MDI Rule Might Be Problematic for Retail Brokers

If the proposed fees in the Market Data Infrastructure (MDI) Rule are accepted as filed, retail broker-dealers don’t have the option to be self-aggregators, according to Chris Nielsen, Director, Market Data Management, Charles Schwab.

Chris Nielsen

“They have to take the data from a competing consolidator, because they are going to have to display the data to their clients,” he said during the latest STA Open Call: Market Data Infrastructure Rule, Proposed Pricing, What is Fair and Reasonable?

“Not only are the existing fees going to be in play that have not gone down, but broker-dealers will have to pay some fee to consolidators because they’re not going to do it for free,” he added.

Manisha Kimmel, Chief Policy Officer, MayStreet, said it’s not just a problem for retail brokers, it’s a huge problem for competing consolidators.

“When we talk about fair and reasonable it’s not just the price point, it’s fair and reasonable terms,” she said.

According to Kimmel, what the exchanges will be providing is no longer consolidated market data. The SIP (securities information processor) will be separated, so the product that they are selling now is the content underlying consolidated market data.

“For there to be a market for competing consolidators, the raw ingredients can’t come with all this baggage in terms of pro, non-pro and compliance checks,” she said.

In December 2020, the SEC adopted rules to modernize the infrastructure for the collection, consolidation and dissemination of market data for exchange-listed national market system stocks (NMS market data).

This infrastructure has not been significantly updated since its initial implementation in the late 1970s, according to the SEC. The adopted rules update and significantly expand the content of NMS market data to better meet the diverse needs of investors in today’s equity markets.

Jim Toes, President & CEO of STA, said the MDI Rule will also update the method by which NMS market data is consolidated and disseminated, by fostering a competitive environment and providing a new decentralized model that achieves reduced latency and other new efficiencies, he said.

Most recently the SIP Operating Committee, which bears much of the responsibility for implementing the MDI Rule, filed amendments to adopt fees for the content underlying consolidated market data sold to various parties, including competing consolidators and self-aggregators, Toes added.

Nielsen said that generally you can categorize the views on the filings into two camps – those exchanges like NASDAQ and NYSE that supported the filing and the exchanges that were not in favor of it going forward such as MEMX and IEX.

The fundamental question is whether fees should be cost-based or value-based.

Kimmel said there are two questions that define the cost-based argument: what are the costs and how should those costs be allocated?

She said that today SIPs have a value problem given that top-of-book feeds offered by various market data vendors are taking their market share because they are cheaper and easier to administer.

Kimmel added that if you’re going to take a value-based argument, you have to address fundamental questions such as “what is the value of the SIP today in light of the top-of-book feeds?” and “how are you defining value?”

Kimmel said there are statutory deadlines as to what the SEC chooses to do. “We have to see and then react accordingly. I don’t think anybody believes this is a fast, smooth process, even if the litigation goes in favor of the SEC.”

Nielsen added that there is some common ground that the industry can work towards, but right now it’s kind of “wait and see what happens.”

“Hopefully, we can get there and have some fees in place that will allow for some room for competitiveness,” he said.

“If the fees aren’t structured correctly and aren’t at a level that is going to foster and encourage firms to be competing consolidators, then there’s not going to be enough people in the game to have enough competition,” Nielsen said.

“That’s fundamental in terms of determining if there will be a market for competing consolidators,” added Kimmel.