Wall Street's top regulator is inching closer to finally overhauling the U.S. public trading tapes, a move that may stoke tensions between brokers and stock exchanges.
Following a 3-2 vote among its commissioners, the SEC rolled out a long-awaited proposal Jan. 8 that could lead equity exchange operators like the Intercontinental Exchange Inc.-owned New York Stock Exchange, Nasdaq Inc. and Cboe Global Markets Inc. to create a new governance regime for the consolidated stock market data feeds known as the Securities Information Processors, or SIPs.
The SIPs give market participants a high-level picture of stock trading at any given moment by using aggregated information from each of the 13 U.S. stock exchanges. The feeds are currently overseen by the exchanges, in conjunction with the Financial Industry Regulatory Authority. But that structure has long been a concern within the brokerage community, where critics argue the exchanges are not adequately improving the speed or data quality of the SIPs because doing so could threaten the dominant positions of their pricier, and more robust, proprietary data feeds.
Now, the SEC is kicking off what may become a years-long process to create a "New Consolidated Data Plan" that would provide the rest of Wall Street with a more direct say in how the SIPs are managed in addition to the exchanges.
"We currently have what can be generally described as a tiered system of market data access in the U.S. equity markets," SEC Chairman Jay Clayton said at a Jan. 8 meeting. "The New Consolidated Data Plan would result in a substantial change to the regulation of the dissemination of equity market data."
Throughout Clayton's tenure, the SEC has taken a more active approach in addressing the industry's complaints related to exchange-sold market data feeds than it has in prior years.
Yet, the proposal still faces a lengthy and winding path before any material changes to the SIPs' governance structures can be made. It will first enter a 45-day comment period that is sure to elicit a flurry of feedback from supporters and critics.
The SIPs have become a lightning rod in recent years with the increased role that exchanges' proprietary products have taken on in the market.
Banks, broker/dealers and even one exchange operator in IEX Group Inc. have been pushing for improvements to the speed of and information within the SIPs, in order to make them viable alternatives to the proprietary feeds sold by NYSE, Nasdaq and Cboe. Today, trading executives say the SIPs provide too little information too slowly to be relied on in a fiercely competitive marketplace where stock prices change at fractions of seconds.
In its proposal, the SEC wrote that the single consolidated data plan ought to provide voting rights to different market participants outside the exchanges. Those include representatives from an institutional investor such as an asset manager, a broker/dealer focused on retail investors, a broker/dealer focused on institutional investors, a securities market data vendor, an issuer and a retail investor. The exchanges and FINRA, under the SEC's plan, would retain two-thirds of the SIP operating committee's voting power.
"Under the current governance structure of the equity data plans, improvements to the SIPs to adequately address important product, performance and pricing differentials between the SIPs and proprietary data products have not occurred," the SEC wrote in its proposal. "This failure contributes to the divergence in the usefulness of core data provided by the SIPs for some market participants compared to the proprietary data feeds."
A group representing ICE, Nasdaq and Cboe, the Equity Markets Association, said in a statement that its members "welcome a dialogue to improve the SIP, providing we do not disrupt the unparalleled fairness, depth and robust nature of these markets that provide extraordinary benefits to all investors and our economy."
The exchanges have recently signaled that changes to the SIPs are on the horizon, including adding more information about smaller trades and improving speeds in two of the products thanks to a technology upgrade from NYSE.
Commissioner Robert Jackson Jr., a Democratic-leaning representative at the SEC who cast one of two dissenting votes, criticized the decision to put the responsibility of creating a new oversight structure for the SIPs in the hands of the exchanges.
"America's stock markets are riven by a fundamental conflict of interest: exchanges both operate public data feeds and profit from selling superior private ones," said Jackson, who has previously criticized his agency's approach to exchange regulation. "Rather than give investors a real say over the data that drives our markets, today's release merely invites for-profit exchanges to draft their own rules on these questions."