Do Stock Exchanges Deserve Absolute Immunity?


Earlier this year, the SEC swore in two new Commissioners, Hester Peirce and Robert Jackson.  While we have seen a few comments recently from Commissioner Peirce (she wanted to approve the bitcoin ETF and thought the Reg ATS amendments were a bit verbose), we haven’t seen much from Commissioner Jackson.

But the folks at Markets Media were 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 and market data access fees. Particularly, Commissioner Jackson questioned whether or not stock exchange immunity is still relevant in today’s 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-traded stock exchange families (NYSE, Nasdaq and Cboe) especially in light of the outstanding City of Providence class action case where exchange immunity has come into question.  Thirteen years after the passage of Reg NMS, the SEC seems to have finally had enough of the conflicts of interests that this regulation helped create at the major stock exchanges.  Reg NMS assisted in turning these once non-profit, self-regulatory bodies into for-profit entities that have created unfair edges 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 receiving the valuable protection of immunity.  Even though they are now essentially data vendors and no longer perform many SRO functions, exchanges have continued to enjoy this regulatory 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 Georgia’s 11th District, NYSE’s parent company ICE’s home district.

Unfortunately, as we all know, things don’t happen quickly in DC and we don’t expect a ruling any time soon about exchange immunity but Commissioner Jackson’s comments should put the exchanges 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.”

We’re 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.