The Securities Industry and Financial Markets Association (SIFMA) filed a comment letter calling the Securities and Exchange Commission (SEC) proposed order on market data fees "fatally flawed" and unveiled a related study to support that contention.
By law, financial firms are required to provide trading data to exchanges at no cost and then buy back the consolidated market data from the exchanges. The Exchange Act requires the SEC to review associated fees to ensure they are "fair" and "reasonable."
In its letter, SIFMA contends the SEC's proposed order is "fatally flawed: its competition analysis is faulty, internally inconsistent, and wholly inadequate." The order's entire analysis of market data fees assumes that competition for order flow among exchanges equates to competition in the sale of market data. Yet, market professionals must buy this data from both exchanges, even where each exchange's share of liquidity approaches fifty percent.
"If they finalize this order, the SEC will be ignoring its congressional mandate to ensure these prices are fair and reasonable, which is unacceptable," said Ira Hammerman, senior managing director and general counsel of SIFMA. "Both the NYSE and Nasdaq market data streams are necessary components for investment professionals' businesses - like gas and water service are necessary utilities in one's home. Gas power cannot serve as a substitute for water service - each is unique and therefore retains its monopoly pricing power - exactly like the exchanges' market data products."
The related study, prepared by the Securities Litigation & Consulting Group, uses (1) the presence of strong network externalities, (2) quantitative analysis of available economic data, including measured market shares and concentrations well in excess of standards set by the United States Department of Justice and (3) public statements and financial disclosures by the exchanges themselves to find "The two dominant exchanges are exercising monopoly pricing power by charging broker dealers and the investing public fees for depth-of-book data that are significantly higher than the relevant costs associated with distributing the data."