SEC Proposes Amendments to Governance of Market Data Plans

Background 

The NMS plans governing market data are designed to consolidate “core data”³ from each of the SROs to an exclusive securities information processor (SIP), which consolidates this market data and makes it available to market participants.⁴ The purpose is to provide the public with a comprehensive, accurate and reliable source of information for the prices and volume of any NMS stock at any time during the trading day.

Today, there are three NMS plans governing the dissemination of core data for equities, two of them administered by New York Stock Exchange LLC (NYSE) and one administered by Nasdaq Stock Market LLC (Nasdaq).⁵ The participants in these NMS plans consist of equities exchanges that facilitate or previously facilitated trading in NMS stocks as well as FINRA. All voting authority with respect to the NMS plans rests with SRO participants, though each of the NMS plans has a nonvoting advisory committee consisting of broker-dealers, a market data vendor and an investor.

Impetus for the Proposed Order

The primary concerns relating to the current governance of the NMS plans and the operation of the SIPs that led to the Proposed Order are conflicts of interest, latency concerns and efficiency. First, the SRO participants in the NMS plans, as national securities exchanges, sell their own propriety market data products, which typically include more detailed quote information and compete with core market data available from the SIPs.⁶ Since the time of the initial creation of the NMS plans in the early 2000s, the exchanges have shifted from member-owned, not-for-profit organizations to publicly held companies seeking to maximize shareholder value. These two facts create a significant conflict of interest that incentivizes the exchanges to maximize the viability of their proprietary market data products at the expense of the core data distributed through the SIPs.

Second, many market participants rely on processing market data as quickly as possible to facilitate their trading. The core data distributed through the SIPs is slower than proprietary market data feeds received directly from the exchanges because core data must be aggregated and consolidated by the SIP before distributed to market participants. While the NMS plans have taken steps in recent years to improve the speed of the SIPs, many market participants still believe that the current speed of core data is not sufficient for them to trade competitively.

Third, each of the three NMS plans today must be separately maintained and operated, which is unnecessary and less efficient than a consolidated NMS plan. In addition, the current governance structure of the NMS plans does not provide the primary consumers of the market data with a voting interest in the operation of the NMS plans.

The Proposed Order

The key aspects of the Proposed Order are set forth below:

• Consolidate NMS Plans — As noted, the Proposed Order would consolidate the three NMS plans to a single New Consolidated Data Plan for efficiency reasons.

• Exchange Groups Assigned One Vote — Currently, each SRO has one vote. The Proposed Order would modify the voting structure to provide that each exchange group would be entitled to a single vote rather than each individual exchange. If an exchange group maintains a consolidated market share of 15 percent or more for at least four of the preceding six calendar months, the exchange group would be entitled to a second vote.
  • The SEC believes that providing each SRO a single vote under the current NMS plan provides exchange groups with disproportionate influence on the governance of the plans. Currently, three exchange groups (Cboe BATS, NYSE and Nasdaq) control 14 of 17 votes.

• Non-SRO Members Provided One-Third Voting Power — The Proposed Order would establish five new positions for non-SRO voting representatives that would be provided a one-third voting interest in aggregate on the operating committee. The non-SRO representatives would consist of (i) an institutional investor (e.g., an asset management firm), (ii) a broker-dealer with a predominately retail customer base, (iii) a broker-dealer with a predominately institutional investor customer base, (iv) a securities market data vendor, (v) an issuer of NMS stock and (vi) a retail investor.⁷
  
  • The SEC believes that the governance of the New Consolidated Data Plan would benefit from a broader constituency having voting rights, in particular consumers of the equity data plans.
  • The Proposed Order provides that non-SRO voting representatives would serve two-year terms and would be subject to reasonable term limits (to be proposed in the New Consolidated Data Plan), and SRO members would not be permitted to select non-SRO voting representatives.
•  Augmented Majority Voting — All actions by the New Consolidated Data Plan’s operating committee would require an augmented majority vote whereby a two-thirds majority would be required provided that this vote also includes a majority of the SRO votes.
  
  • This is intended to ensure that the SROs have sufficient voting power to act jointly on behalf of the plan to carry out statutory requirements.⁸
    
•  Operating Committee Functions — The SEC proposes a number of provisions to be included in the New Consolidated Data Plan to define the roles and responsibilities of the Operating Committee, including: 
  
  • Propose Amendments: specifying that the operating committee is responsible for “proposing amendments” to the consolidated data plan to help ensure the plan distributes data consistent with its statutory goals.
  • Public Reporting of Performance Reviews: reviewing the performance of plan processors and ensuring the public reporting of plan processors’ performance and other metrics.
  • Oversight of Service Providers: selecting and overseeing an independent plan administrator (discussed below), plan processors, an auditor and other professional service providers consistent with the consolidated data plan and subject to an augmented majority vote.
  • Revenue Allocation Formula: designing and maintaining a fair and reasonable revenue allocation formula.⁹
    
  • Fees: developing and maintaining fair, reasonable and consistent terms and fees for the distribution, transmission and aggregation of market data. 
• Administrator Independence — The Proposed Order provides that the administrator of the New Consolidated Data Plan must be independent, meaning that the administrator could not be owned or controlled by a corporate entity that separately offers for sale a market data product, either directly or via another subsidiary. 
  
  • This means that NYSE and Nasdaq, the current administrators of the existing NMS plans, would not be eligible to serve as the administrator of the New Consolidated Data Plan. 
  • The SEC states that it believes the conflicts of interest faced by a nonindependent administrator are so great that such conflicts cannot be sufficiently alleviated through policies and procedures addressing conflicts of interest.
• Executive Sessions Limited — In response to perceived overuse of executive session meetings of the operating committee and to bring more transparency to decision making, the Proposed Order provides that executive sessions in which non-SRO members of the operating committee would be excluded could only occur (i) when it is appropriate to exclude non-SRO members (e.g., discussing a matter that exclusively affect the SROs), (ii) where it is included on the written agenda with a clearly stated rationale for the executive session and (iii) where the proposed executive session is approved by a majority vote of the SRO members of the operating committee. 
• Conflicts of Interest Policy — The Proposed Order provides that the New Consolidated Data Plan should include a comprehensive conflicts of interest policy applicable to all members of the operating committee and that address dual roles that some members may have (e.g., as a SRO offering proprietary market data while simultaneously responsible for operation of the New Consolidated Data Plan).
• Other Policies — The Proposed Order provides that other policies within the existing NMS plans that are “necessary for the operation and oversight” should be adopted as part of the New Consolidated Data Plan. In addition, the Proposed Order calls for a robust confidentiality policy to ensure that participants do not use information for their commercial or proprietary benefit as well as a policy to govern an orderly transition from the existing NMS plans to the New Consolidated Data Plan.

What’s Next
After considering comments on the Proposed Order, the SEC may issue a final order that would require the plan participants to propose a New Consolidated Data Plan in accordance with the final order, which would then be published for public comment. Notably, the two Democratic Commissioners (Robert Jackson and Allison Herren Lee) dissented from the Proposed Order, noting concerns that the proposed reforms did not go far enough and arguing that the SEC should take a more active approach to implementing these reforms. Both Commissioners cited the NMS plan governing the Consolidated Audit Trail(CAT), which remains unfinished after nearly a decade, as evidence regarding the lengthy delays that often accompany coordinated NMS plans.

The Proposed Order, if implemented, would address a number of the equity market structure initiatives outlined by Chairman Clayton and Division of Trading and Markets Director Brett Redfearn in a March 2019 speech.¹⁰ The current SEC leadership might next consider further changes to equity market structure such as (i) re-examining the regulatory authority and responsibility of for-profit exchanges, (ii) expanding data disseminated under the SIPs to include streaming or depth of book data or even (iii) establishing a competing consolidator model in which any number of market data vendors or broker-dealers could aggregate market data and distribute it without the need for any SIP. The looming 2020 election and any potential leadership changes at the SEC, however, might portend a more limited reform agenda in the coming months. 

¹ Securities Exchange Act of 1934 Release No. 87906 (January 8, 2020), 85 FR 2164 (January 14, 2020).

² For a discussion of some of these past initiatives and what may yet be on the horizon, see our August 2019 client alert Increasing SEC Scrutiny of Exchange Fees and What May Come Next.

³ “Core data” consists of (1) the price, size and exchange of the last sale; (2) each exchange’s current highest bid and lowest offer, and the shares available at those prices and (3) the national best bid and offer (i.e., the highest bid and lowest offer currently available on any exchange).

⁴ Section 11A of the Securities Exchange Act of 1934 directs the SEC to, among other things, prescribe rules providing for the “prompt, accurate, reliable, and fair collection, processing, distribution, and publication of information with respect to quotations for and transactions in such securities and the fairness and usefulness of the form and content of such information.” 15 U.S.C. 78k-1(c)(1)(B). Section 11A further authorizes the SEC, by rule or order, to authorize or require the SROs to act jointly with respect to matters as to which they share authority, including the NMS plans governing the dissemination of core market data. 15 U.S.C. 78k-1(a)(3)(B).

⁵ The three NMS plans that govern the distribution of core data are (1) the Consolidated Tape Association Plan (CTA Plan); (2) the Consolidated Quotation Plan (CQ Plan); and (3) the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation, and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privileges Basis (UTP Plan). There is also a fourth NMS plan for options exchanges governing the collection, consolidation and dissemination of last sale and quotation information for listed options, known as the Limited Liability Company Agreement of Options Price Reporting Authority, LLC (OPRA Plan). The SEC states in the Proposed Order that it is proposing to take an “incremental approach” to addressing NMS plan governance issues and may consider future amendments to the OPRA Plan.

⁶ For example, the exchange proprietary market data feeds typically in “depth of book” market data, which show quotations beyond just the best available bid or offer at a given time.

⁷ The non-SRO representatives could not be affiliated with an SRO or a broker-dealer to serve as the representative of an issuer, market data vendor or retail investor.

⁸ 15 U.S.C. 78k-1.

⁹ The SEC noted that a number of industry representatives have called for greater transparency regarding the revenue allocation formula, including a “plain language version.”

¹⁰ Chairman Jay Clayton and Director Brett Redfearn, Equity Market Structure 2019: Looking Back & Moving Forward, remarks at Gabelli School of Business, Fordham University (March 8, 2019) available at https://www.sec.gov/news/speech/clayton-redfearn-equity-market-structure-2019.