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US stock exchanges face renewed pressure from SEC for fee filing transparency

Wall Street's top securities regulator wants more transparency from U.S. stock exchanges when they propose a price change to their market data products.

On May 21, staffers within the SEC's Division of Trading and Markets issued new guidance about how self-regulatory organizations such as the Intercontinental Exchange Inc.-owned New York Stock Exchange and Nasdaq Inc. ought to use "plain English," cost-benefit analyses and meet a handful of other expectations set by the regulator in their future attempts to alter their data products' existing fees.

The new framework marks the latest check from the SEC on the biggest U.S. stock exchanges' booming data businesses.

Seven months earlier, the SEC issued a landmark decision to reject fee increases for two data products owned by the New York Stock Exchange and Nasdaq, while also sending back more than 400 challenged fee filings to the two exchanges and Cboe Global Markets Inc. for further review. That ruling has since been contested by the exchanges in the federal court system. The SEC's guidance also closely trails SEC Chairman Jay Clayton's call for a review of Regulation National Market System, a package of sweeping equity market reforms that some industry experts say has led to a proliferation of exchange-sold data products.

Exchanges' market data products have become increasingly valuable in today's high-speed electronic stock market, as broker/dealers and trading firms rely on near-real-time trading information to stay competitive.

But many exchanges' data customers have complained in recent years that the New York Stock Exchange, Nasdaq and Cboe unjustly hiked prices for their data products and connectivity services to take advantage of that booming demand, which those critics say has then acted as a barrier to entry for new market participants. Wolverine Execution Services LLC, a Chicago-based broker/dealer, estimated in a November 2018 letter to the SEC that a new entrant in the equity market with 10 employees serving 10 external customers would have to spend $370,073 monthly to obtain colocation, ports and the lowest latency market products available.

The exchanges say the price increases are justified given the competitive nature of their business.

"Competition remains robust in the exchange industry, and we will continue to work closely with our clients and the SEC to ensure transparency and fairness," Nasdaq spokesman Joe Christinat said in an email about the SEC's guidance.

A Cboe representative said in an email that the exchange is "concerned" that parts of the SEC's guidance "may go beyond the requirements of the Exchange Act and add unnecessary complexity to exchange fee filings, thereby impeding competition to the detriment of investors." A representative for the NYSE did not respond to a request for comment.

IEX Group Inc., a U.S. stock exchange operator that does not charge for market data, applauded the agency's new framework.

"Today marks a major milestone in bringing more transparency in service of investors and their agents," IEX Chief Market Policy Officer John Ramsay said in a statement.