May 22, 2019
By John McCrank
NEW YORK (Reuters) – The U.S. Securities and Exchange Commission has told equities exchanges they must clearly describe and justify how they set their fees, including how they charge for market data and connectivity, potentially limiting future revenue growth.
The exchanges must “fully and fairly describe” their proposed fees and show that they are reasonable, equitably allocated, not unfairly discriminatory, or an undue burden competition, as required by the Exchange Act, SEC staff said in guidance released late on Tuesday.
The move was prompted by a years-long dispute over what many brokers and investors see as sky-rocketing costs for things like market data and connectivity to the exchanges, both of which are essential for trading, but are also major revenue drivers for most exchanges.
Collectively, exchange operators including New York Stock Exchange-owner Intercontinental Exchange Inc, Nasdaq Inc and Cboe Global Markets, file hundreds of new fees or rebates, or changes to existing ones, with the SEC per year. Because the exchanges are considered self-regulatory organizations, the rule filings become immediately effective.
But last year the SEC increased its scrutiny of fee filings, putting a wide swath of them under review as part of a broader effort by the regulator under Chairman Jay Clayton to improve transparency around exchange pricing.
The exchanges have appealed the decision and the fees are still in place, but the SEC guidance released Tuesday indicated the exchanges must do a better job justifying their fees or continue to have them temporarily suspended and put under review.
“Competition remains robust in the exchange industry and we will continue to work closely with our clients and the SEC to ensure transparency and fairness,” Nasdaq spokesman Allan Schoenberg said in a statement.
In January a group of large Wall Street firms, including Virtu Financial, Morgan Stanley and TD Ameritrade Holding Corp, said they plan to launch a new exchange that will offer “lower pricing on market data, and connectivity and transaction fees.”
The so-called Members Exchange said it plans to file its exchange application this year.
IEX Group, the only independent U.S. exchange currently operating, has also been a critic of its peers and called the SEC guidance “a major milestone in bringing more transparency” to the market.
“We applaud the Commission’s efforts to hold exchanges accountable for justifying the fees they charge for market data and connectivity – services where exchanges have rightly been criticized for exerting monopoly pricing power.”
(Reporting by John McCrank; Editing by Alistair Bell)