Do Stock Exchanges Deserve Absolute Immunity?

Earlier this year, the SECswore intwo new Commissioners, Hester Peirce and Robert Jackson. While we have seen afew comments recentlyfrom CommissionerPeirce (she wanted to approve the bitcoin ETF and thought the Reg ATS amendments were a bit verbose), we havent seen much from Commissioner Jackson.

But the folks atMarkets Mediawere able to track him down this week and get his comments on some important issues related to exchanges.

Commissioner Jackson has indicated that he wants to place two long neglected topics on the top of his list: stock exchange immunity andmarket data access fees. Particularly, Commissioner Jackson questioned whether or not stockexchange immunity is still relevant in todays market structure:

The reason for this is because when the regulator first established an SRO model, exchanges were mutually owned organizations, he said. Now, they are privately held and do what privately held businesses do, which is pursue profits.

Exchanges cannot have it both ways,he said. They cannot keep profits for their private shareholders and then expect to be able to hurt people and not be held accountable.It is one or the other – either they are the government, or they are a private profit-making institution.

These comments should send shivers up the spines of executives at the three major, publicly-tradedstockexchangefamilies (NYSE, Nasdaq and Cboe) especially in light of the outstanding City of Providence class action case whereexchange immunity has come into question. Thirteen years after the passage of Reg NMS, the SEC seems to have finallyhad enough of the conflicts of interests that this regulation helpedcreateat the major stock exchanges. Reg NMSassisted inturning these once non-profit, self-regulatory bodies into for-profit entities that have created unfairedges for their highest volume clients at the expense of long-term investors.

The notion of absolute immunity has allowed these exchanges to operate for-profit businesses while receivingthe valuable protection of immunity. Even though they are nowessentially data vendors and no longer perform many SRO functions, exchangeshave continued toenjoythisregulatory protection – until now.

We expect that exchanges will fight vigorously to maintain their immunity status. In fact, there is currently a bill in Congress, H.R. 3555, which seeks to change the Exchange Act to redefine the facility of an exchange and strip out certain stock exchange activities from SEC oversight. It was introduced by Rep. Barry Loudermilk from Georgias 11thDistrict, NYSEs parent company ICEs home district.

Unfortunately, as we all know, things dont happen quickly in DC and we dont expect a ruling any time soon about exchange immunity but Commissioner Jacksons comments should put theexchanges on notice. Commissioner Jackson made this clear:

On the question of immunity, I do not know whether it will be reached during my term.I do know that the SEC understands that it time to take a hard look at exchanges and it understands that now better than it had in a very long time.

Were glad to see that Commissioner Jackson has the exchanges in his crosshairs and we hope this encourages the major exchanges to rethink some of their questionable behaviors now.