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The U.S. Securities and Exchange Commission this week adopted rules designed to bring more competition and fairness to market data.
The long-signaled move is a significant regulatory development in what has been a bone of contention between exchanges and brokers for years. At first blush, securities industry participants and observers are constructive.
Brokers say exchanges have a monopoly on data and charge way too much; exchanges say prices are a function of their own costs to generate the data, and brokers have choices in the marketplace. The Securities Industry Processor (SIP), the utility alternative to exchange data products, is seen as antiquated and of dubious value in today’s high-speed electronic markets.
In a June 2004 op-ed entitled “The Case for Real Reform” and published in Traders Magazine, Larry Leibowitz, then executive vice president and co-head of Schwab Soundview Capital Markets, expounded on the situation:
“The SEC should focus on reforming a monopoly-based system that wildly increases the cost to investors for vital trading information. It reportedly costs the listed markets $488 million per year to generate market data. That’s hard to believe considering that last year the Plan Networks reportedly made $424 million in revenue and incurred only $38 million in expenses. This is a mark-up of 1,000 percent! Nasdaq, operator of one of the data networks, recently stated that it believes it can cut its data prices by 75 percent and still provide a sufficient return to its shareholders. Clearly, there is excess market data money available at the exchanges. That manifests itself in everything from tape shredding to market data rebates. And average investors pay inflated charges to the exchanges to see their own limit orders displayed.
The government-created market data providers should be asked to defend the cost. Until there is transparency in cost and governance, investors will continue to subsidize markets. Markets should fund their own regulatory and operational functions directly and transparently, rather than indirectly through opaque market data charges to investors.”
Little has changed since then, at least in brokers’ eyes. (Leibowitz later became Chief Operating Officer of exchange group NYSE Euronext.)
But in its current push, the SEC is seeking to change the dynamic by reinvigorating the SIP. The plan is to expand the data the SIP provides, and to open up the business of providing SIP data from an exclusivity arrangement to competing consolidators.
A truly viable SIP should go a long way towards resolving the market data debate.