SEC's decision targets stock market profits

The five-member panel unanimously rejected a pair of demands to raise rates on some NYSE and Nasdaq data, saying trade had not justified price increases. This decision is the first time the SEC has refused fee increases for the stock market's most lucrative stock market data class. This casts doubt on a crucial source of revenue that has offset the decline in trading fee income.

The SEC's decision was side by side with the Securities Industry and Financial Markets Association, or Sifma, a major financial sector professional group that accused traders of "exploiting their monopoly on market data." Brokers believe that large and small investors will benefit if regulators skyrocketing market data costs.

The SEC has also shelved more than 400 other market data fee increases contested by Sifma. The regulator did not reject these price increases, but asked the stock exchanges to investigate brokers' complaints. This decision puts the stock markets under pressure to limit costs or to explain why they are needed, which stock markets have always resisted.

"Today's decision is a win for ordinary investors in our stock markets, who have been paying too high costs for too long to create an uneven playing field," said SEC Commissioner Robert J. Jackson Jr. He added that "exchanges will have to show that competitive forces, not market power, justify any increase. "

A spokeswoman for the NYSE declined to comment, saying the company needed time to review the decision, and that a Nasdaq spokesperson was not immediately available to comment. The stock exchanges have denied that they have overcharged their data or acted as monopolies, and should ask a federal court of appeal to overturn the SEC's decision.

Brokers, including those who deal with retail investors, such as mutual funds and pension funds, are essentially required, under SEC rules, to purchase stock market data. . These costs, say brokers, act as a tax for the industry, whether they swallow or pass on to customers.

Data has become a lucrative business for the three major currency groups that dominate the US stock market: the parent company of the NYSE.

Intercontinental exchange
Inc.

known as ICE, Nasdaq and

Cboe Global Markets
Inc.

Until the 2000s, trade accounted for only a small share of data revenue and sometimes even provided free data. Now revenues from the various ICE and Nasdaq data activities are competing with those of the companies.

This change coincided with an explosion of demand. The importance and volume of market data has increased in recent decades due to the widespread adoption of e-commerce and the ramp-up of ultra-fast operators who need information. fast on price movements.

The stock exchanges sell data on current stock prices and recent transactions, as well as on the volume of supply and demand for stocks at different price levels. High-frequency traders use this data to fuel their computerized trading strategies. Brokerage, including banks

UBS Group
AG

and

JPMorgan Chase

& Co., use it to make sure they offer their clients – hedge funds, pension funds and other big investors – the best price on every transaction.

By leveraging their core stock-data business, exchanges have spurred into related areas, such as bond price data and market analysis software. According to an analysis of the Capital Markets Regulatory Committee, a research group consisting of large banks and asset managers realized a total annual turnover between 2014 and 2017 from the data services of market of the three major stockbrokers.

The exchanges indicated that the analysis overestimated the size and growth rate of their data activities. Information provided by ICE, Nasdaq and Cboe indicates that their combined market data revenue was approximately $ 560 million in 2017, although this does not include the connection fees that operators and brokers must pay. to access this data. The figure also excludes option sales and futures data.

"There is absolutely no evidence that anyone can benefit from harmful government intervention to set prices, aside from the Wall Street interests that continue to perpetuate these myths in an effort to strengthen their markets." profits, "said a spokeswoman for the NYSE before the SEC. decision.

The increase in data costs has so far had little impact on small investors and their overall transaction costs have generally declined in recent years. Well-known names in the retail investment sector have nevertheless joined Wall Street banks to complain about rising fees.

Charles Schwab
Corp.

, Fidelity Investments and

T. Rowe Price Group
Inc.

were among the 24 companies that signed a letter to the SEC in December, denouncing the "oligopoly" of stock market data exchanges.

Clearpool Group Inc., an electronic brokerage start-up whose office is located a few blocks from the Big Man's historic headquarters in Lower Manhattan, has announced that its annual data expenditures on NYSE shares have gone from 212 $ 000 in 2015 to $ 323,000, an increase of 62%. Since then, Clearpool's data spend at the NYSE has declined because it has stopped paying for the most expensive data streams, the company said. "We have seen a steady rise in prices," said Joe Wald, CEO of Clearpool.

The SEC's decision will likely make it more difficult to increase the fees for data and associated fees for connecting to their computer systems. The SEC has already begun to look more closely at these fee increases, to ensure they do not harm competition, according to regulators and operators involved in the fight.

A federal court of appeal said last year that the SEC had failed to control similar fees in the options market and had ordered the agency to improve its oversight. The court decision "raised the bar for the commission on our review of [exchange] deposits, "said SEC Trade and Markets Director Brett Redfearn at an industrial conference held last week.

American stock exchanges have long used their status as pillars of American capitalism to make their way to Washington. According to an analysis by Mr. Jackson, the SEC Commissioner, the SEC did not reject any of the 95 connection fee exchange proposals from 2016 to September.

The SEC's Sifma decision reopens fundamental questions about the role of trade. Should they be public services working for the good of the markets or, as for-profit companies, should they focus on shareholder profitability?

The NYSE metamorphosis into a Big Data company began in the 2000s, following the SEC's new rules to break the decades-old NYSE-Nasdaq duopoly. Founded in 1792, the NYSE has dominated stock trading in the United States for most of American history. As recently as the 1990s, more than two-thirds of US equities were traded in dollars.

The rise of competing markets and electronic trading platforms has eroded the Big Board's market share. Today, the NYSE manages approximately 23% of US equity trading volume.

By fighting against low-cost competitors, the traditional activity of the stock market has suffered. According to an analysis by Equity Research Desk, a research firm, the net sales of the New York Stock Exchange between 2008 and 2017 decreased more than 40% to $ 196 million.

Anxious to stand out, the NYSE turned to its business data. About 1.7 billion shares a day on average are changing hands in the NYSE markets. Numerous digital message volumes circulate around the Big Bigger's 400,000 square foot data center in Mahwah, New Jersey, each representing a transaction or an order to buy or sell shares. The NYSE compiles these messages into high-speed electronic streams that it sells to brokers and dealers.

The NYSE also broadcasts share prices via a cheaper and slower public data stream, called the securities information processor, or SIP. This is used by retail brokers such as

Holding TD Ameritrade
Corp.

and internet search engines like Google and

Yahoo
.

Banks and e-commerce companies feel that SIP is too slow to be useful. Sifma has accused the NYSE and other exchanges of underinvesting in SIP in order to steer big customers towards more expensive data feeds. The NYSE and other stock markets deny this claim.

Wall Street veterans, including former NYSE executives, said the Big Board had focused its efforts on data after converting it to a for-profit corporation in 2006. They add that the process is 39, is accelerated after the takeover of the NYSE by ICE in Atlanta in 2013.

The last objective of ICE is to improve the control of the main financial data flows. Last year, 45% of the company's net revenues came from market data sales and corresponding fees, compared with 9% in 2011. This includes the sale of data from its stock exchanges as well as over-the-counter activities.

ICE stated that real-time market data sales represented only 2% of its annual turnover and had not grown rapidly.

Chief Executive Jeffrey Sprecher has rejected claims in the past that ICE would abuse market power to generate huge profits from data. "It's a false story," he told The Wall Street Journal in an interview last year, noting that Big Board customers were free to buy cheaper data feeds.

Asked about the legal battle with Sifma, the CEO of ICE said, "People are looking for all the benefits they can get by trying to coerce their suppliers."

The brokers say that part of the problem lies in the well-intentioned SEC regulations, designed to protect investors, but which ended up creating a profit opportunity for trading.

According to a rule adopted in 2005, brokers must send customer orders to the stock exchange that displays the best price for a stock. Brokers say that means they have to buy price data from the 13 US markets currently in operation. All but one market now belongs to the NYSE, Nasdaq and Cboe. The other, IEX Group Inc., does not sell high-quality data feeds and has attacked its major competitors for their data practices.

The SEC requires brokers to give their clients the best possible execution of orders. Regulators have stated that brokers must use the fastest and most complete data flow of the stock market to price the orders of customers, if they also use this data for their own operations.

Data is one of the many costs brokers incur and can be used to determine the amount billed by their clients, including mutual funds and pension funds. Richard Johnson, analyst at Greenwich Associates, says rising data costs help explain why the average brokerage commission paid by financial institutions has held steady at around 2.6 cents per share since 2010, after declining during the previous three decades.

High-frequency trading companies are also struck by the rising cost of trade data. These companies use powerful computer algorithms to break down actions in fractions of a second. If a company can get information on stock price developments a little faster than its rivals, it can use it to beat the competition. This is a great incentive to move to the fastest data streams and connections available.

In 2012, Nasdaq launched a new version of its Totalview-ITCH data feed, which, according to traders, was only two million seconds faster than the best version. The cost was $ 25,000 more per month, but many high-speed companies paid.

"We are in a competitive market," said Adam Nunes, business development manager at Hudson River Trading LLC, a high-speed trading company. "We have to buy it to compete with other trading companies."

-Liz Hoffman contributed to this article.

Write to Alexander Osipovich at [email protected], Dave Michaels at [email protected] and Gretchen Morgenson at [email protected]