Exchanges won two recent battles over market data fees, allowing for at least a temporary sigh of relief. 

Last week, a U.S. Securities and Exchange Commission proposal to gather data on exchange transaction fees was struck down by a D.C. Circuit Court, which ruled that the regulator fell short in specifically defining the perceived problem. Exchanges had opposed the plan on the premise that it was not well thought-out and could harm market liquidity and by extension end-user investors. 

That followed a June 5 court decision that said the SEC cannot challenge or dispute some fees that exchanges charge for trading data.  

But while exchanges won the battles, the war goes on, potentially in a stepped-up way. On June 22, the SEC and the Department of Justice’s Antitrust Division announced a “historic” memorandum of understanding to work together to enhance competition in securities markets. 

Exchanges are competitive. They own the data. The public and the SEC reviews pricing (now). They provide a discounted product via SIP.

Solutions IMHO are 1) remove liability limits 2) upgrade SIP to be more competitive (in proposal) 3) green light new exchanges (in process) https://t.co/yQ5cXGqaBi

— Larry Tabb (@ltabb) June 23, 2020

By way of background, institutional brokers and trading firms who use exchange market data say fees are unnecessarily high; exchanges say the prices reflect their own costs and there is ample choice in the marketplace.  

In a June 22 webcast, SEC officials acknowledged the court rulings, but said they will press on with their mission to make markets fairer and more transparent.

Regarding the Transaction Fee Pilot, “the decision served to emphasize our need to have real data from exchanges, ATSs, and other market participants to facilitate oversight and analysis of new and existing rules,” SEC Commissioner Jay Clayton said. “The court has said that the Commission cannot set up this kind of controlled environment, and so I expect we will continue to work in the real environment to make sure we have the data and other information we need.”

On data fees, Clayton indicated the SEC will keep exchanges’ feet to the fire. “In the absence of evidence demonstrating that competitive forces actually constrain the pricing of market data, the Commission has the obligation, under the Exchange Act, to suspend exchanges’ fee filings unless it is established that the fee is reasonable on another basis, such as a reasonable cost basis,” he said. “In other words, the exchange has the burden of demonstrating these competitive forces or an alternative basis for finding the fee fair and reasonable.”

For their part, exchanges concur with the thesis that market structure needs improvement and modernization, but they say data costs are unfairly singled out as a lightning rod for criticism, and they stand behind the numbers as a function of their costs and representative of a competitive marketplace.   

Nasdaq Chief Economist Phil Mackintosh has published research showing that all exchange fees impact investor returns by just 0.001%, half the amount of SIP fees and SEC and Finra fees, and a small fraction of fund expenses and investment advisor fees. Mackintosh has also asserted that most of the increase in Nasdaq’s data services revenue comes from acquisitions and new products rather than fee increases.  

A Nasdaq spokesperson said: “We welcome any additional reviews from the SEC and/or DOJ as we are fully confident in the integrity of our market data business.”

The Equity Markets Association, an exchange industry trade group, called the early June court decision on exchange fees “a victory for the rule of law and free and fair competition,” and said the Transaction Fee Pilot “would have brought many unknown consequences for the investing public and the companies that list on the exchanges. There are better, less harmful and less costly solutions.”  

SIFMA, a trade group comprised of brokerage and buy side, said it welcomed the DOJ-SEC collaboration. “SIFMA has long argued that (exchange) fee increases are inconsistent with the exchanges’ actual costs in collecting and distributing market data and thus constitute an excessive mark-up over cost. We appreciate the focus by the SEC and the DOJ on this important issue.”