Lucrative fees for detailed stock-price information, a profit driver for companies including the owner of the New York Stock Exchange, are under growing scrutiny after a federal regulator’s decision to block recent increases to hundreds of them.
The action by the Securities and Exchange Commission is one of its most significant steps in years toward reforming equity markets, and it may be the start of a broader push to buoy investor protections.
The unanimous decision, announced earlier this month, is the latest in a decades-long battle over what the New York Stock Exchange and the Nasdaq Stock Market charge brokerage firms for access to a quicker and more detailed feed on stock prices than small retail investors typically see.
The SEC didn’t determine that the price increases were too steep, merely that the exchanges didn’t meet their statutory obligation to demonstrate that they were reasonable. It gave the companies one year to justify an estimated 400 price hikes, setting them aside in the meantime.
“Today’s actions will enable the commission and market participants to more efficiently and effectively ensure that market data fees are set, reviewed and regulated in the best interest of our markets and our Main Street investors,” Chairman Jay Clayton said in a statement.
Nasdaq confirmed it would appeal the decision. A spokesperson for the InterContinental Exchange, which owns NYSE, didn’t respond to a request for comment, but it’s expected to appeal as well.
“We are disappointed by the SEC’s decision, given the strength of our evidence, convincing record of facts and our track record in the courts,” Nasdaq said in its statement. “This decision represents the latest in a 20-year long series of attempts to over-regulate the best capital markets in the world.”
The issue is slated to come up again during a two-day roundtable the SEC is holding this month on market access, a discussion that comes amid a push by some in the agency for more investor-oriented reforms.
Over a decade ago, the New York Stock Exchange, the Chicago Stock Exchange and others operated as not-for-profit entities. But after a series of mergers, the bulk of the equity exchanges are owned by three for-profit companies — ICE, Nasdaq and CBOE Global Markets.
That consolidation of ownership and the resulting drive to constantly boost profits is leading to policies that hurt small investors, Democratic Commissioner Robert Jackson said in a September speech.
“Their profit motive gives exchanges every reason to structure stock markets in a way that maximizes their rents,” he told an audience at George Mason University. “The elaborate stock-market structure we have today isn’t free. American investors are paying for it, one microsecond a time.”
Among the practices Jackson highlighted as particularly egregious is the availability of both public and private, subscription-based feeds for information on stock prices — the business the SEC targeted in its recent decision.
When small investors seek to purchase a stock, they’re quoted a price based on the “top of the book,” or the highest and lowest bids. But brokerage firms examine the prices for the whole “book” in order to get the best deal for their clients, a requirement they argue effectively forces them to pay Nasdaq and NYSE for the private feed.
Since markets can charge brokerage firms thousands of dollars for access to quicker and more detailed information than Mom-and-Pop investors see on stock tickers on CNBC or Fox Business, there’s less incentive for the exchanges to invest in the public database, Jackson said
“It’s like letting Barnes & Noble run our public libraries,” he said. “Nobody should be surprised to find that our libraries don’t have enough books.”
The price increases for the private service have helped to bolster earnings at the exchanges significantly. Nasdaq reported a 22 percent jump in revenue from information services, including market data, to $175 million in the three months through June. Revenue for data services at ICE grew 1 percent to $526 million in the same period.
Alongside the fee ruling, the SEC launched a pilot program examining transaction fees. Exchanges charge investment firms to place large orders, but also provide rebates to incentivize purchases that add market liquidity.
The agency’s concern is that certain companies are opting to place orders on the exchanges that provide the highest rebate, and the SEC wants to test whether reducing fees would help curb that practice.
Opponents such as the American Securities Association, a group that represents regional brokers, believe the initiative will drive firms to file with private exchanges known as dark pools.
“That will have a negative impact on non-Wall Street broker-dealers because we don’t run dark pools,” Chief Executive Officer Chris Iacovella said in a recent interview.
