The publication of the Market Data Infrastructure Rule in the Federal Register in April set the clock ticking on the submission of an NMS Plan amendment to address new requirements. Due by November 5, the amended Plan will set the stage for the advent of “Competing Consolidators” of consolidated US equities market data. Let’s take a look at required and optional elements of the amendment focused on Plan revenue, considering how the Plan might look with incremental or foundational changes.
To Bundle or Not to Bundle
New content added to consolidated market data will include depth of book data, auction information and additional information on odd lots. The Market Data Infrastructure Rule requires fees for these new data sets to be addressed by the upcoming Plan amendment. While the Rule discusses the value of product differentiation—the implication being that there will be multiple price points for consolidated market data—it is up to the Plan to address how the SROs will price the new content. At one end of the spectrum we could have a single price for all consolidated market data. At the other, Competing Consolidators could build bundles based on client demand, which would be a fundamental change from the way NMS market data is currently commercialized.
Addressing Changing Obligations of Plans/SROs
The Rule notes that fees should address the fact that the Plans will no longer be the exclusive SIP operators and that the SROs are no longer responsible for the connectivity and transmission services required for providing data to the exclusive SIPs from their data centers. The new Plan will need to take into account the fact that Competing Consolidators will now assume all of these obligations, which means the Plan no longer needs to recoup these expenses. While the current SIPs will be operational for at least some period of time after the introduction of Competing Consolidators, the Rule states that their costs should not be covered through fees charged to the new Competing Consolidators.
On the flip side, the Plans will now be obligated to assess the Competing Consolidators, support timestamps and calculate gross revenue. That shouldn’t be a huge lift given the level of timestamping already in place and the significant number of publicly disclosed metrics that the Competing Consolidators will produce. For the listing exchanges, there is also a new obligation to provide regulatory data, which could be a factor in fees.
It is possible that these changes could be reflected in a revised revenue allocation formula. While not required by the Rule, it does discuss how it’s the Operating Committee’s prerogative to reflect the changing SRO obligations in a new revenue allocation formula. Given the amount of work that went into creating the last formula, it will be interesting to see if the Operating Committee decides to tackle this issue.
Charging Competing Consolidators a Fair and Reasonable Price
While the Rule ultimately punts fee-setting to the Operating Committee, there is a fair amount of discussion around how such fees should be set and the statutory standards—in this case, the Exchange Act and Rule 603(a) under Regulation NMS—that apply. Both require that fees be “fair and reasonable” and “not unreasonably discriminatory.” As the Rule states, one way to comply with these standards is to “show they are reasonably related to costs.” Given that costs to the SROs or the Plans are not contingent on the number of subscribers a Competing Consolidator has, it is possible that a fixed fee could be established. The implications of a fixed fee charged to Competing Consolidators are far-reaching, especially as it relates to the simplification of audit and billing practices.
Setting fees is not without its challenges and there is real revenue at stake. The Rule states: “Exclusive SIP revenues from data fees totaled more than $430 million in 2017.” We expect there will be a considerable number of comments from market participants on this issue, as it fundamentally determines the value proposition of being a Competing Consolidator and has the potential to address industry pain points with SIP market data administration.
Impact of Additional Notices & Filings
The process of amending the Plans does not operate in a vacuum. While the Governance Order litigation was dismissed by the U.S. Court of Appeals for the District of Columbia Circuit on June 15 for being premature, watch for an approved new equity market data plan (which the SROs call the “CT Plan”) by August 9. Since the Governance Order was not considered a final action, the new CT plan could be the subject of a new lawsuit. Additionally, the exchanges refiled their lawsuit in April, correctly anticipating the June 15 dismissal of the original Market Data Infrastructure Rule litigation. Beyond that, the Operating Committee will also need to publish updated administrative policies.
After the filing of the proposed Plan amendment there will be a comment period and ultimately Commission action. Here at MayStreet, we look forward to reviewing the filing and commenting on its impact to Competing Consolidators and the industry at large. Assuming there is no stay of an approved Plan amendment, then we are off to the races, waiting for potential Competing Consolidators to file their Form CCs.
— Manisha Kimmel, Chief Policy Officer