Brett Redfearn, Director of the SEC’s Division of Trading and Markets, has said proposed changes to governance structures for US consolidated equity market data would help to tackle conflicts of interest which have contributed to the development of a two-tier market.
“Fundamentally, the idea is to make sure the governance structure reflects the way the world looks today and has a greater diversity of views that eliminates some of the conflicts that have potentially been guiding plans up to the present moment,” he said on Wednesday, speaking the Security Traders Association 2020 Market Structure Virtual Conference.
On Tuesday, the SEC released for public comment a filing made by exchanges and FINRA on August 11 which proposes a new single national market plan governing the public dissemination of real-time consolidated equity market data for NMS stocks. The proposal is available for 30 days from publication in the Federal Register, after which the SEC will make amendments and issue the final plan. The new filing is the latest iteration of a regulatory reform process which began in January 2020 when the SEC published a proposed order to increase transparency and reduce conflicts of interest in the governance of consolidated equity market data.
The proposal widens membership of the SIP operating committee beyond self-regulatory organizations for the first time, to include representatives from an institutional investor, a broker-dealer with a retail customer base, a broker-dealer with an institutional customer base, a market data vendor and an issuer. It will also prevent exchange operators from gaining increased voting power through market consolidation.
“The current plan provides voting power solely to the exchanges and FINRA. They are offering competing proprietary data products and one would suggest this potentially introduces certain conflicts. Part of the goal here is, in addition to streamlining, is to help deal with those conflicts,” said Redfearn, speaking in conversation with Doug Clark, Head of Market Structure for the Americas at Credit Suisse.
The market data reform proposals also include measures that would see a wider range of content included in market data feeds provided by SIPs and the introduction of competition by the licensing of competing consolidators. Redfearn said these changes would level the playing field and reduce information asymmetries between market participants receiving SIP data and those buying proprietary feeds.
“Is the SIP product a competitor to prop feeds for institutional investors? The answer is clearly not. It has significantly less content and is significantly slower due to its centralized consolidation system. We’ve heard institutions saying they would not trade with people who only use SIP data. This is about modernizing so we can upgrade the product and reduce information asymmetry. Ultimately, we think this also should help to facilitate best execution in the marketplace,” said Redfearn.
And despite some skepticism from market observers about the proposed framework for competing SIP consolidators, notably in relation to latency and data standards, Redfearn insisted there is “a reasonable chance” of successfully introducing competition into the market. “Competing consolidators will bring things to the market that will help to stimulate innovation. This will help to keep this product competitive and fresh and useful for market participants,” he said.
Redfearn acknowledged the increasing divergence in recent years between SIP and proprietary data feeds, noting the latter had become expensive and inaccessible to a number of market participants. “That raises a lot of questions about fairness and equity in our marketplace. Part of our job is to ensure the widespread availability of market data to market participants,” he said.
Exchange operators must file with the SEC to justify any fee increases. In 2017, a court ruling in the case ‘Susquehanna International Group vs SEC’ effectively forced the regulator to apply a higher standard of proof to exchanges to justify applications for higher fees.
Redfearn acknowledged the need for the regulator to understanding the financial information behind filings for fee rises and said it was sometimes “difficult to get a clear picture” from the data provided by exchanges. “The SEC is charged by statute with a responsibility to ensure market data fees are fair and reasonable, not discriminatory, [imposing] no undue burden on competition. It’s our job to understand what the words mean when we review fees,” he said.
“The courts have emphasized that the SEC cannot merely place unquestioning reliance on the statements of SROs in their fee filings. If a statement cites competitive forces, we need to get behind that and look at the extent to which competitive forces indeed guide that.”
As well as issuing guidance on SRO fee filings, the SEC has also amended Regulation NMS to rescind the ‘effective on filing’ procedure for proposed fee changes by NMS plans. This means future proposals will be subject to public comment and SEC review prior to introduction. “I’d like to believe that this will lead to more public engagement and participation in the fee review process. When rules eventually come into effect, it will be after a considerable amount of vetting and consideration by the Commission and the marketplace.”
Both Redfearn and Clark asserted they were speaking in a personal capacity and that their views were not necessarily shared by their employers.