US Equity Market Data - How Conflicts of Interest Overwhelm an Outdated Regulatory Model & Market Participants - Full Report

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US Equity Market Data - How Conflicts of Interest Overwhelm an Outdated Regulatory Model & Market Participants - Full Report

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The regulatory regime for overseeing the provision of US equity market data is broken, and getting worse. In this 80-page Market Data Report, Healthy Markets examines the evolution of US equity market data, exploring how the public and private market data feeds have developed, and how they are used by market participants. We explore the conflicts of interest and costs that are reshaping the markets and market participants, and offer 14 detailed recommendations on how regulators can make things less complex and less costly for the markets.

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The 80-page report provides a comprehensive review of the regulatory framework, uses, and costs for both public and private US equity market data. To help provide perspective, the report also includes summaries of more than 2 1/2 years of recent Market Data filings.

Amongst other findings, the Healthy Markets Data Report found that:

  • the exchanges that oversee the government-mandated public market data process are competing directly with that public data by selling their own data and connectivity offerings;
  • market participants rely on both the public and private market data to stay competitive and fulfill their regulatory obligations;
  •  the non-competitive forces for market data and connectivity create significant upward pressures on prices, wherein both public and private data and connectivity prices have skyrocketed in recent years (e.g., a market participant who wanted the fastest connections with the most relevant trading information for BATS, NYSE, and Nasdaq has seen its costs rise from $72,150 per month on June 1, 2012 to $182,775 per month on June 1, 2017);
  • despite admitting that exchanges’ tape revenues and private data and connectivity products are material to their businesses, none of the major exchanges clearly discloses the sizes of these revenues; and
  • the vast majority of exchanges’ data and connectivity changes and fee hikes are implemented with effectively no regulatory scrutiny.

Based on these and other findings detailed in the Report, Healthy Markets offers 14 recommendations that regulators could take to improve the regulation and oversight of market data, including that they should: 

  • require justification of data, connectivity, and fee changes for both public and private feeds, and thoroughly review all such changes for fairness, reasonableness and potential discriminatory impacts and undue burdens on market participants;
  • expressly acknowledge the governmental function of the SIP data feeds, and so require exchanges to return all revenues in excess of expenses incurred to operate and maintain the SIP data processing;
  • revise NMS Plan governance to include voting representation from investment advisers and broker-dealers;
  • eliminate “one vote per exchange registration” and replace with “one vote per exchange group”;
  • simplify pricing models within the SIP to eliminate the need to count end users, accounts or terminals, and eliminate the distinctions between professionals and non-professionals;
  • establish clear parameters for market data audits by exchanges or their representatives;
  • increase the transparency of public market data revenue collection and costs so that the public is aware of both on a quarterly basis;
  • improve the relative value of the SIP feeds by expanding the information to include order depth of book information;
  • minimize the time discrepancies between when market participants may receive information from the private data feeds and the SIP feeds;
  • clarify that rule filing requirements apply to all data derived from an exchange’s role in the national market system and marketed to anyone, including a data vendor, whether by the exchange or an affiliate and that standards for market date filings apply;
  • require all exchanges to provide detailed financial information regarding their public data fees, their revenues and expenses related to public and private data, as well as connectivity or other related products and services;
  • increase the transparency and disclosure of enhancements to SIP resiliency;
  • mandate monthly public reporting of latency across SIP plans and how that compares to the private market data products offered by the exchanges; and
  • if competing SIPs are permitted, establish protections to mitigate conflicts of interest and abuses that may be created by differences between the SIPs.

The exchanges essentially set the rules for what’s covered by the public data feeds, and at what cost,” said Christopher Nagy, Director of Healthy Markets. “But the exchanges also sell data and connectivity services that directly compete with the public market data and they make millions from both the public and the private offerings.”

“We have two competing market data systems now, both of which are essential to be able to see what’s going on in the markets,” said Tyler Gellasch, Executive Director of the Healthy Markets Association. “Updating the rules for market data to account for modern realities--such as the exchanges now being for-profit companies--would increase transparency, reduce costs, and improve the markets for investors, traders, and other market participants.”