Statement on Proposed Updates to the National Market System for the Collection, Consolidation, and Dissemination of Information With Respect to Quotations for and Transactions in National Market System Stock
Feb. 14, 2020
Today, I join my fellow Commissioners in voting to propose sweeping changes to the means by which market participants receive consolidated equity market data, and to the content of “core data” itself. I appreciate the work of the SEC staff who contributed to this proposal, particularly those in the Divisions of Trading and Markets and Economic and Risk Analysis.
We live in an increasingly technology- and data-driven world. Since the SEC adopted Regulation NMS 15 years ago, electronification has been an unrelenting trend throughout our equity markets. Today, firms’ appetites for data are only increasing, and transmission speeds are more critical than ever. In this regard, I understand many businesses have evolved such that they increasingly rely on proprietary exchange data feeds for the decisions they make every microsecond of the trading day, rendering the consolidated data distributed by the exclusive SIPs less useful to a growing number of market participants.
In contrast to this evolution, our rules governing dissemination of quote and transaction data mostly have remained static. Today, I support the Commission’s proposal to make headway in this area. Nevertheless, I believe several aspects of the proposal will merit continued consideration. The proposal includes numerous questions to elicit public feedback on many such important issues. I would like to highlight a few of these areas in which I am particularly interested.
First, the Commission proposes subjecting “competing consolidators” to Regulation Systems Compliance and Integrity (“Regulation SCI”). Regulation SCI is designed to strengthen the technology infrastructure of the U.S. securities markets by reducing the occurrence of systems issues, improving resiliency when systems problems do occur, and enhancing the Commission’s oversight of securities market technology infrastructure.
Today, the exclusive SIPs are subject to Regulation SCI, a requirement that makes sense to me, given that they are the exclusive means of market participants’ accessing “core data” (other than from the exchanges via proprietary feeds).
This proposal, however, envisions that there will be several competing consolidators, offering market participants an array of options as to the data feeds they consume. We noted in the proposal that competing consolidators would “play a significant role in the U.S. securities markets and/or have the potential to impact investors, the overall market, or the trading of individual securities, and that “if a competing consolidator’s consolidated market data feed became unavailable or otherwise unreliable, it could have a significant impact on the trading of securities, and could interfere with the maintenance of fair and orderly markets.”
I would like input from the industry on this proposed Regulation SCI requirement. I am especially interested in the views of those who are considering serving as a competing consolidator.
- What are your thoughts on the likely costs to comply with Regulation SCI?
- Are our cost estimates reasonable (both initial and ongoing)?
- Does it make sense to require Regulation SCI compliance in light of the non-exclusive role we foresee for competing consolidators?
- Is full Regulation SCI compliance appropriate (as we believe it is for exclusive SIPs today), or should we calibrate the requirement differently to account for the proposed non-exclusive nature of competing consolidators?
- If we require something less than full Regulation SCI compliance, what components would be reasonable for us to dial back?
We note throughout the proposing release that we preliminarily believe the proposed changes would facilitate brokers’ “best execution.” For example, we have proposed changes to the definition of “round lot” (to include smaller orders for higher priced stocks) and the inclusion of certain depth of book in “core data” (which we propose to define). Brokers and investors alike would have access to more robust information than is currently available from the exclusive SIPs. Brokers (particularly those who do not subscribe to proprietary exchange data feeds) would be able to use this enhanced information for their routing decisions. Investors also would be able to use this enhanced information to assess the quality of execution provided by their brokers.
This brings me to two areas for which I am interested in public feedback.
First, I have been told by some participants that, to truly achieve best execution, depth of book data is essential. Some (sell side firms) have told me that they will only use the proprietary exchange data feeds and some (buy side firms) have told me that they will only hire firms that use proprietary exchange data feeds, given the enhanced content and reduced latency compared to the exclusive SIPs. To me, this invites several important questions:
- To brokers who currently believe that they need proprietary exchange data feeds to help satisfy their regulatory best execution obligations to their customers—do you think the enhanced core data in competing consolidator feeds will change your analysis?
- To asset managers—do you think the enhanced core data in competing consolidator feeds would affect the regulatory best execution analysis as it applies to you?
- If the answer to either of these questions is “no,” what else do you think is needed (either in terms of data content or the means or method of dissemination) to get the answers to a “yes”?
- Do you think some market participants will utilize proprietary exchange feeds to satisfy best execution obligations, even with proposed enhanced core data and other changes we have proposed?
Second, I have said several times that I think the Commission should consider providing a non-prescriptive interpretation of, or guidance on, the regulatory requirement to achieve “best execution.” I repeatedly emphasize regulatory requirement because I believe there generally should be a difference between what our regulations require and what businesses do for commercial reasons.
We note in the proposal that “the Commission is not specifying minimum data elements needed to achieve best execution.” Yet, we repeatedly state that the proposed changes would facilitate best execution. I recognize that the proposal might not be the most appropriate place to address the issue, but to me, it seems like we are dodging the issue altogether.
- Will the proposed changes facilitate best execution?
- Given the emphasis on best execution in the proposal, should the Commission say more about how it envisions the proposed changes would facilitate broker’s best execution obligations?
Rule 611—the Order Protection Rule
I rarely leave a discussion about equity market structure without raising Rule 611—the Order Protection Rule (“OPR”). I have previously noted that I would like the Commission to take a closer look at OPR and how it affects our markets. I have also asked whether the Commission should consider minor adjustments to Rule 611, more significant changes, or even eliminating OPR entirely.
Today, we proposed a new definition of “round lot.” If approved, certain sub-100 share orders and quotes (currently odd lots) would be considered round lots. OPR, however, would not apply to these sub-100 share round lots.
I do not really consider this an adjustment to OPR, because currently OPR generally does not apply to sub-100 share orders. Nevertheless, I am pleased to see that the Commission, at least preliminarily, has decided not to extend OPR for these orders and quotes, even if considered round lots under the proposed future state.
- Should OPR apply to these proposed, new sub-100 share round lots, or, instead, are existing broker best execution obligations and the proposed enhanced core data content sufficient?
- With the proposed enhanced core data content, is OPR needed for 100-share round lots (i.e., those within the proposed $0-$50 stock group)?
- Considering the original rationale for OPR and the mostly electronic nature of our markets today, is OPR still needed?
- If the SEC were to set forth clearer expectations on best execution, how would that affect the use case for OPR?
Cost of Core Data from Exchanges
Before I close, I would like to highlight the discussion in the proposal of the fees for core data that exchanges would charge competing consolidators and “self-aggregators.”
Today, the fees charged by the exclusive SIPs are governed by the respective NMS plans and are subject to certain statutory standards, including that they be fair and reasonable. If the current NMS plan participants want to change these fees, they must submit them to the Commission. The proposal envisions the same approach.
Currently, and in the past, the Commission has taken the view that the fees for any product that is limited to consolidated market data can be assessed for their reasonable relationship to cost. The proposal envisions that competing consolidators would replace the exclusive SIPs, and the exchanges would be required to disseminate enhanced core data to competing consolidators (similar to the role of the exclusive SIPs). As I think about this, I also have several questions related to the fees the exchanges will charge.
- Should the proposed changes affect the analysis of the fees the exchanges charge for core data?
- Will “reasonably related to cost” remain an appropriate way to assess these fees?
- If not, what would be a more appropriate assessment?
The Commission has taken great strides to account for the views expressed by the sell side, buy side, exchanges, and others, especially the robust input from the industry over the last year and a half. Always constructive, even if sometimes critical, your voices have helped us get to this point. I look forward to seeing a robust comment file for this proposal and reading the diverse views expressed in those letters.
Again, thank you to all those who have helped us reach this point.
 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (“Regulation NMS Adopting Release”).
 17 CFR 242.1000 et seq. See Securities Exchange Act Release No. 73639 (Nov. 19, 2014), 79 FR 72252 (Dec. 5, 2014) (“Regulation SCI Adopting Release”).
 See Proposing Release, citing Regulation SCI Adopting Release at 72258.
 See Proposing Release.
 See, e.g., Elad L. Roisman, Remarks at the SIFMA Equity Market Structure Conference: The Dynamics of our Markets and the Changing Structure on which they are Built (Sept. 19, 2019), available at https://www.sec.gov/news/speech/roisman-remarks-sifma-equity-market-structure-conference-091919.
 See Proposing Release at n. 90.
 I have previously asked whether the SEC’s views and expectations regarding broker best execution are sufficiently clear. See supra n. 6. This remains an area of great interest to me.
 17 CFR 242.611.
 See, e.g., supra note 6.
 Certain exceptions apply. See, e.g., Proposing Release at n. 141.
 When the Commission adopted OPR, it noted that OPR was established to protect against trade-throughs for all NMS stocks and to protect only quotations that are immediately accessible through automatic execution. See Regulation NMS Adopting Release.
 See, e.g., 15 U.S.C. 78k-1(c)(1)(C).
 See, e.g., Proposing Release at n. 439.