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July 15, 2007

The Market Data Rebate Grab Bag

By Nina Mehta

The outlook for tape revenue rebates to market participants, three months after the Securities and Exchange Commission's new market data revenue-sharing formula went into effect, remains unsettled. A few of the smallest exchanges have decided what to do about their allotments to traders, but the biggest bourses are still sitting on the fence.

Chris Concannon, executive vice president for transaction services at Nasdaq, said Nasdaq hasn't decided whether-or how-to alter the way it allocates market data revenue rebates to its member firms. The exchange has made "no decision to funnel [the market data revenues] through [to firms] according to the formula," Concannon said last month.

NYSE Arca also hasn't changed its existing plan. The New York Stock Exchange, a sister company to NYSE Arca and the largest recipient of market data revenues among self-regulatory organizations, does not share its revenues. Last year, NYSE Group, the parent company to the NYSE and NYSE Arca, took in $207.7 million in tape revenues for exchange-listed and Nasdaq securities, according to NYSE Euronext, NYSE Group's parent company.

Until recently, most exchanges that shared their market data revenues with member firms did so according to the SEC's earlier formula that determined each SRO's share of the market data revenue pies controlled by the securities information processors. That formula was based on a market center's share of tape prints for listed securities and a combination of its share of tape prints and transaction volume for Nasdaq securities.

In April, the SEC altered that formula. It made the change to encourage price discovery and to reduce trading behavior designed solely to increase revenues-behavior that, the SEC said, jeopardized market quality.

The new formula takes into account both quotes and trades. It is widely seen as much more complex than the previous one because of this dual focus and the formula's calculation methodology for quotations. So far, according to market participants, it's unclear what impact that may have on any individual SRO's revenues.

However, the Chicago Stock Exchange, the ISE Stock Exchange and the Boston Stock Exchange made their decisions about sharing market data early.

The CHX nixed the rebate altogether. The BSE nixed the rebate for single-side orders, but kept it for crossed orders. The ISE Stock Exchange, which only came into existence last year, is the lone exchange that has decided to pass market data revenues back to customers according to the SEC's new formula.

In March, when the CHX proposed to stop sharing market data revenues with customers, it told the SEC that "even if the Exchange believed it was appropriate to share revenue under the new allocation, the Exchange will not receive sufficient information from the securities information processors [SIPs] to readily calculate the amount of revenue that might be shared in connection with a specific quote or trade."

Nasdaq's Concannon noted that the SEC's formula makes calculations at the SIP level complicated and that the complication increases once "exchanges cut up the revenues."

Many market participants do not expect the big SROs to use the SEC's new market data revenue allocation formula as a strict basis for sharing revenues with market participants. Some of them may incorporate proxies reflecting the quoting activity of market participants into their calculations. However, the expectation is that SROs will eventually return more of the revenues they receive to those using their markets.

The SIPs collect last sale and top-of-book market data from SROs. They use the SEC's market data revenue allocation formula to distribute to those SROs the revenues resulting from the dissemination of consolidated market data to vendors and others.