Securities and Exchange Commission Open Meeting
U.S. Securities and Exchange Commission
Wednesday, January 8, 2020
Key Topics & Takeaways
- New Consolidated Data Plan: In a 3-2 vote, the Commission approved a proposed order that directs the equities exchanges and the Financial Industry Regulatory Authority to establish a new National Market System plan which would grant non-SRO representatives 1/3 of the voting power on the new consolidated data plan operating committee
Opening Statements & Introduction
Chairman Jay Clayton
Clayton summarized the proposed order which would direct the equities exchanges and the Financial Industry Regulatory Authority (FINRA) to file with the U.S. Securities and Exchange Commission (SEC) a new National Market System (NMS) plan designed to increase transparency and address conflicts of interest, as well as other issues, presented by the current governance structure of the existing NMS data plans. He stated that this proposed order will begin the process of addressing both the inefficiency of having three NMS plans for equity market data as well as market participant concerns regarding the governance structure of the equity data plans. He continued that this new NMS plan would be titled the ‘New Consolidated Data Plan.” He stated that the proposed order sets forth: 1.) issues regarding the current equity data plans provision of equity market data; 2.) issues arising from the current governance structure of these plans; and 3.) specific governance provisions that the Commission preliminarily believes would allow the new plan to address these issues and better serve investors and market participants. He noted that as the proposed order addresses issues of importance to a variety of market participants, the Commission welcomes comments and insights regarding how best to improve the governance and operation of the equity data plans.
Staff Presentation: Notice of Proposed Order Directing the Exchanges and the Financial Industry Regulatory Authority to Submit a New National Market System Plan Regarding Consolidated Equity Market Data
- Brett Redfearn, Director, Division of Trading and Markets
- Michael Coe
- Christian Sabella
Redfearn summarized the proposed order and emphasized that the new consolidated data plan, which would replace the three existing equity data plans, will have a substantially different governance structure. He echoed the comments of Chairman Clayton regarding the history and context of Regulation NMS before stating that like any regulatory action, Regulation NMS could not possibly anticipate how the markets would develop in the future, especially as it concerns the current treatment of equity market data under Regulation NMS. He emphasized the changes in the equity markets since that time, specifically referencing technological advancements and that the exchanges are no longer member-owned non-profit organizations. He then addressed the consolidation of the exchanges and the fact that the three equity NMS plans now effectively have one operating committee and one advisory committee and yet there are still three separate NMS plans for equity market data. Further, he noted the fact that full voting rights on the operating committee are granted solely to the exchanges and FINRA (SROs). He concluded by stating that the Division of Trading and Markets believes that there should be a single NMS plan for market data due to the fact that the de-mutualization of the exchanges, as well as the proliferation of proprietary exchange data products, has exacerbated the exchanges’ conflict of interest and their lack of incentive to improve the provision of core data and Security Information Processors (SIPs).
Coe stated that the proposed order would do the following: 1.) require the operating committee of the new consolidated data plan to include, and provide votes to, individuals representing non-self-regulatory organizations (SROs), specifically, individuals representing the following: an institutional investor, a broker-dealer with a predominately retail customer base, a broker-dealer with a predominately institutional investor customer base, a securities market data vendor, an issuer of NMS stock, and a retail investor. The proposed order would establish a fair and transparent nomination process for the selection of non-SRO representatives to the operating committee, stipulating that the non-SRO representatives would select the new non-SRO representatives to sit on the committee. Further, the non-SRO representatives to the committee would be allocated 1/3 of the voting power on the new consolidated data plan operating committee; 2.) stipulate that each unaffiliated SRO and affiliated exchange would be allocated one vote on the operating committee regardless of the number of exchanges licenses the entity may hold. Further, the second vote would only be provided if the unaffiliated SRO or exchange group has a market center or centers that trade at least 15 percent of the consolidated equity market share for at least four of the six months preceding a vote of the operating committee; 3.) establish that action by the operating committee, including amendment of the plan, would require an ‘augmented majority vote’, a 2/3 majority vote of all votes on the operating committee provided that this vote also includes a majority of the SRO votes; 4.) require that the administrator of the new consolidated data plan not be owned or controlled by a corporate entity that separately offers for sale a market data product; 5.) require that the new consolidated data plan set forth the specific duties of the operating committee as they relate to items such as the proposal of amendments to the plan, the selection and oversight of independent plan operators and professional service providers, as well as the development and maintenance of fair and reasonable fees for core data offerings; 6.) require policies that address the treatment of conflicts of interest for both SRO and non-SRO representatives on the operating committee while limiting the use of executive sessions to circumstances where it is appropriate to exclude non-SRO members. He concluded that staff recommends a 45-day comment period and that the existing equity data plans would continue to govern the processing and dissemination of equity market data until the new consolidated data plan is ready.
Commissioner Robert J. Jackson Jr.
Jackson outlined his dissent, specifically stating that this proposed order will not result in ‘real reform’ and that it invites for-profit exchanges to draft their own rules as to how best to address the conflict of interest that is a result of these same exchanges being allowed to control the public feed while also selling their own superior private data feed. He said that private enterprises should not be blamed for maximizing profit opportunities that are legal under current law. He continued that the law should be changed to address the incentives produced by giving exchanges control over the public data feed and the opportunity to sell private, propriety data products. He concluded that without addressing these incentives, exchanges will have no reason to act contrary to their private interest and the market, as well as market participants, will bear the consequences.
Commissioner Hester M. Peirce
Peirce noted her support for the fact that this recommendation takes the form of a proposal as it will allow the Commission to deliberate and address the multitude of general views on how to improve the current system. She outlined her appreciation for the exchanges already taking steps to make the consolidated data feeds faster and more reliable. She stressed the difficulty in addressing market data issues as well as the complexity of NMS plan governance. She continued that this proposal will consider whether additional governance changes will help improve the system. She stated that the proposed order will allow the Commission to take in additional viewpoints to ensure that the new consolidated data plan improves upon the status quo. She concluded that potential additional reforms will be addressed in the future, specifically reforms that rely on governance by market forces.
Commissioner Elad L. Roisman
Roisman outlined his support, noting that reform is an iterative process and this proposed order represents an important first step. He acknowledged that proprietary exchange feeds will continue to play a role, even a ‘necessary’ role, in the market but that the SEC should address the potential for these propriety feeds to proliferate at the detriment of the SIPs under a governance structure where conflicts of interests exist. He continued by stating that every regulatory solution inevitably creates unintended consequences and as such, the Commission should continue to consider a wide array of viewpoints. He then recommended that the Commission should reexamine other factors related to the supply and demand of proprietary data feeds, such as broker best execution obligations.
Commissioner Allison Herren Lee
Lee acknowledged the conflict of interest that exists when for-profit exchanges control and oversee the SIPs while at the same time selling their own proprietary data streams. She stressed that the effectiveness of any future proposals for improving the NMS plan structure will depend upon establishing a solid governance structure. She then outlined her dissent, stating that the proposed order falls short in safeguarding the public interest. She continued that the non-SRO voting members called for in this proposed order will have neither the voting power nor the market incentives to push for the larger reforms required to ensure that the SIPs provide adequate market data to investors on a fair and reasonable basis. She stated that the Commission should address this issue more directly and that this proposed order may both take years to complete while also producing an inadequate solution.
The Commission voted in favor of the proposal, 3-2, with Jackson and Lee dissenting.
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