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 Stocks

Today the Commission is proposing significant modifications to our rules relating to the distribution and scope of consolidated market data under Regulation NMS.  When the Commission approved its proposal last month to change the governance of national market system plans relating to market data, I expressed my hope that staff would “explore ways to get to the root of the problem by allowing more competition into this space.”[1]  This proposal represents a possible approach to doing just that, and I am happy to join my colleagues in voting to approve this proposal.  I look forward to the lively conversation that I hope will follow. 

The Commission made a mistake when it determined in Regulation NMS to leave unchanged a regulatory framework that relied on a monopoly to provide for the dissemination of market data.  Monopolies, especially those created or maintained through regulation, are not known for their efficiency or their ability to respond quickly to market or technological changes. 

It is no surprise, then, that the Commission’s confidence in 2005—that “the current model . . . benefits investors, particularly retail investors, by helping them to assess quoted prices at the time they place an order and to evaluate the best execution of their orders against such prices by obtaining data from a single source that is highly reliable and comprehensive”[2]—has proved unfounded.  To be fair, our markets have changed dramatically over the past 15 years, but we increasingly hear from investors that the consolidated tape data (“SIP data”) has not kept up with those changes:  Many investors insist that SIP data alone does not enable them to determine whether their broker-dealers are meeting best execution expectations.  The proposed rule would attempt to address these concerns by expanding the scope of “core data” and by ensuring that the consolidation and dissemination of that data are subject to competitive forces. 

Together, these proposed changes could improve dramatically the value and usefulness of consolidated data disseminated pursuant to Regulation NMS.  The expansion of “core data” to include depth-of-book information, odd lots, and auction information should provide market participants who rely on consolidated data with a clearer picture of market conditions and could improve execution quality for many investors.  Introducing competition, in the form of competing consolidators, into the market for consolidation and dissemination of core data should ensure that market participants receive market data on a timeline that is better calibrated to the ever-increasing speed of trading in our equities markets.  

As we consider these proposed changes, however, we must acknowledge that market participants have widely varying market data needs depending on their business model, investment strategy, and many other factors.  Moreover, investors with different goals may measure execution quality in different ways.  A one-size-fits-all model—particularly one mandated by a regulator—is not appropriate for our financial markets, which serve many different types of market participants.  Our rules should allow market participants to obtain market data commensurate with their needs, and we should not feel compelled to eliminate every information asymmetry in our markets.  Getting a lot of data quickly is important to some, but not all, market participants.  The proposed rules generally are designed to accommodate these varying preferences: They would permit competing consolidators to offer different types of market data in response to subscriber demand, and exchanges could continue to sell proprietary data feeds to market participants that find them useful in pursuing a trading strategy or business model.  I look forward to comment regarding whether the proposal provides sufficient flexibility to meet the diverse data demands of participants in our markets.

I also look forward to comment on two issues in the release that cause me particular concern.  First, subjecting competing consolidators to Regulation SCI threatens to impose burdens that could deter firms from entering the market as competing consolidators.  In the competitive market with multiple providers of consolidated market data that the proposal envisions, why is regulation necessary to ensure that firms establish safeguards against cybersecurity threats and systems failures?  Market discipline should reduce the risk of such failures, and the presence of multiple consolidators would ensure the existence of backup data services in the event of failure.  On the other hand, I would ask: could imposing Regulation SCI lead to a market for data aggregation and distribution that looks very much like the market for consolidated data that we have today, with a limited number of players, little competition, and negligible innovation.

Second, have we appropriately defined the limits of what self-aggregators can do with the data that they aggregate?  Under the proposed rule, self-aggregators “may not make consolidated market data, or any subset of consolidated market data, available to any other person,” including affiliates or customers.  Is this limitation consistent with current practices of firms that aggregate data for internal use?  To the extent that these firms currently do aggregate data on behalf of affiliates or customers, is it reasonable to expect these firms to register as competing consolidators (and subject themselves to Regulation SCI) to continuing doing so?  On a related note, are we defining competing consolidator so broadly that it encompasses activities that are now—and should remain—unregulated?

I have often said that our financial markets are a national treasure.  They transform people’s lives; they fuel innovation; they generate wealth across the entire country.  Our securities exchanges are at the center of these markets.  They bring buyers and sellers together, which makes it possible for firms to grow and for investors to participate in the wealth produced by that growth.  I want to hear from them how this proposal will affect their ability to play this essential role and from other market participants about how the proposal will affect their activity in these markets.

Thank you to the staff in the Divisions of Trading and Markets and Economic and Risk Analysis for your hard work on this proposal.