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SEC says stock exchanges did not justify fees in landmark decision

Two of the largest U.S. stock exchanges have not justified price hikes to certain proprietary trading data products, the SEC said in an Oct. 16 decision.

By a unanimous vote, the SEC's five-person commission determined that the Intercontinental Exchange Inc.-owned New York Stock Exchange and Nasdaq Inc. did not show that specific fees charged to banks, broker/dealers and hedge funds for certain market data products were fair and reasonable. The SEC also sent back more than 400 challenges of various exchanges' market data, connectivity and other fee proposals so that the exchanges, including the New York Stock Exchange, Nasdaq and Cboe Global Markets Inc., can review those comments.

"We find that the record does not support the position of the exchanges," the SEC wrote in its opinion. "Because we find that the exchanges fail to meet their burden to demonstrate that the fees are fair and reasonable and not unreasonably discriminatory, we set aside the challenged fees."

Wall Street has been grappling over market data for several years. While exchanges have managed to transform the sale of trading data into a core business line, purchasers of those data feeds say the prices are unnecessarily high.

Those concerns were at the heart of the five-year-old lawsuit brought by the Securities Industry and Financial Markets Association, an industry trade group representing dozens of Wall Street companies, against the New York Stock Exchange and Nasdaq. The SEC sided with SIFMA in its decision.

"This pragmatic ruling by the SEC indicates increasing recognition by policymakers that the fee structure for proprietary market data products is broken," SIFMA Managing Director and Association General Counsel Melissa MacGregor said in a statement. "Today's decision should prompt further examination of policy reforms to ensure the efficiency of public market data feeds and fairness of fees."

Many market participants have argued that they have to subscribe to exchanges' costliest data products to stay competitive, and therefore the steep prices exchanges charge can often act as barriers to entry. There are public data feeds that can act as alternatives to exchanges' proprietary data, but market participants say the depth of information in the private feeds is a necessity.

Exchanges' market data feeds have been a point of contention for some regulators in 2018. SEC Commissioner Robert Jackson Jr. said in a September speech that exchanges "have been better at extracting rents than regulators have been at stopping them."

Exchange executives have argued that U.S. equity market data products, such as those referenced in the case, are not sizable parts of their growing data businesses. A Sept. 24 research report from Keefe Bruyette & Woods analyst Kyle Voigt estimated that Cboe, Nasdaq and ICE respectively will generate revenues of $140 million, $261 million and $215 million in 2018 from their public and private U.S. equity data feeds. Exchange executives also say the prices for their feeds are warranted given the information and value they provide to market participants.

The exchanges argued in early October that the SEC should reopen oral arguments in the case and that SEC Division of Trading and Markets Director Brett Redfearn, a former JPMorgan Chase & Co. executive, should be recused from the case, given prior comments he has made publicly on the topic. The SEC denied that request, saying that its decision-making process "would not be significantly aided by oral argument."

Whether the decision marks the end of the yearslong legal battle between the exchanges and SIFMA is unclear. Nasdaq said in a statement that it plans to appeal the decision.

"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," a Nasdaq spokesperson said in an email. "This decision represents the latest in a 20-year-long series of attempts to over-regulate the best capital markets in the world."

A New York Stock Exchange spokesperson said in a statement that the exchange operator believes the ruling will not withstand its challenge. "This decision represents a troubling shift by the SEC from pursuing its core mission of ensuring the long-term health of our financial markets to regulatory overreach prioritizing the interests of powerful Wall Street interests over protecting the interests of retail investors and listed companies," the company's spokesperson wrote in an email.

The SEC also noted that the decision does not indicate that the fees charged by exchanges were too high, but that the companies failed to adequately justify them. The regulatory agency is hosting a two-day roundtable event Oct. 25 and Oct. 26 that will include executives from exchanges, trading firms and big banks debating how the SEC should regulate trading data.

"The facts and theories put forward by the exchanges did not sufficiently demonstrate that the fees satisfied the relevant statutory test," SEC Chairman Jay Clayton said in a statement.