Statement on Proposed Order for Creation of a New Consolidated Market Data Plan for Equity Market Data
Jan. 8, 2020
I want to start by thanking Chairman Clayton, Director Redfearn, and our dedicated staff for their work over the past couple of years to address some of the more complex and conflicted areas of equity market structure such as the transaction fee pilot, order handling disclosure reforms, and the regulation of alternative trading systems. I’m grateful for this work and the continued focus on these issues, including today’s proposal.
Our regulatory regime currently places for-profit trading venues in the position of setting many of the rules and costs for how our markets function. The regime was established decades ago, and given the dramatic changes in our markets since, we must now ask: Does the current regime operate to ensure that investors have timely access to essential information about what their stocks are worth and where they can get the best prices?
I am not alone in answering this question with a resounding “no.”That is why I appreciate that we are today addressing the governance structure underpinning our public market data streams, known as the Securities Information Processors or “SIPs.” In 1975, Congress directed the Commission “to facilitate the establishment of a national market system for securities,” and gave the Commission authority to order self-regulatory organizations (or SROs)—including the exchanges—to act jointly in pursuit of that goal. Congress’ intent in providing the Commission with substantial authority over the SIPs was to “insure the availability of prompt and accurate trading information . . . to guarantee fair access to such systems by all brokers, dealers and investors, and to prevent any competitive restriction on their operation.” In 2005, the Commission issued Regulation NMS which, among other things, defined requirements for the collection, consolidation, and dissemination of the data by SIPs.
Although this is a complex area, the basic issue we confront today is not. We have for-profit stock exchanges that control and oversee the SIPs while also selling their own proprietary data streams that directly compete with the SIPs. The conflict of interest is obvious.
How to deal with this conflict is less obvious. What we consider today is one step in a thoughtful agenda laid out by Chairman Clayton and Director Redfearn for improving NMS plan structure that I hope will be rolled out in the coming months. I appreciate their commitment to moving forward with that agenda, and look forward to future proposals. In many ways, however, the effectiveness of any future proposals will depend upon establishing a solid governance structure. If the governance structure for the SIPs does not adequately address conflicts of interest, efforts to improve them through future orders, rule proposals, or other initiatives may well be unsuccessful.
As a result, after much analysis and reflection, I’ve come to the conclusion that I cannot support today’s proposed order. While the proposed order takes steps toward addressing the conflicts of interests inherent in having for-profit exchanges both overseeing the SIPs and selling their own competing proprietary data streams, it unfortunately falls short in safeguarding the public interest.
The key piece of today’s proposal would potentially add non-SRO voting members to the governance structure, essentially giving these new members one-third of the vote. But simply adding non-SRO voting members will not protect the public interest in ensuring robust and useful SIPs. Indeed, these members would have neither the voting power, nor necessarily the market incentives, to affirmatively usher in the larger reforms required for the SIPs to provide adequate market data to investors on a fair and reasonable basis. What’s more, we risk preserving for years to come an insufficient governance structure on the grounds that it has been somewhat improved.
And finally, I am very concerned that we may never see a full package of necessary reforms implemented. Today we issue a proposed order related to governance, which order may or may not be finalized, to seek future proposals from the stock exchanges, which proposals may or may not be sufficient or finalized. This process, as we have seen with another NMS plan, the Consolidated Audit Trail, could take years to complete, and may ultimately produce an inadequate solution.
It is the Commission’s role, not that of private market participants, to ensure that the public has timely access to essential trading information, and to address how the SIPs must be improved in terms of latency, content and fee transparency. Today’s governance proposal falls short both on substance and form. We should be addressing these difficult issues more directly and holistically. As a result, unfortunately, I cannot support the proposed order.
 See Pub. L. 94-29, 89 Stat. 97 (1975).
 See S. Rep. 94-75 (1975).
 See Regulation NMS, Final Rule, Rel. No. 34-51808 at 29-34 (Aug. 29, 2005).
 See Chairman Jay Clayton and Brett Redfearn, Director, Division of Trading and Markets, “Equity Market Structure 2019: Looking Back & Moving Forward,” Remarks at Gabelli School of Business, Fordham University New York, New York (Mar. 8, 2019), https://www.sec.gov/news/speech/clayton-redfearn-equity-market-structure-2019.
 Today’s proposal would require the existing SIPs to be combined into a single SIP governed by an operating committee of SRO-member and non-SRO members. Non-SRO members would have 1/3 of the votes on the operating committee. Actions by the operating committee would generally require an “augmented majority vote”. An augmented majority vote means that at least 2/3 of the votes of SRO and non-SRO participants, including a majority of the SRO participants’ votes, must be cast in favor of a proposal for it to pass. See Securities and Exchange Commission, Proposed Order Directing the Exchanges and Financial Industry Regulatory Authority to Submit a New National Market System Plan Regarding Consolidated Equity Market Data, Rel. No. 34- at 51-52 (Jan. 8, 2020).