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Cboe floats repealing basic market rule to fix Wall Street's data cost concerns

Wall Street's mounting concerns over exchanges' market data feeds could be resolved by abolishing a key part of the regulation that governs U.S. stock markets, a top Cboe Global Markets Inc. executive said.

"The No. 1 way for the SEC to reduce market data fees is by eliminating Reg NMS," said Cboe President and COO Chris Concannon at an Oct. 4 industry conference. Concannon was specifically referring to the Order Protection Rule, an integral part of the reform package known as Regulation National Market System, or Reg NMS.

Adopted in 2005, Reg NMS was designed to modernize the U.S. stock market and promote competition among exchanges beyond the now-Intercontinental Exchange Inc.-owned New York Stock Exchange and Nasdaq Inc. But as Reg NMS has aged, concerns have swelled over the Order Protection Rule, which banks, broker/dealers and traders claim adds unnecessary complexity to the U.S. stock market.

Under the rule, orders must be shipped to the exchange with the best execution price, an increasingly challenging and costly task as prices reflect trading activity on more than a dozen exchanges and about 40 private trading venues. To ensure their orders receive the best execution, which should in turn benefit the investor or broker requesting the trade, market participants say they have to rely on exchanges' proprietary data feeds.

Yet, while exchanges have morphed their data offerings into core business lines, regulators, trading companies and even one stock exchange operator say the prices for market data make those products steep and burdensome expenditures.

"[Market data pricing has] been completely unchecked. It does nothing but go up," said Joe Wald, founder and CEO of independent broker/dealer and electronic trading software company Clearpool Group Inc., in an interview. The only way to get the legally required best execution "is by purchasing the data feeds," Wald said.

The fight taking place across Wall Street over market data is now intensifying ahead of an upcoming SEC roundtable event that will explore possible reforms to the private data feeds and their public alternatives, known as the Securities Information Processors, or SIPs. The SIPs are not controlled by any one exchange, but they are not as detailed as the exchanges' individual data feeds.

Regulators recently started to take a harder look at proposals to raise market data prices that in the past would have gotten a green light. In September, SEC Commissioner Robert Jackson Jr. criticized exchanges' connectivity and market data prices, saying that exchanges "have been better at extracting rents than regulators have been at stopping them."

Exchange executives say their market data feeds' prices are warranted given the depth of information their products hold compared to the low-cost SIPs, which aggregate data from each exchange into single feeds.

Traders can rely on the much-improved SIPs to fulfill their best execution obligations. But many executives still say the public feeds are not a viable option to rely on exclusively because doing so would put them at a competitive disadvantage to firms using the more comprehensive and slightly faster private feeds.

Removing the Order Protection Rule would eliminate the need to subscribe to exchanges' fastest feeds, Cboe's Concannon said. The regulation, also known as the trade-through rule, was heavily criticized prior to its implementation, including by Nasdaq, which wrote in 2004 that the rule would harm execution quality and competition. Concannon worked for Nasdaq from 2003 to 2009.

While the rule's elimination may threaten retail orders being traded through by larger investors, any ripple effects would "be absorbed pretty efficiently," he said.

Whether revoking the Order Protection Rule would actually resolve Wall Street's concerns about market data is doubtful, though, said Doug Clark, head of market structure for the Americas at independent brokerage Investment Technology Group Inc., in an interview.

"I have to know what the prices at all the exchanges are [for my clients]," said Clark, who called Concannon's proposal a "distraction" designed to slow progress in the SEC's proposed access fee pilot, a stock market experiment that will tweak the elaborate systems of fees and rebates exchanges use to attract trading. The pilot could cost investors "millions," Concannon said.

A day before Concannon's remarks, the New York Stock Exchange offered up an alternative version of the SEC's proposed test in an attempt to compromise with the industry over market data concerns.

The Big Board's pilot would halt any further market data fee hikes, in return for a single cut to exchanges' trading fees. But several market participants continue to say that exchanges' market data fees are already too high, furthering the uncertainty around whether and how to reform market data products.

"There's no easy solution," Georgetown University finance and market structure professor Jim Angel said in an interview. "Our grandchildren are going to be arguing about market data."