SEC Roundtable on Market Data and Market Access

Securities and Exchange Commission

Roundtable on Market Data and Market Access

Thursday, October 25, 2018 – Friday, October 26, 2018

Opening Remarks

Commissioner Kara Stein asked the speakers to consider whether market regulation has kept up with the 40-year-old market system or if changes are needed to reflect the faster and data-rich markets. She continued that the central market system was created to centralize markets and protect public orders because investors were uncertain whether the process worked to receive the best execution. Stein posed the following questions: What system is best for investors to receive best execution? What is the cost of market data and who has to pay for it? What incentives ensure market data is relevant and reliant? Does the National Market System (NMS) governance structure create internal conflicts? Does everyone need the fastest market data?

Commissioner Robert Jackson asked whether inefficient fair access costs are passed along to ordinary investors, noting that this is not just a dispute between exchanges and the broker dealers and that investors ultimately face some of the costs. He stressed the need for transparency into the costs to determine whether there is a competitive market to ensure that the exchanges’ actions are fair, reasonable and not unreasonably discriminatory.

Commissioner Elad Roisman noted his interest in how regulatory requirements, such as the order protection rule, vendor display rule or best execution requirements impact broker-dealers’ demand for market data, suggesting a review of the rules to ensure that they achieve the intended objectives. Roisman asked about the impact on retail investors and how much savings would be passed to investors if the cost is reduced and how internalizers, ATSs and other broker dealers that use the lit quotes for off-exchange trading share the cost of developing market data.

Division of Trading and Markets Director Brett Redfearn stated that the primary objective of Regulation NMS is fair markets and when adopting the 2005 changes, market participants were concerned that moving to a competing consolidator would require firms to purchase market data from all self-regulatory organizations (SROs) and reduce competition. The key question that Redfearn wanted to understand is whether data from the securities information processors (SIPs) meets the basic needs of investors and to what extent the purchase of additional proprietary data products is necessary in addition to the core data provided by the SIPs.

 Panel 1 – Overview of Current Landscape for Market Data Products and Market Access Services

Doug Cifu of Virtu Financial stated that Virtu handles about 30 percent of retail orders and pays to connect and for market data from nearly every exchange at a cost exceeding $34 million. He continued that most market participants are required to pay the connectivity and proprietary data fees to help investors with price improvement, and showed that market participants pay over $1 million annually for connection to the exchanges through a cable that was available on Amazon for $88. While he admitted the cable is symbolic and not the only factor in the cost, Cifu explained that this significant markup suggest that exchanges should publish costs to ensure fair competition and transparency in the markets.

Chris Concannon of Cboe stated that the evidence shows that trading costs continue to decline, while execution quality is high, and that investors have never had it better. After discussing investment banks’ trading revenues, Concannon stated that this debate is commercial in nature, and that firms make a business choice whether to purchase market data.

Stacey Cunningham of NYSE stated that Main Street investors have never had a better trading environment, as variable costs have decreased, and fixed costs have increased but overall costs are decreasing. Cunningham claimed that the banks have issues about market data fees because exchange profits now go to shareholders instead of the member-owned banks. Rather than focusing on this industry dispute, Cunningham stated that the SEC should focus on making more companies want to go public.

Brad Katsuyama of IEX stated that exchange products are unique to each exchange and that this pricing power has resulted in “egregious” price hikes over the years. He explained that there is no substitute for NYSE data, but if there was, IEX would prefer paying any other person than their competitor. He continued that exchanges have a higher burden to meet as the exchanges are given a special status and have a regulatory monopoly on their products. Katsuyama also raised concerns with exchanges operating nearly identical business models by the same parent companies and said one benefit is for the parent company to collect fees from market participants to connect to each exchange. He reviewed costs of market data and stated his belief that the potential mark up for exchange run data center exceeds 3,000 percent. Katsuyama stated that the issue is about fairness and the resulting barriers to entry from the excessive market data fees. For moving forward, Katsuyama suggested increasing transparency in the market data and access costs and providing all market participants with full voting representation on SIP committees.

Mehmet Kinak of T.Rowe Price stated that by working on the buy-side, he, rather than the exchanges, represents investors interests, and is concerned about an ecosystem that favors one party over another one, such as when a for-profit company can regulate its competitors while competing for order flow. He continued that while the buy-side has not been vocal in the past, they have seen the costs for non-display increase by 25 percent in three years, double in five, along with increases in the cost for terminals. Kinak noted the problems with the broad definitions the exchanges consider to be non-display, and how market data users are not allowed to store, reproduce, report, or use the data for analysis without paying, despite the exchanges being the aggregators and not the producers of the data. He continued that the buy-side additionally pays for the increase in market data indirectly through broker-dealers that are valuable as they subscribe to all the market data feeds. Kinak suggested that market data costs, as with all other costs, should decrease, which can be accomplished through competition.

Hal Scott of the Committee on Capital Markets Regulation stated that U.S. equities’ trading costs are near record lows and marginal reforms could further reduce trading costs for investors. He stated that broker-dealers must pay for access to the SIPs, proprietary data feeds and connectivity services to execute their orders and meet their best execution obligations, and that while exchanges and other trading systems compete for order flow, this competition has not constrained cost of market data. He explained that this is in part because broker dealers pay a fixed cost to access these services and the cost of market data is not part of the order routing decision. Scott noted that the Committee on Capital Markets Regulation published its recommendations for reforms which include: 1) the exchanges should make standardized and thorough disclosures on all market data services and underlying costs; 2) the Commission should require exchanges to provide further evidence that the fees are appropriate; and 3) allow competing consolidators of SIP data.

Tom Wittman of Nasdaq stated that the commercial debate about fees should not be turned into a public policy debate, and that exchanges are not effectively taxing retail investors because the trading costs are a fraction of the previous costs and are the lowest ever. Wittman disagreed that firms are forced to purchase the proprietary feeds and that market participants can chose whether to purchase the additional feeds based on their business model. Additionally, he disagreed that the exchanges keep the SIP slow and deprived of information as demonstrated by the improvements over the last few years. Wittman stated that this issue is not about Main Street investors and is a well-functioning competitive market with no role for government action.

Using SIP Data

The panelists shared their view on the current and intended use of the SIP and whether broker-dealers can rely on SIP data to meet their best execution obligations. Scott stated that market data historically has been a public good as it is essential to the market as a whole, and now that the exchanges supplement the SIP with proprietary data, the public should additionally be entitled to this information. Cifu stated that without proprietary feeds and being able to consolidate the full depth-of-book for a more robust view of the market, market-makers and institutional brokers could not execute orders for retail and institutional investors and thus would not continue to operate. Kinak agreed and stated that he will not send his order flow to a broker-dealer that does not subscribe to the fastest and most in-depth market data products, viewing this as a best execution obligation. Kinak stated that depth-of-book is necessary to see where investors reside, but Cunningham stated this could be added to the SIPs if people thought this is necessary information. Cifu stated that if he could, he would create a more comprehensive and faster SIP that he and Kinak both agreed they would rely on since it will be cheaper.

Conversely, the exchanges representatives believed broker-dealers rely on the SIP because they do not see every broker-dealer subscribing to every proprietary data feed. Concannon stated that the SIP provides value as the Commission still requires the SIP and not all broker-dealers purchase the proprietary data feeds, suggesting their reliance on the SIP. Additionally, Concannon stated that this is a commercial decision because the Commission has not demanded all the broker-dealers to subscribe to proprietary feeds. Cunningham agreed and stated that looking across all of the NYSE exchanges, not all broker-dealers subscribe to all the proprietary data feeds. Wittman stated that the exchanges made vast improvements to the SIP and is important for investors. Concannon stated that out of the top ten firms by market share—four investment banks and six technology-assisted trading firms—four receive a payment from Cboe every month because rebates outweigh the cost of market data and not all these firms buy the fastest and most in-depth market data and connectivity fees. Concannon stated that some of these users can reduce their market data cost by purchasing it through a third party that provides access to all the feeds.

Level of Fees

The panelists discussed their views on how the Commission should determine whether these fees are fair, reasonable and not unduly burdensome. Cifu stated that market participants say these fees are unfair and the exchanges should provide more information on their profit margins but the exchanges keep saying “just trust us.” Scott stated the Commission and public need full and comprehensible disclosure to help the Commission make this determination. Katsuyama stated the Commission should consider the profit margins and any excessive profits show the fees are unreasonable. Wittman stated that the costs of market data are related to order executions and it is not easy to dissect these costs. Cunningham stated that fairness should consider the total cost of trading because while market data fees may increase, other areas have larger decreases in cost. Kinak stated that the barrier to entry from purchasing these market data products is too high and therefore the fees are not fair and reasonable.

 Panel 2 – SIP Core Data Products and Exchange Top-Of-Book Data Products

Jeff Brown of Charles Schwab began the discussion by stating that the SIP is outdated and that retail investors need more information, such as depth-of-book data. Simon Emrich of Norgest Bank Investment Management stated that the increase in cost of market data has reduced the competitive landscape for broker-dealers as evidenced by the reduction in the number of broker-dealers he will use for execution services. Adam Inzirillo of Bank of America Merrill Lynch stated that he would like to see the Consolidated Tape Association (CTA) and Unlisted Trading Privileges (UTP) consolidated and stated that only proprietary data feeds allow market participants to see depth-of-book across all markets. Mark Skalabrin of Redline Trading Solutions stated that the SIP cannot compete with the proprietary data feeds because of the latencies and lack of content, and that the cost of these feeds cause extreme barriers to entry and contribute to people not purchasing these faster, more in-depth feeds.

Cost of Data

Oliver Albers of Nasdaq stated that the cost of the SIP for retail investors has remained constant or decreased while professional traders pay most of the cost. Michael Blaugrund of NYSE stated that the SIP data cost and distribution of revenues is now public. Matt Billings of TD Ameritrade stated that market participants do not know the cost to operate the SIP and believes too many people are unjustifiably designated as professionals. Blaugrund responded that he is willing to re-visit the definition of who is a professional, but that the direct costs to operate the SIP should not be publicized to avoid misinterpretations. Inzirillo and Skalabrin stated that the biggest fee increases have come from non-display fees. Emrich stated that even if the fees have remained fairly constant, the use for the SIP data has decreased and he will not use broker-dealers who only subscribe to the SIP.

Differences Between SIP and Proprietary Market Data Products

Blaugrund stated that in addition to improving the latencies, the SIPs, per the advisory committee members request, now publish the latency information. Skalabrin, Inzirillio, and Emrich stated that the geographical locations of the consolidator to create the National Best Bid and Offer (NBBO) is the biggest consideration. Blaugrund stated that because the aggregation time has dramatically improved, the geographical latency problems are more relevant. Blaugrund stated that using microwave technology instead of fiber may be less reliable but would help the geographical latency for the NBBO. Albers stated that competing consolidators makes the true NBBO questionable and raises questions such as whether market participants would have to benchmark arbitrage across the different consolidators. Skalabrin stated that there is no longer a single NBBO because most firms are already creating their own.


Albers stated that the firms subscribe to the SIP for multiple purposes and no one consumes just proprietary products. Billings stated that the SIP is sufficient with some improvements for retail investors, but executing brokers need more information and cannot rely on just the SIP. Emrich stated the SIP is not sufficient for the executing brokers, nor for his pre- and post-trade analysis. Emrich stated there will always be some use for proprietary feeds due to some latency. Brown stated there is significant differences in execution quality between brokers who use the SIP and not the proprietary data products. However, Blaugrund and Albers stated that the SIP is sufficient for trading.

Panel 3 – Exchange Depth-Of-Book Data Products and Market Access Services

James Brooks of ICE stated that there is no requirement for NYSE to provide proprietary products and firms can choose which products to use. Brooks stated that broker-dealers have different uses for proprietary products and about half of all broker-dealers do not use any proprietary products. In response to Redfearn, Brooks stated that he was unwilling to provide numbers on the revenues for proprietary data products.

Michael Friedman of Trillium Management stated that investors need depth-of-book data to make its trading decisions, and that the order protection rule affects broker-dealers’ needs to consume depth-of-book products but would still need to purchase these products without the order protection rule to get the best quotes and best execution. Thus, he continued, the demand for depth-of-book data would remain the same without the order protection rule. Friedman also discussed the importance of proprietary data feeds for post-trade surveillance to identify spoofing and layering.

Chris Isaacson of Cboe stated that broker-dealers are not obligated to buy all the proprietary feeds from every exchange and not all of them do so today. In response to Redfearn, Isaacson said that it is difficult to define whether these products are out of reach because no one is required to purchase the data and Cboe offers different ways to connect. Isaacson stated that market share, price, and location are factors in deciding whether to purchase the proprietary feeds and pay the connectivity fees.

Vlad Khandros of UBS stated that market data pricing is inelastic in many areas. While he agreed that the U.S. capital markets are strong and investors have the lowest fees they have faced, Khandros stated that improvements can still be made. Khandros stated that within UBS, market data is the third biggest expense after human capital and real estate. Khandros stated that as a result of competition, the cost for users has decreased but the cost for broker-dealers continue to increase, and referenced the SIFMA and Expand Research Study that found the NYSE integrated feed has increased by approximately 1,100 percent over the last eight years. Khandros also stated that UBS’ market share has increased because it can afford to purchase all the market data products from each exchange.

Jamil Nazarali of Citadel Securities stated that accurate and up-to-date market data information is critical for effective trading, and that the SIP does not provide sufficient information at adequate speeds to determine the market. Nazarali stated that their customers demand the best prices and it is not a commercial decision because they would not be in business without the proprietary data products.

Ronan Ryan of IEX stated that exchanges decide what the SIPs and proprietary data feeds offer and the price, and that IEX gives all its data for free that lets market participants see every order at every price level. Ryan stated that all the panelists today have said they need to purchase the proprietary data feeds except for the exchange representatives who say it is a choice. While Ryan recognized that the cost includes more than the equipment, he stated that the market data and connectivity fees are too high. He continued that the exchanges have exclusive control over the information and put the market participants in a prisoner’s dilemma because once a market participant purchases the faster product, everyone else must do the same to remain competitive.

Joseph Wald of Clearpool Group stated that Clearpool Group is a new entrant to the market and discussed his experience with the barriers to entry from the cost of market data. Wald explained that the market data fees have a disproportionate impact on smaller broker-dealers and feels compelled to purchase all the proprietary feeds. For example, Wald stated that market data was 25 percent of Clearpool’s non-human operating budget in its first year which made it difficult to start the business. He continued that the lack of transparency and high costs, and complex tiering structure for market data, result in huge upstart costs for smaller firms.

Khandros stated that a lot of firms are outsourcing their order routing to access the market and these broker-dealers may be the firms not subscribing to all the products. Khandros re-iterated the statements by representatives from the buy-side that they would never route orders to an executing broker that does not purchase all the proprietary feeds. Khandros stated that people can choose whether to use UBS as its executing broker, but UBS cannot choose to disconnect from an exchange.

Pricing Proprietary Products

Brooks and Isaacson discussed how the exchanges determine the cost of its proprietary products. Brooks stated the price for the proprietary products is based in part on capacity. Isaacson stated that the price of products is driven in part by the value to the market and in part by the cost. Brooks stated that he supports applying a market-based approach in determining whether market data prices are appropriate. Brooks also said that the Commission should focus on the total cost to trade, and all products, instead of the isolated cost of a particular market data product, because overall the cost to trade has decreased for investors.

Core Data

The panelists discussed what should be considered core data and ways to ensure all market participants have fair access to that data. Isaacson believed the SIPs have already made sufficient progress but is welcome to further discussing other things to include, such as odd lots, but thinks depth-of-book may be overinclusive. Wald stated that he appreciates the improvements to the SIP but it should include, at least, auctions in the SIP to help make it useful for effective order placement. Nazarali stated the need to address the location latency first and then move to including additional information. Khandros stated the need to have a truly competitive process for obtaining market data to solve this issue. Khandros and Ryan stated the Commission needs more information on the cost of market data, and at minimum, the Commission should have this information. Wald stated that effective immediately fee filings is counter intuitive to the Commission’s obligation to determine whether the fees are fair.

Panel 4 – Elements of the Core Data Infrastructure

Michael Blaugrund of NYSE discussed the distributed SIP proposal submitted to the public comment file. This proposal would require the exchanges to simultaneously broadcast to SIP locations where each exchange can download the data. The regulatory messages will be calculated by the listing exchange SIP and republished by others. Continuously publishing the SIP, and only having only one hop, will minimize the latency delays. This proposal would reduce overall latency by over 80% and recipients will not be required to make changes to their current infrastructure.

Paul O’Donnell of Morgan Stanley focused on whether the problem is that the SIP is inadequate for retail investors or whether executing brokers should be able to rely on the SIP. The first instance will require minimal amount of work to meet these expectations but allowing executing brokers to rely on the SIP will require a significant amount of work. O’Donnell stated the keys areas to improve include: (1) content from SIP needs to be efficient; (2) a fast consolidation system needs to be located close to the trading engine; and (3) the network from the exchange to the consolidator needs to be fast. O’Donnell also stated the Commission should not focus on the next best technology but rather ensure competition, such as a CMDA, to allow the market to make these decisions.

Professor Robert Bartlett of UC Berkeley stated the reason we are considering these issues is in part because Regulation NMS did not include a consolidated order book. Bartlett raised one problem with multiple consolidators is that it creates multiple NBBOs, which makes it difficult to determine whether you get the best price. Rather than supporting a proposal that will create multiple NBBOs, the focus should be on what NBBO the broker-dealer used.

Isaac Chang of AQR Capital Management stated that all market participants—buy-side, sell-side and exchanges—have a claim to owning the market data. Chang stated there is a fundamental concern with confidence in the markets and that we need to address. Chang also stated that market data should be treated as a public good and that any regulatory framework should not be tailored around the current state of technology. Chang emphasized that a solution should not be focused on the current state of the world. Chang also stated that the Commission should resolve, or at least manage, the conflict that exists from the public and private feeds are created by the same organization.

Dominick Paniscotti of Nasdaq stated that the transparency problem is with the creation of the NBBO because there should only be one. Paniscotti stated that a CMDA or distributed consolidator does not solve the problem but only pushes it into the future. Paniscotti suggested that moving the SIPs to the cloud instead of data centers would be an effective substitute so that there is one access point to that information.

Adam Nunes of Hudson River Trading stated that there should be one feed for one fee. The CMDA will still require an extra hop and having a SIP as fast as the direct feeds would ensure they are fair. Nunes additionally stated that the regulatory structure should be flexible to evolve with technology and the Commission should not just chose one method, such as the cloud.

Jarrod Yuster of PICO Quantitative Trading suggested developing a competitive SIP, and the panelists explored some of the advantages and disadvantages of developing competitive SIPs. Blaugrund stated that its appealing defer to market forces to pick the best outcome, but the market may emphasize speed at the expense of resiliency. However, O’Donnell and Nunes stated that a CMDA will increase resiliency. Additionally, O’Donnell stated that there are opportunities to reduce the cost in the current model because of the duplication with three tames and two plan processors.

Paniscotti stated that having multiple distributors will add complexity and it would be easier to focus on having one NBBO in a single location. However, Blaugrund and O’Donnell stated that everyone will have a different view based on where they are located. Bartlett further stated that providing broker-dealers with discretion in choosing a NBBO will continue to cause problems with confidence and that investors need a way to evaluate how the broker-dealer executed the trade.

Transparency in the Markets

The panelists discussed the importance of promoting transparency in the markets to ensure investors get the best price. Chang stated that AQR, or its executing broker, needs to rely on more than the SIP to tell investors they received a best price, unless this is not the purpose of the SIP. Blaugrund stated that he understands the SIP needs more improvements so more people can confidently rely on the SIP for the best price. Bartlett stated that the SIP should demonstrate that people get the best price, and that currently SIPs cannot be used for to get the best price or for post-trade analysis.

Core Data

The participants discussed what should be considered as core data. Chang stated that the definition of core data will change over time and that it may be best to consider all market data as public goods. Nunes stated that odd lots should be included. Blaugrund stated that including odd lots and auction imbalances is a sensible and achievable next step but adding depth-of-book to the SIP may include additional costs due to the technology challenge. Bartlett stated that including odd lots will be useful and core data should include multiple levels of depth in the market at the time of the trade.

Panel 5 – Governance of Core Data Infrastructure

Richard Ketchum, former FINRA CEO, provided recommendations on ways to further improve the governance structure. Ketchum discussed the importance of including all stakeholders and review the governance structure with the consolidation of exchanges to three main parent companies. He continued that the advisory committee should have a vote and require the operating committee to respond to its own recommendations and that here should be a reduction in the use of executive committee sessions. Ketchum added that the voting rights should be based on exchange family rather than exchange and potentially award an extra vote based on market share.

Hubert de Jesus of Blackrock stated that these discussions will continue without reforms to ensure appropriate governance. de Jesus discussed the inherent conflicts of interest the exchanges face with the authority to develop NMS plans. Additionally, exchanges do not represent the entire market, and governance should include diverse range of participants with equal voting representation. He continued that the construct of the exchanges developing the NMS plans date back to when exchanges were member owned and before the exchanges offered competing proprietary data products with the SIP. He added that the advisory committee is considering a conflict of interest policy, but it does not address the exchanges dual interests in SIP and proprietary revenues.

Emily Kasparov of CHX discussed the efforts to enhance the SIPs and stated that she does not experience these conflicts of interest in the operating committee. Kasparov stated that the SIP governance committees are filled with those with expertise and have already made significant improvements to increase transparency. She continued that the SIPs began publishing revenues and is considering providing a webcast of the operating committee meetings. Kasparov stated that the SIPs have operated for over forty years without conflicted interest issues. Kasparov explained that the plan states that the exchanges select its participants and the expertise on the operating committees improve the SIP.

Kevin Cronin of Invesco stated the importance of fixing the governance structure of the SIPs to ensure fees are fair, reasonable and not unduly burdensome. Cronin raised concerns with allowing certain market participants—the exchanges—to buy an advantage to others without—contrary to the specialists—requiring additional obligations. Cronin stressed the importance of addressing these structural conflicts first because any improvements made to the SIP could be countered by improvements to the proprietary feeds.

Bryan Harkins of Cboe stated that BATS [now part of Cboe] had pushed for improvements to the governance structure and changes have already been seen. Harkins stated that Cboe makes more money from the SIP than the proprietary feeds and half of their customers rely on the SIP. Harkins stated that the operating committee speaks for the exchanges, and not to improve revenue from one product, and that conflicts of interest exist everywhere, including on the advisor side. Harkins noted that he favors providing disclosure for conflicts, instead of removing them. Harkins sees giving the advisory committee a vote as a step in a positive direction but does not favor any actions to limit the exchanges’ abilities under the plan.

Michael Masone of Citigroup stated that the plan participants are doing the best they can under the constructs of a flawed system, and that this governance structure was established 43 years ago when the exchanges were member owned and did not have to worry about this conflict of interest. However, now exchanges must answer to their shareholders and act to maximize profits. Masone suggested changing the governance structure for real or perceived reasons because the persons on the governance plans are in an awkward position. This issue also occurs in other NMS plans, such as the Consolidated Audit Trail (CAT), and at minimum, other market participants should have voting representation. Additionally, Masone highlighted that the EMSAC, advisory committee, SIFMA, ICI, U.S. Treasury, CCMR, and Nasdaq have all said the SIP governance needs some reform.

John Ramsay of IEX stated that conflicts of interest that can overwhelm the best motives and that he has seen conflicts have impacted decisions of the plans that have undermined the public good. By offering competing proprietary data feeds, the exchanges have the power to impact the usefulness of the SIP for trading. For example, he has not been able to get auction data included in the SIP. Additionally, there is not even a provision to allow other market participants to bid to offer a competing processor.

Advisory Committees

The panelists then discussed whether advisory committee members be given a vote. Ramsay recommended building a balanced board with representatives from the exchanges, FINRA, vendors, buy-side and sell-side. Masone stated that it should at least be opened up to one asset manager and one broker-dealer. Ketchum stated that all market participants have conflicts but supports providing a vote to the advisory committee and someone from the public. Ketchum also suggested the Commission clarify the responsibility of the members of the plan and consider articulating the fiduciary duties as plan participants. de Jesus stated the advisory committee needs a vote because currently the operating committee can address their issues in a different way or table the discussion. Cronin suggested at least give the industry a voice in determining what is core data and setting the standards for an acceptable amount of latency. Harkins and Kasparov raised concerns with the higher obligations SROs have, but Harkins supports a vote for the advisors while Kasparov supports the current structure but welcomes the continued discussion. de Jesus stated that are ways to increase the accountability of the advisory committee such as setting aside some of the revenues, or fees charged to broker-dealers, to pay for any liabilities.

The panelists also considered whether the current structure of one vote per exchange license is appropriate. Kasparov supports the current structure and stated that requiring unanimous votes makes minority views important and Harkins stated that exchanges have a higher obligation so should have a higher voting power. Conversely, Cronin, de Jesus, Ketchum, Ramsay and Masone all support providing one vote per exchange group. Masone further elaborated that fragmentation should be dis-incentivized by limiting the benefits to an exchange receives for operating an additional exchange that’s not necessary to the market.

Panel 6 – Funding of Core Data Infrastructure
This panel began with a discussion on the panelists views of whether the fees are fair. Greg Babyak of Bloomberg discussed the previous court decisions and the recent Commission decision that found the exchanges did not provide enough information to show that market data products face competition. Babyak stated that exchanges have a monopoly over core data and therefore the prices should be tied to cost. Adrian Facini of IEX agreed that market data is a monopoly product because there is no replacement for NYSE market data than from NYSE. Brian Schell of Cboe disagrees that exchanges have a monopoly because of the competition for market share and that decreases in market share results in a decrease in market data. Bradley Jones of Quantlab Financial stated that transparency is essential, and broker-dealers don’t have the option to take action for being over charged by the exchanges for market data. Marcy Pike of Fidelity Investments agreed that the exchanges should provide the cost of producing the SIP data.

Costs of Market Data
Panelists then discussed the costs of market data and whether these are or should be disclosed. Schell stated executing the transactions and the dissemination of the data are so inextricably linked we don’t know how to properly allocate those costs. Additionally, that the total costs are reported in Cboe’s 10k and 10q filings and provide further breakdowns of SIP revenue. Larry Tabb of Tabb Group stated that the exchanges’ financial statements do not provide enough breakdown of the costs and he sees that SIP revenues have been fairly consistent. Tabb also stated that the exchanges force firms to pay for the same data multiple times based on licensing for various business models.  John Yetter of Nasdaq stated that the SIP revenues benefit new exchanges because they immediately get revenues and he is resistant to disclosing the cost because some market participants will want the products to be priced at cost which will be problematic. Additionally, Yetter stated that SIP fees for non-professionals have been falling.

Determining Fees
The panelists discussed the SIP relevance to cost and the process of determining the appropriate fees. Schell stated that Cboe does not manage its business based on cost and order execution and market data are too interrelated to separate. Additionally, Schell discussed the different business models of exchanges and how some may choose a higher transaction fee or another revenue model. Yetter stated that there is not an issue with SIP pricing as the fees have remained stable and the revenues are used to set off costs. However, Pike stated that costs should decrease as with everywhere else in the market. Additionally, Tabb pointed out that while the SIP revenue has remained stable, the SIP has become less fit for use in trading off that data.

Increasing Transparency
The panelists discussed ways to increase transparency to see if the SIP fees are fair, reasonable and not unreasonably discriminatory. Jonas suggested allowing bids to see if someone can process the SIP data for faster and cheaper. Babyak stated that the estimated cost for market data does not have to be perfect, but we should make sure the costs are disclosed to avoid massive rate hikes. However, Schell questioned disclosures on cost, claiming that in-depth disclosure will be difficult to maintain and not consistent across exchanges. Tabb stated that either market data products need competition, which is challenging, or there needs to be a good understanding of the fees relative to the cost.

Cost of Market Data
The panelists discussed the growth in the cost of market data. Yetter suggested the Commission look at the price changes over time. Schell stated that some of the exchange revenue growth is from subscriber growth in large markets such as Asia and Europe. However, Facini and Pike stated the fees charged are based on the exchanges perceived value of the data rather than the cost. Further, Pike stated that the industry faces the difficulties in interpreting the exchange policies on the use of the data and the opaqueness of the distinction between professional and nonprofessional users.

The panelists disagreed on whether order flow constrains the cost of market data. Yetter stated that Exchanges are two sided markets with trading volume and data because trading volume is essential to create market data. Yetter stated that the Supreme Court in Amex v. Ohio found that two sided markets must be considered together and suggests that the cost to execute trades are now, or negative. Pike and Jonas disagreed with linking order flow with market data because a broker-dealer cannot change its order flow in response to excessive market data fees.

The panelists then discussed whether there is competition that constrains fees for core information provided in proprietary products. Pike stated that there has been over a 300 percent increase in NYSE corporate actions data and that some proprietary products miss necessary information that is added later. Jonas stated that not all these new products are necessary for market participants, but once a competitor purchases a better product, all the others must follow suit to stay competitive and in business. Babyak stated that the NetCoalition case considered whether there is competition and found that market data products are not substitutable and the competition in order flow does not affect the cost of market data.

Panel 7 – Public Transparency

Bill Conti of Goldman Sachs began discussing the transparency of the SIP process. Conti stated that he has seen decreases in costs on the transaction side where the exchanges face competition but market data prices, where exchanges don’t face completion, have only gone up. Conti stated the exchanges took a major step forward with publishing the SIP revenues but there still needs to be more transparency. Conti stated that it would be best for market data fees to be based on a cost-based model, and wishes to see that transparency by product line, but at a minimum, the Commission needs that information to make a determination on fairness.

Melissa Hinmon of Glenmede Investment Management stated that the fee schedules are complicated, making it difficult to ensure proper use of market data and that better disclosure will ensure more efficient use of the data. Hinmon also discussed her fears of market data being too expensive for small or medium sized broker-dealers. Typically, these broker-dealers provide liquidity in smaller name stocks, but if the market data becomes too expensive, they will no longer be able to invest in these smaller companies.

Rich Steiner of RBC Capital Markets discussed the Potomak Petition to the Commission to review market data fees. Steiner stated that broker-dealers cannot assess whether the fees are reasonable because there is no competition between the exchanges for market data and no way to compare the fees to the cost. Steiner stated that broker-dealers don’t view it as a commercial decision to purchase the proprietary feeds but rather a best execution obligation. Additionally, Steiner finds the requirement to “pay to play” troubling in determining whether the fees are fair.

Anthony Masso of Succession Systems helps clients review their market data costs and sees clients’ confusion when trying to apply the definitions. Masso stated that clients are frustrated when they feel they pay for things multiple times. This also leads to feelings of being ripped off, even if that is inaccurate, because there is no way to understand the basis for the costs.

Tyler Gellasch of Healthy Markets stated that the demutualization of exchanges did not imagine the market we would have today and anticipate these market data and access problems. Gellasch stated that the SIP should be the same speed and provide the same data as the proprietary feeds and should be regulated as a utility. Gellasch stated that smaller firms cannot compete for order executions because they cannot afford these feeds. Additionally, broker-dealers cannot accurately measure their best execution obligations on stale prices.  Gellasch stated these costs should be publicized because the Commission may not have enough resources to analyze the costs.

Jeff Davis of Nasdaq stated that being transparent is the business of an exchange and will look for ways to improve customers’ experiences based on the comments from the past two days. Davis stated that competitive forces can constrain the cost of core data and wants to avoid intrusive government regulation. Davis stated that the SIP provides reliable quotes, and serves an important function in the market, and highlighted the numerous steps to improve transparency in the SIP. Davis also stated that the SIP revenue incentivizes conduct to promote lit quotes and Nasdaq gave back 83 percent of the TRF revenue to those firms. Davis would provide the Commission with any information they request, but does not think all the information should be made public. Additionally, Davis expressed his support for providing the advisory committee with a vote and include them in the executive sessions.

Kevin Carrai of Cboe re-emphasized that he welcomes efforts to improve transparency and highlighted the efforts already made to improve transparency. Carrai suggested working through the conflict of interest policies first and then through the confidentiality policies. Carrai stated that Cboe has tried improving the user experience with any complication of fees by offering a data management service, but only one firm uses it. Carrai also stated that when Cboe first introduced non-display fees, it excluded smaller broker-dealers to prevent excluding them from getting the data.

The panelists discussed areas where transparency needs improvement and what should remain confidential. Davis stated that the SIP governance plans should continue to keep legal actions, involvements of specific firms and audits private. Davis also welcomed the Commission to ask more information about cost but should avoid setting cost-based formulas. Davis also asked for more guidance on the purpose of the SIP and uses of the SIP revenue. Carrai also stated his willingness to provide information to the Commission about the market data fees relative to the cost. Steiner agrees that he doesn’t want government rate making, but he needs more information to provide clients.

Fee Filings
In response to questions, the panelists discussed what should be included in fee filings for the Commission to determine whether the fees are fair. Davis stated that the Commission should provide more clarity on what best execution means in the current trading environment and clear written guidance on SIP filings. Gellasch stated that the fee filings should include the requirements under Exchange Act, an explanation of the product and who are the intended purchasers. Steiner and Conti suggested the exchanges should provide a more in-depth disclosure of the cost and fees for the products. Carrai stated that he does not have a problem identifying anything to the Commission but any firm identifying information should not be publicly disclosed.

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