data or proprietary data feeds, the Commission believes that the New
Consolidated Data Plan should include comprehensive conflict-of-
interest provisions for both SRO and non-SRO representatives of the
operating committee.\260\
---------------------------------------------------------------------------
\259\ As discussed above, the Commission has observed that
advisory committee members currently have limited ability to
participate in the decision making of the Equity Data Plans, and the
interests of many shareholders of the exchanges may not be aligned
with members' interests or the interests of other interested
parties. See supra Section II.B.1.
\260\ See Day Two Transcript, supra note 113, at 92:16-20
(statement of Hubert de Jesus, Blackrock) (stating that the
conflicts of interest policy should address the core conflict
between SIP and proprietary data feed interests and establish
procedures to manage these conflicts among representatives).
---------------------------------------------------------------------------
4. Confidentiality Policy
In the operation of the Equity Data Plans, Participants and
Participant representatives have been privy to confidential and
proprietary information of substantial commercial or competitive value,
including, among other things, information about core data usage, the
SIPs' customer lists, financial information, and subscriber audit
results.\261\ However, the terms of the Equity Data Plans do not
address commercial use of confidential or proprietary information by
the Participants. The Commission therefore believes that the New
Consolidated Data Plan should include provisions regarding the
treatment of confidential information.
---------------------------------------------------------------------------
\261\ See supra note 118-119 and accompanying text.
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5. Other Provisions of the New Consolidated Data Plan
Because SIP data plays a critical role in the operation of the
national market system, the Commission believes that the prompt,
accurate, reliable, and fair collection, processing, distribution, and
publication of SIP data must be maintained through the transition from
the existing Equity Data Plans to the New Consolidated Data Plan.
Therefore, the Commission believes that the New Consolidated Data
Plan's terms should provide for the orderly and predictable transition
of functions and responsibilities from the three existing Equity Data
Plans to the New Consolidated Data Plan. The Commission believes that
this transition should contemplate a period of time during which the
Equity Data Plans continue to have responsibility for the collection,
processing, and dissemination of SIP data, and for determining,
collecting, and allocating data fees, while the New Consolidated Data
Plan commences operations and prepares to assume responsibility for SIP
data.
The Commission believes that this transition period should provide
that, before the New Consolidated Data Plan assumes responsibility for
the dissemination of SIP data, the members of the New Consolidated Data
Plan operating committee will be selected and the New Consolidated Data
Plan operating committee will have a reasonable period of time to
launch its formal operations. For example, before commencing
operations, the operating committee of the New Consolidated Data Plan
would need to, among other things, select plan processors \262\ and an
independent plan administrator, and adopt a fee schedule. In
particular, as part of this transition, the Commission believes that
until the New Consolidated Data Plan has become operational, fees for
data products disseminated by the SIPs should continue to be governed
by the provisions of the existing Equity Data Plans. As discussed
above,\263\ the Commission believes that the SROs face inherent
conflicts of interest with respect to the operation of the Equity Data
Plans, and the Commission therefore believes that a schedule of fees
for data products offered by the New Consolidated Data Plan should be
filed by the New Consolidated Data Plan operating committee, which
would reflect broader representation of market
[[Page 2186]]
participants. The Commission believes that this should help to mitigate
the conflicts of interest faced by the exchanges and should help to
ensure that decisions relating to New Consolidated Data Plan operations
support the prompt, accurate, reliable, and fair dissemination of core
data.\264\
---------------------------------------------------------------------------
\262\ The role of the operating committee of the New
Consolidated Data Plan would include selecting plan processors.
\263\ See supra Section II.A.
\264\ See 15 U.S.C. 78k-1(c)(1)(B).
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Finally, the Commission recognizes that the Equity Data Plans
govern the operations of separate and distinct SIPs, each of which
contains unique features, and that the Equity Data Plans therefore
contain distinct operational and technical provisions relating to these
SIPs. In addition, the Equity Data Plans contain a number of provisions
relating to other areas, including provisions specifically addressing
governance, administrative, financial, and other miscellaneous matters.
Under the New Consolidated Data Plan, there would be one NMS plan,
along with one independent plan administrator, responsible for the
governance and operation of multiple SIPs. The Commission believes,
therefore, that the New Consolidated Data Plan submitted by the SROs
under this Order should propose to adopt and include all other
provisions of the Equity Data Plans necessary for the operation and
oversight of the SIPs under the New Consolidated Data Plan, provided
that these additional provisions are in furtherance of the purposes of
the New Consolidated Data Plan as expressed in this Order and are not
inconsistent with any regulatory requirements. Further, the New
Consolidated Data Plan should, where possible, attempt to harmonize
inconsistencies among, and combine duplicate provisions in, the Equity
Data Plans that do not unavoidably arise from the existence of separate
and distinct SIPs. Finally, as discussed above, existing fee schedules
should continue to remain in effect under the Equity Data Plans until a
fee schedule for the New Consolidated Data Plan, authorized by the new
operating committee of the New Consolidated Data Plan after it is
constituted, becomes effective.
* * * * *
As noted above, Section 11A(a)(2) of the Act \265\ directs the
Commission, having due regard for the public interest, the protection
of investors, and the maintenance of fair and orderly markets, to
facilitate the establishment of a national market system for
securities. Section 11A(a)(3)(B) provides the Commission the authority
to require the SROs, by order, ``to act jointly . . . in planning,
developing, operating, or regulating a national market system (or a
subsystem thereof).'' \266\
---------------------------------------------------------------------------
\265\ 15 U.S.C. 78k-1(a)(2).
\266\ 15 U.S.C. 78k-1(a)(3)(B).
---------------------------------------------------------------------------
For the reasons discussed above, the Commission believes that it is
in the public interest to require the Participants in the Equity Data
Plans to jointly develop and file with the Commission a New
Consolidated Data Plan as an NMS plan pursuant to Rule 608(a) of
Regulation NMS.\267\
---------------------------------------------------------------------------
\267\ 17 CFR 242.608(a).
---------------------------------------------------------------------------
III. The New Consolidated Data Plan
The Commission hereby orders the Participants in the Equity Data
Plans to jointly develop and file with the Commission, as an NMS plan
pursuant to Rule 608(a) of Regulation NMS,\268\ a single New
Consolidated Data Plan that consolidates the three current Equity Data
Plans and that includes, at a minimum, the following terms and
conditions:
---------------------------------------------------------------------------
\268\ 17 CFR 242.608(a). The New Consolidated Data Plan, or any
amendment thereto, must comply with the requirements of Rule 608 of
Regulation NMS, including the requirement in Rule 608(a) to include
an analysis of the impact on competition. 17 CFR 242.608(a).
---------------------------------------------------------------------------
The New Consolidated Data Plan shall provide for the
orderly transition of functions and responsibilities from the three
existing Equity Data Plans and shall provide that dissemination of, and
fees for, SIP data will continue to be governed by the provisions of
the Equity Data Plans until the New Consolidated Data Plan is ready to
assume responsibility for the dissemination of SIP data and fees of the
New Consolidated Data Plan have been approved.
The New Consolidated Data Plan shall provide that each
exchange group and unaffiliated SRO will be entitled to name a member
of the operating committee (SRO member), who will be authorized to cast
one vote on all operating committee matters pertaining to the operation
and administration of the New Consolidated Data Plan, provided that an
SRO member representing an exchange group or an unaffiliated SRO whose
market center(s) have consolidated equity market share of more than 15%
during four of the six calendar months preceding a vote of the
operating committee will be authorized to cast two votes, and provided
that an SRO member representing an exchange that has ceased operations
as an equity trading venue, or has yet to commence operation as an
equity trading venue, will not be permitted to cast a vote on New
Consolidated Data Plan matters.
The New Consolidated Data Plan shall provide that the
operating committee will include, for a term of two years, and for a
maximum term to be set forth in the New Consolidated Data Plan,
individuals representing each of the following categories: An
institutional investor (e.g., an asset management firm), a broker-
dealer with a predominantly retail investor customer base, a broker-
dealer with a predominantly institutional investor customer base, a
securities market data vendor, an issuer of NMS stock, and a retail
investor (i.e., Non-SRO Members), provided that the representatives of
the securities market data vendor, the issuer, and the retail investor,
respectively, may not be affiliated with an SRO, a broker-dealer, or an
institutional investor.
The New Consolidated Data Plan shall provide that the
initial Non-SRO Members will be selected by a majority vote of those
current members of the Equity Data Plans' advisory committees,
excluding advisory committee members who were selected by a Participant
to be its representative, and, further, that until the initial Non-SRO
Members have been selected, the Participants shall renew the expiring
terms of all members of the Equity Data Plans' advisory committee
(other than those selected to represent a Participant) who remain
willing to serve in that role.
The New Consolidated Data Plan shall provide for a fair
and transparent nomination process for Non-SRO Members.
The New Consolidated Data Plan shall provide that the
aggregate number of votes provided to Non-SRO Members will, at all
times, be one half of the aggregate number of SRO member votes and the
number of Non-SRO Member votes will increase or decrease as necessary
to ensure that the ratio between the number of SRO member votes and the
number of Non-SRO Member votes is maintained, with Non-SRO Member votes
equally allocated, by fractional shares of a vote as necessary, among
the Non-SRO Members authorized and eligible to vote.
The New Consolidated Data Plan shall include provisions to
address circumstances in which a member is unable to attend an
operating committee meeting or to cast a vote on a matter.
The New Consolidated Data Plan shall provide that all
actions under the terms of the New Consolidated Data Plan, except for
the selection of Non-SRO Members and decisions to enter into an SRO-
only executive session, will be required to be authorized by an
augmented majority vote.
The New Consolidated Data Plan shall provide that the
responsibilities of the operating committee will include:
[[Page 2187]]
[cir] Proposing amendments to the New Consolidated Data Plan or
implementing other policies and procedures as necessary to ensure
prompt, accurate, reliable, and fair collection, processing,
distribution, and publication of information with respect to quotations
for and transactions in NMS stocks and the fairness and usefulness of
the form and content of that information;
[cir] selecting, overseeing, specifying the role and
responsibilities of, and evaluating the performance of, an independent
plan administrator, plan processors, an auditor, and other professional
service providers, provided that any expenditures for professional
services that are paid for from New Consolidated Data Plan revenues
must be for activities consistent with the terms of the New
Consolidated Data Plan and must be authorized by an augmented majority
of the operating committee;
[cir] developing and maintaining fair, reasonable, and consistent
terms and fees for the distribution, transmission, and aggregation of
core data;
[cir] reviewing the performance of the plan processors; and
ensuring the public reporting of plan processors' performance and other
metrics and information about the plan processors;
[cir] assessing the marketplace for equity market data products and
ensuring that SIP data offerings are priced in a manner that is fair
and reasonable, and designed to ensure the widespread availability of
SIP data to investors and market participants; and
[cir] designing a fair and reasonable revenue allocation formula
for allocating plan revenues to be applied by the independent plan
administrator, and overseeing, reviewing and revising that formula as
needed.
The New Consolidated Data Plan shall provide that the
independent plan administrator will not be owned or controlled by a
corporate entity that offers for sale its own proprietary market data
product, either directly or via another subsidiary.
The New Consolidated Data Plan shall include provisions
designed to address the conflicts of interest of SRO Members and Non-
SRO Members.
The New Consolidated Data Plan shall include provisions
designed to protect confidential and proprietary information from
misuse.
The New Consolidated Data Plan shall provide that the use
of executive session of SRO members will be confined to circumstances
in which it is appropriate to exclude Non-SRO Members, such as, for
example, discussions regarding matters that exclusively affect the SROs
with respect to the Commission's oversight of the New Consolidated Data
Plan (including attorney-client communications relating to such
matters).
The New Consolidated Data Plan shall provide that requests
to enter into an executive session of SRO members will be required to
be included on a written agenda, along with a clearly stated rationale
for each matter to be discussed and must be approved by a majority vote
of the SRO members of the operating committee.
To the extent that those provisions are in furtherance of
the purposes of the New Consolidated Data Plan as expressed in this
Order and not inconsistent with any other regulatory requirements, the
New Consolidated Data Plan shall adopt and include all other provisions
of the Equity Data Plans necessary for the operation and oversight of
the SIPs under the New Consolidated Data Plan, and the New Consolidated
Data Plan should, to the extent possible, attempt to harmonize and
combine existing provisions in the Equity Data Plans that relate to the
Equity Data Plans' separate processors.
* * * * *
It is hereby ordered, pursuant to Section 11A(a)(3)(B) of the
Act,\269\ that the Participants act jointly in developing and filing
with the Commission, as an NMS plan pursuant to Rule 608(a) of
Regulation NMS,\270\ a New Consolidated Data Plan, as described above.
The Participants are ordered to file the New Consolidated Data Plan
with the Commission no later than [90 days after the order is issued].
\269\ 15 U.S.C. 78k-1(a)(3)(B).
\270\ 17 CFR 242.608(a).
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By the Commission.
Vanessa Countryman,
Secretary.
[FR Doc. 2020-00360 Filed 1-13-20; 8:45 am]
BILLING CODE 8011-01-P