Section 916 Of Dodd-Frank Has Made The SEC’s Job Even More Difficult

Back in February, we wrote about section 916 of Dodd Frank which essentially gave exchanges a much easier path to invoke new rules and assign new fees to their subscribers.  We wrote:

If an Exchange decides to submit a rule change that is deemed “immediately effective”, then the SEC is going to have a much tougher time getting it disapproved. Prior to Section 916, the SEC could have stepped in within 60 days of the filing and forced the exchange to justify its changes. Now, the burden falls on the SEC. They can suspend the rule change but then must institute proceedings to approve or disapprove the rule. The SEC would have to make the case why the rule change does not meet code.

Section 916 is at the center of a court case about market data fees that SIFMA and the NetCoalition have filed.  Reuters points out that this case is about to hear final arguments:

“Sifma, which represents about 600 banks, brokers and asset managers, and NetCoalition suspect that the fees NYSE and Nasdaq charge for their market data substantially exceed their costs.

 SIFMA and NetCoalition went to court to try to get the SEC to step in and not approve some of the fee increases that the exchanges have been submitting:

The Securities Industry and Financial Markets Association (Sifma) and the NetCoalition technology trade group took the SEC to court for not objecting to new market data fees filed with the agency by units of NYSE Euronext and Nasdaq OMX.”

Think about that.  The SEC is being sued to try to get them to do their job.  To be fair, it was Section 916 of Dodd Frank that essentially tied the SEC’s hands (gee, we wonder how many lobbyists the financial community hired to get Section 916 inserted into Dodd Frank).

Market data fees have been steady revenue for the exchanges for years.  We wrote about some of these fees in our April 2010 SEC Comment Letter  on the Concept Release:

Exchanges generate market data revenue from the sale of quote and trade information to third parties such as Bloomberg and Yahoo Finance. This fee paid by the vendor to the exchange is usually just passed along to all investors. This is a huge revenue generating business for the major exchanges. Sales of consolidated market data generated approximately $400 million in 2004. This represented about 10-15% of total revenues from the largest exchange.

In 2007, to further complicate matters as a result of Reg NMS, the SEC changed how market data revenue was calculated. No longer would it be from the volume executed, but now a portion would be credited based on quotes. After the revenue pools are calculated, they are now shared with exchanges based on quotes and trades. Quotes at the NBBO and trades are eligible for approximately 50% of revenue. Only exchanges can compete for the quote revenue since trade reporting facilities (TRFs) only report trades and do not quote.”

No wonder the exchanges are fighting so hard to keep these revenues.  We hope the court sees what an important issue this is and rules in favor of SIFMA/NetCoaltion.