SIFMA Wins a Famous Victory: We Sort it Out

jurisA March 16, 2014 order by the Securities and Exchange Commission clears the way for further debate over the terms of access to market data.

The Securities Acts Amendments of 1975 authorized the SEC to see to it that market data fees charged by exchanges are reasonable and that there shall be no unfair discrimination between customers, issuers, brokers, or dealers.

Now tell us all about the war

In 2006, in the course of approving an increase in fees, specifically fees on depth-of-book data from NYSE Arca on a real-time basis, the Securities and Exchange Commission said that the exchanges are subject to “significant competitive forces” so their fees are reasonable. Before that, the SEC had used a cost-based approach in its review of data fees. But in 2006 it engaged in a two-step process of inference. First, there exist competitive forces, which militate in favor of allowing the fares the exchange requested. Second, so far as it could see there was no “substantial countervailing basis” to find the proposed fees unfair.

The SEC also invoked a distinction between “core” data and “non-core” data. It apparently assists an exchange in making the case for a data fee increase if the SEC sees the data at issue as “non-core,” which is the case with depth-of-book data.

SIFMA Marches to Blenheim

The Securities Industry and Financial Markets Association believed that the SEC’s shift in focus in 2006 was in violation of the commission’s mandate under the 1975 statute.

Thus, in 2008, SIFMA and NetCoalition joined as plaintiffs in a lawsuit aimed at setting aside the 2006 order.

In 2010, the US Court of Appeals for the DC Circuit agreed with them in part, vacating the order. The appellate court did not say that the whole market-based approach was in error, but it found that in this case there was an inadequate factual record. The proposition that “order flow competition constrains market data prices” is an empirical one, and requires factual support, the judges said.

The court also observed that the distinction between “core” and “non-core” is an administrative invention. The statutes don’t draw any such line. Nonetheless, the court seemed agreeable to the creation of such a distinction as a matter of agency discretion.

The bottom line, though, was that the SEC and behind them the exchanges lost, but lived to fight another day. The fee increase was vacated and remanded “for further proceedings consistent with this opinion.”

The exchanges absorbed the loss and immediately returned to the game. On November 1, 2010, NYSE Arca filed a Form 19b-4 giving notice of a rule change, i.e. a fee increase for market data.

With fire and sword the country round….

SIFMA and NetCoalition filed another lawsuit seeking to have these suspended. But this time the DC Circuit said it had no jurisdiction. It also set out a roadmap by which they could contest the matter properly. The plaintiffs would have to petition challenging the change under Exchange Act section 19(d), and an order under 19(d) would be reviewable. They did so.

The exchanges responded to that petition with various arguments about how 19(d) was unavailing. Last July the SEC asked the parties to provide briefing on the procedural issues, so it could decide them before moving on to substantive matters.

And that was what the March 16th order was: a response to those briefs, and a decision to move on, deciding on the substance.

In a statement, the general counsel of SIFMA, Ira Hammerman, said that SIFMA is happy with this result, which it says “sets an important precedent regarding the procedure for challenging unlawful exchange fees.”

And there the matter lies. The basic cartelization of the industry, and the oversight of the cartel by various national authorities, is of course unquestioned. But as to the specifics of the price-setting process: there one can encounter, or win, a “famous victory” from time to time. The problem remains, as readers of Robert Southey’s poem on another battle and its aftermath will remember, that the fame of the victory is no real answer to the question, “what good came of it at last?”



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