In recent years, U.S. stock exchanges thought they had a guaranteed profit machine that could revive their sagging businesses: selling market data at ever-higher prices to a captive audience of Wall Street banks and traders.
On Tuesday, the Securities and Exchange Commission ruled against the New York Stock Exchange and
in a 12-year legal dispute over market-data fees.
The five-member commission unanimously shot down a pair of requests to raise fees for certain NYSE and Nasdaq data, saying the exchanges hadn’t justified the price increases. The decision is the first time the SEC has rejected fee increases for the exchanges’ most lucrative class of stock-market data feeds. It casts doubt on a crucial source of revenue that has helped make up for declining trading-fee income.
The SEC’s decision sided with the Securities Industry and Financial Markets Association, or Sifma, a major financial-industry trade group that had accused the exchanges of “exploiting their monopoly over market data.” Brokers say big and small investors alike will benefit if regulators rein in skyrocketing market-data costs.
The SEC also put into limbo over 400 other market-data fee increases that were challenged by Sifma. The regulator didn’t reject those price increases but told the exchanges to review the brokers’ complaints. The move puts pressure on the stock exchanges to restrain fees or disclose more about why they are necessary, which exchanges have historically resisted.
“Today’s decision is a victory for ordinary investors in our stock markets—who have, for too long, been paying steep costs for an uneven playing field,” said SEC Commissioner Robert J. Jackson Jr. He added that “exchanges will have to show that competitive forces, not market power, justify any increase.”
A NYSE spokeswoman declined to comment saying the company needed time to review the decision, and a Nasdaq spokesperson wasn’t immediately available to comment. The exchanges have denied overcharging for data or acting as monopolists, and are expected to ask a federal appeals court to overturn the SEC’s decision.
Brokers, including those that serve retail-oriented investors such as mutual funds and pension funds, say they are essentially required by SEC rules to buy the exchanges’ data. Those costs, brokers say, act as a tax on the industry, which they either swallow or pass on to customers.
Data has emerged as a lucrative business for the three big exchange groups that dominate the U.S. stock market: NYSE parent
known as ICE, Nasdaq and
Cboe Global Markets
Until the 2000s, exchanges made only a small share of revenue from data and sometimes even gave data away free. Now, revenues from ICE’s and Nasdaq’s various data-related businesses rival what the companies make from trading.
Andrew Harnik/Associated PRess
That shift coincided with an explosion in demand. The importance and sheer volume of market data has grown in the past few decades due to the widespread adoption of electronic trading and the rise of ultrafast traders who need lightning-quick information about price moves.
Exchanges sell data on current stock prices and recent trades, as well as on how much supply and demand there is for stocks at different price levels. High-frequency traders use such data to power their computerized trading strategies. Brokerages, including banks
& Co., use it to ensure they are giving their clients—hedge funds, pension funds and other big investors—the best price on each trade.
Building on their core equities-data business, exchanges have pushed into related areas, such as bond-price data and market-analysis software. From 2014 to 2017, total annual revenues from market-data services for the big three exchange companies surged 45% to $2.3 billion, according to an analysis by the Committee on Capital Markets Regulation, a research group whose members include big banks and asset managers.
Exchanges said the analysis overstates the size and growth rate of their data business. Disclosures from ICE, Nasdaq and Cboe show their combined stock-market data revenues were around $560 million in 2017, although that doesn’t include connection fees that traders and brokers must pay to access such data. The figure also excludes sales of options and futures data.
“There is absolutely no evidence that anyone would benefit from harmful government price-setting intervention, other than the Wall Street interests that continue to perpetuate these myths in a self-interested bid to further lift their profits,” a NYSE spokeswoman said before the SEC ruling.
So far, small investors haven’t seen much impact from rising data costs, and their overall trading costs have generally fallen in recent years. Well-known names in retail investing have nonetheless joined Wall Street banks in complaining about fee increases.
, Fidelity Investments and
T. Rowe Price Group
were among 24 companies that signed a letter to the SEC in December blasting the exchanges’ “oligopoly” over stock-market data.
Clearpool Group Inc., a startup electronic brokerage whose office is just a few blocks from the Big Board’s historic headquarters in lower Manhattan, said its yearly outlays for NYSE equities data climbed to $343,000 in 2015 from $212,000 in 2013, a 62% increase. Since then, Clearpool’s NYSE data expenses have dropped, because it stopped paying for the priciest data feeds, the company said. “What we’ve seen is a steady increase in the pricing,” said Clearpool CEO Joe Wald.
The SEC’s ruling will likely make it tougher for exchanges to raise fees for data and related charges for connecting to their computer systems. The SEC has already started to scrutinize such fee increases more closely, in a broad effort to ensure they don’t undermine competition, according to regulators and traders involved in the fight.
A federal appeals court said last year that the SEC fell down on the job of scrutinizing similar fees in the options market and ordered the agency to improve its oversight. The court ruling “has raised the bar for the commission on our review of [exchange] filings,” Brett Redfearn, the SEC’s director of trading and markets, said at an industry conference last week.
U.S. stock exchanges have long used their status as pillars of American capitalism to get their way in Washington. From 2016 through September, the SEC didn’t reject any of 95 exchange proposals related to connection fees, according to an analysis by Mr. Jackson, the SEC commissioner.
The SEC’s Sifma ruling reopens fundamental questions about the role of exchanges. Should they be utilities working for the good of markets, or, as for-profit companies, should they focus on making money for shareholders?
The NYSE’s metamorphosis into a Big Data company started in the 2000s, after new SEC rules aimed at breaking the decades-old NYSE-Nasdaq duopoly took effect. Founded in 1792, the NYSE dominated U.S. stock trading for most of American history. As recently as the 1990s, it handled more than two-thirds of U.S. equities trading on a dollar basis.
The rise of rival exchanges and electronic trading platforms eroded the Big Board’s market share. Today the NYSE handles about 23% of U.S. stock-trading volume.
As it battled low-cost competitors, the exchange’s traditional business suffered. From 2008 to 2017, the NYSE’s net revenue from transaction fees fell by more than 40% to $196 million, according to an analysis by Equity Research Desk, a research firm.
Seeking to lift its flagging fortunes, the NYSE turned to its trove of trading data. On an average day, around 1.7 billion shares change hands on the NYSE’s markets. Vast volumes of digital messages zip around the Big Board’s 400,000-square-foot data center in Mahwah, N.J., each of which represents a trade or a pending order to buy or sell stocks. The NYSE compiles those messages into high-speed electronic feeds that it sells to brokers and traders.
The NYSE also broadcasts stock prices through a cheaper, slower public data feed, called the securities information processor, or SIP. This is used by retail brokers such as
TD Ameritrade Holding
and internet search engines like Google and
Banks and electronic-trading firms say the SIP is too slow to be useful. Sifma has accused the NYSE and other exchanges of underinvesting in the SIP to steer big-ticket customers to pricier data feeds. The NYSE and other exchanges deny that contention.
Wall Street veterans, including former NYSE executives, say the Big Board stepped up its focus on data after its conversion to a for-profit company in 2006. They add that the process accelerated after Atlanta-based ICE completed its takeover of the NYSE in 2013.
ICE’s latest focus is amassing control of crucial financial data flows. Last year, 45% of the company’s net revenues came from market-data sales and related fees, up from 9% in 2011. That includes the sale of data from its exchanges as well as from nonexchange businesses.
ICE has said that sales of real-time stock-market data account for just 2% of its annual revenue and haven’t been growing quickly.
Chief Executive Jeffrey Sprecher has rejected allegations in the past that ICE abuses its market power to make outsize profits from data. “That’s a false narrative,” he told The Wall Street Journal in an interview last year, stressing that the Big Board’s customers were free to buy less-expensive data feeds.
Richard Drew/Associated Press
When asked about the legal battle with Sifma, the ICE CEO said, “People are looking for any edge they can get in trying to squeeze their vendors.”
Brokers say part of the problem is well-intentioned SEC regulations that were designed to protect investors but ended up providing a profit opportunity for the exchanges.
Under a rule adopted in 2005, brokers must send customer orders to whichever exchange is displaying the best price for a stock. Brokers say that means they have to buy price data from all 13 U.S. exchanges currently in operation. All but one of those markets are now owned by the NYSE, Nasdaq and Cboe. The other, IEX Group Inc., doesn’t sell premium data feeds and has attacked its larger rivals for their data practices.
The SEC requires brokers to give their clients the best execution possible on orders. Regulators have said that requires brokers to use the exchanges’ fastest and deepest data feeds to price customer orders, if the brokers also use that data for any of their own trading.
Richard Drew/Associated Press
Data is among many costs facing brokers, and it helps determine how much they charge their customers, including mutual funds and pension funds. Richard Johnson, an analyst with research firm Greenwich Associates, says rising data costs help explain why the average brokerage commission paid by financial institutions has held steady at about 2.6 cents per share since 2010, after dropping for the three decades before then.
High-frequency trading firms say they have also been hammered by the mounting cost of exchange data. Such firms use powerful computer algorithms to zip in and out of stocks in fractions of a second. If a firm can get information about a move in stock prices slightly faster than its rivals, it can use that to beat the competition. That’s a big incentive to upgrade to the fastest available data feeds and connections.
In 2012, Nasdaq introduced a new version of its Totalview-ITCH data feed that traders say was just two millionths of a second faster than the next-best version. The cost was an additional $25,000 a month, but many high-speed firms paid up.
“We’re in a competitive market,” said Adam Nunes, head of business development at Hudson River Trading LLC, a high-speed trading firm. “We need to buy it in order to compete with other trading firms.”
—Liz Hoffman contributed to this article.