SEC Adopts Rules to Modernize Key Market Infrastructure

The SEC recently approved its market data infrastructure proposal. Earlier this year, the SEC introduced its proposal to modernize the infrastructure for the collection, consolidation, and dissemination of market data for exchange-listed national market system (NMS) stocks. One notable change in the new NMS rules is the introduction of competitive forces into this component of the NMS.

Today, the national securities exchanges (i.e., NYSE, Cboe, Nasdaq, IEX) and other SROs like FINRA send their market data to a single securities information processor (SIP), which then consolidates the information and makes it available to the public. The SEC’s new rule replaces the current single SIP model with a decentralized model of “competing consolidators”.

The impetus of this, in part at least, stems from the fact that the current system of disseminating NMS market data has not kept up with technological and market developments. Indeed, the national securities exchanges offer their own proprietary data feeds that are faster and more robust (i.e., depth of book) than the consolidated data available from the SIP.

The new rules update and expand the content of NMS market data to include: (1) information about orders in share amounts smaller than the current round lot size (e.g., 100 shares) for higher priced stocks; (2) information about certain orders that are outside of an exchange’s best bid and best offer (i.e., depth of book); and (3) information about orders that are participating in opening, closing and other auctions.

The new rules also create two new categories of entities: (1) competing consolidators, which would be responsible for collecting, consolidating and disseminating consolidated market data to the public; and (2) self-aggregators, which would be brokers or dealers that choose to collect and consolidate market data solely for their internal use.

The new rules envision that exchanges and other SROs may operate as consolidators based on their current status and that non-SROs can also be consolidators via a registration procedure with the SEC. All competing consolidators would be subject to certain standards with respect to the promptness, accuracy, reliability and fairness of their operations.

NYSE, Nasdaq, and Cboe, however, recently filed suit to block the SEC’s plan. So while the SEC’s plan has received some positive comments, there is also the view that it carries with it significant risks of additional cost and complexity.