Big win for the SEC yesterday and a big loss for the major stock exchanges.  We’re talking about the US Court of Appeals ruling to reject the major exchanges challenge of the SEC’s Market Data Infrastructure Rule which the SEC approved in December 2020.  The rule has two main parts:

(1) update and expand the content of NMS market data

(2) establish a decentralized consolidation model in which competing consolidators, rather than the exclusive SIPs, will be responsible for collecting, consolidating, and disseminating consolidated market data to the public.

The major stock exchanges (NYSE, Nasdaq and Cboe) didn’t seem to like the fact that the SEC was going to break their monopoly on proprietary data feeds and also require them to add content to the core data requirements so they went to the Courts to try and get the rule thrown out. These were the exchanges main arguments as to why the rule was unfair:

• it will deprive investors of a single, uniform “national best bid and offer” quote; 
• stifle innovation in the data market 
• drive order flow to off-exchange “dark” trading venues and impede exchanges’ ability to compete with such venues
• and deprive the exchanges themselves of a main source of revenue. 

The last argument was the most laughable and self-serving argument. The exchanges were basically saying that, if the SEC allowed competing SIP’s, then the for-profit, public stock exchanges would lose money. In other words, “Investor be damned, we are the exchanges and we deserve to profit from the data that investors have generated.”  Well, the Court didn’t see it that way and admonished the exchanges with these harsh words:

“Petitioners’ contention that the Commission “duck[ed] serious evaluation of the costs” the Rule would impose on competition rests on a fallacy: Petitioners equate competition with their own competitive position. But a policy change can “disadvantage certain participants while simultaneously enhancing competition in the market.”

“Likewise, petitioners’ claim that reduced revenues will cripple their reinvestment in their own products, hurting their customers, defies basic economic principles. The Commission points out that like any business, the exchanges can obtain external funding for promising opportunities to develop new products in the future; they are not limited to their internal cash on-hand in developing new products and services. Similarly unavailing is petitioners’ suggestion that “[a] reduction in market-data revenue would also limit the funds available to exchanges to fulfill their statutorily mandated regulatory responsibilities, which further ‘the protection of investors’ and the ‘maintenance of fair and orderly markets..”  The notion that any reduction in revenue would necessarily compromise the exchanges’ bottom line so severely as to affect their ability to comply with their regulatory responsibilities is unsubstantiated. “

Ouch, those words must really sting. We wonder how much money the major exchanges wasted on legal fees?

We’re glad the Courts rejected the major exchanges self-serving arguments. While the playing field will never be level when it comes to market data and information asymmetries will still exist, the SEC Market Data Infrastructure Rule will help tilt the playing field back into the direction of the long-term investor.