SEC Proposes Overhaul of Market Data Infrastructure

I. Background

In 1975, Congress adopted amendments to the Securities Exchange Act of 1934 (Exchange Act) charging the SEC with creating a “national market system” (NMS) including rules governing the collection and distribution of quotations and transaction information regarding securities.⁴ With certain limited exceptions, the same security may trade on multiple different markets and at different prices in the U.S. Accordingly, to determine the best available price for a security at given time or the last sale price of a security, a consolidated view of market quotations and transactions across all markets is necessary.

Today, the dissemination of this consolidated market data occurs through one of three exclusive SIPs, which consolidate exchange market data and are required to make it available to market participants.⁵ The SIPs are governed by SEC-approved NMS plans that are designed to ensure that the SIPs provide the public with a comprehensive, accurate and reliable source of information for the prices and volume of any NMS stock at any time during the trading day on fair and reasonable terms. On January 8, 2020, the SEC proposed amendments related to the NMS plans governing the SIPs that would, among other things, consolidate the three existing NMS plans into a single plan (the NMS Plan) and require an independent administrator of the NMS Plan.⁶ The consolidated NMS Plan would still play an important role under the Proposal despite the elimination of exclusive SIPs.

For many years the distribution of SIP consolidated market data has been criticized for being meaningfully slower than exchange’s proprietary data feeds. Today’s markets have evolved into high-speed electronic markets where even small degrees of latency in processing market data affect trading strategies, and many broker-dealers believe they must use exchange proprietary market data to compete effectively. The Proposal is designed to address that concern and other issues by enhancing the content and distribution means of consolidated market data.

II. Proposed Enhancements to Reg NMS

The Proposal primarily changes three things: (1) the displayed size of round lots depending on the price of the security, (2) the content of consolidated market data and (3) the means of distribution of consolidated market data (SIP vs. competing consolidator). The discussion below provides an overview and brief explanation of the significance of each of these items, as well as for core data, self-aggregators, requirements for exchanges distributing market data, and fees under the Proposal.

A. Round Lots

Under the Proposal, the applicable round lot size for a particular NMS stock would vary depending on the stock’s average closing price of the stock during the previous month, as reported by its primary listing market.⁷ For initial public offerings (IPOs), the IPO price would be used to determine the applicable round lot. The proposed round lots would be as follows:

Under the Proposal, only where the best bid and the best offer are of at least 100 shares can those quotations be “protected” for purposes of the Order Protection Rule.⁸ In other words, for a quotation to be protected, it must be the best bid or offer and have a quantity of at least 100 shares. Consequently, for stocks that have a lower round lot quantity, there may be bids and offers that are priced better than the best protected bid and protected offer available.⁹

This will result in frequent differences between the best protected bid and protected offer (PBBO) and the national best bid and national best offer (NBBO). Today, the PBBO and NBBO for a given stock are generally the same because all stocks have a uniform round lot size of 100 shares. As noted above, stocks that had an average closing price during the previous month above $50.01 per share will have a round lot of less than 100 shares.¹⁰ Therefore, any time the best bid and best offer for such stocks is less than 100 shares each, the NBBO will be different than PBBO. For example, assume stock XYZ has a round lot size of 20 with the following quotes:

The best bid and offer for XYZ are the highest buy order that is a round lot and the lowest sell order that is a round lot. Because XYZ has a round lot of 20 shares (i.e., its average closing price for the preceding month was between $50.01 and $100.00) and protected quotes must be for at least 100 shares, the NBBO differs from the PBBO.

Significance – What this means is that the NBBO quotations in the example above would not be “protected” from a trade-through under Rule 611 (Order Protection Rule) of Reg. NMS.¹¹ However, a broker-dealer could not ignore these quotes because the duty of best execution generally requires the execution of customer trades “at the most favorable terms reasonably available under the circumstances, i.e., at the best reasonably available price.”¹² Given the duty of best execution to execute against any quotes that are better than the best protected quotation, a question arises whether the Order Protection Rule continues to be necessary at all.

Additionally, broker-dealers will need to ensure that customer limit orders that meet the applicable round lot size for the security are displayed, consistent with the Limit Order Display Rule.¹³ For example, an order that previously may have constituted an odd lot for a security might be a round lot that must be displayed under the Proposal.

B. Consolidated Market Data

Under the Proposal, competing consolidators would be responsible for the distribution of newly defined “consolidated market data.” Currently, consolidated market data produced by the SIPs generally consists of “core data,” which is the price, size and exchange of the last sale; each exchange’s highest bid and lowest offer (BBO) and the quantity available at those prices (also known as “top of book data”); and the NBBO. The SIPs also today provide certain regulatory information related to the NMS Plan to Address Extraordinary Market Volatility (aka the Limit-Up Limit-Down Plan) and short sale circuit breakers, such as information about when circuit breakers have been triggered.

The Proposal would expand the content of consolidated market data by expanding the components of core data, as well as by adding additional exchange-specific program data for exchange retail liquidity programs.¹⁴ Specifically, under the Proposal, “consolidated market data” would mean data from all exchanges and Financial Industry Regulatory Authority (FINRA) (collectively self-regulatory organizations or SROs) that consists of the following:

a. Core data – as detailed further below, this would continue to contain top-of-book quotations and last sale data but would newly add (i) depth of book (DOB) data, (ii) odd-lot transaction data, and (iii) exchange auction information (e.g., opening auction)

b. Regulatory data – includes information for each stock relating to

i. Short sale circuit breakers – information regarding whether the short sale circuit breaker has been triggered¹⁵

ii. Price bands – relating to single-stock and market-wide circuit breakers under the Limit-Up Limit-Down Plan¹⁶

iii. Halts – trading halts and reopening notifications under the Limit-Up Limit-Down Plan

iv. Opening and closing prices – from the primary listing exchange

v. Round lots – indicator of the applicable round lot size for each stock

vi. Other indications – certain other messages such as subpenny and trade through exempt indicators

c. Administrative data – administrative, control and other technical messages that may be required by the NMS Plan¹⁷

d. Exchange-specific program data – data relating to exchange retail liquidity programs¹⁸

e. Additional data – as may be required pursuant to the NMS Plan

Significance – The most significant aspect of proposed definition of consolidated market data is the expansion of core data, discussed below.

C. Core Data

Although the term is currently undefined under Regulation NMS, “core data” provided by the SIPs currently consists of (i) the price, size and exchange of the last sale; (ii) top-of-book quotations from each exchange; and (iii) the NBBO. The Proposal would establish a new definition of core data to include all of these elements but would add to it the following:

a. Best protected bid and protected offer (PBBO) – As described above, under the Proposal, only where the best bid and the best offer are of at least 100 shares can those quotations be protected within the meaning of the Order Protection Rule. As a result, stocks with round lots of less than 100 shares (i.e., average closing price above $50.01 per share the previous month) may have better priced quotes that are not protected.

b. Odd-lot data – odd-lot quantities that when aggregated equal a round lot in the applicable stock shall be included as a bid or offer and disseminated at the least aggressive price of the aggregated odd-lot orders.

For example, assume stock XYZ has a round lot of 20 shares and the following quotes:

In this example quotes 1, 2 and 3 when aggregated amount to a round lot (20 shares) and would therefore be displayed as a single quotation at the least aggressive of their prices ($74.98).

c. DOB data – would mean all quotation sizes at each exchange aggregated at each of the five price levels below a protected bid and above a protected offer. DOB data would also include any quotations between an exchange’s best bid and its protected bid and its best offer and protected offer. For example, assume Exchange A is at the NBBO for stock XYZ and has the following bids on its order book:

Here, DOB data includes the quotes between the NBBO and the PBBO as well as each of the next five prices levels below the PBBO (i.e., $74.96, $74.95 and so on).

d. Auction information – would mean all the information specified by each exchange related to their auctions (e.g., opening, closing, reopening after a halt). This information would generally include, for example, estimated opening (or reopening) prices, the quantity of buy and sell orders during the preauction period and order imbalance indicators (e.g., more buys than sells). 

Significance – Under the Proposal, core data would now include DOB data, odd-lot data and auction information, the majority of which is available today only through proprietary exchange data feeds. Given the enhancements to consolidated market data under the Proposal, many market participants could find that they no longer need to subscribe to proprietary market data products from exchanges. But, self-aggregators of proprietary market data feeds would still generally have a latency advantage over those acquiring consolidated market data from competing consolidators.

D. Competing Consolidators

As noted, competing consolidators would replace the exclusive SIPs for the distribution of consolidated market data. A competing consolidator would be required to register with the SEC on proposed Form CC pursuant to proposed Exchange Act Rule 614 using the SEC’s EDGAR system in a manner similar to the requirements for NMS Stock ATSs.²⁰ The following provides an overview of competing consolidators under the Proposal:

a. Eligibility –both SROs and non-SRO entities, including broker-dealers and non-broker-dealers, would be eligible to operate as competing consolidators. An SRO, however, would not necessarily be required to complete Form CC to provide consolidated market data but would be subject to monthly reporting requirements.²¹

b. Form CC Requirements

i. General information – name, address, legal status (e.g., LLC) and affiliation with a broker-dealer

ii. Control persons (Exhibits A and B) – disclosure of persons owning more than 10 percent of the applicant or that otherwise directly or indirectly control the applicant as well as officers and directors of the applicant

iii. Affiliates and organizational chart (Exhibits C and D) – disclosure of affiliates of the applicant (i.e., entities that control, are controlled by or under common control with the applicant)²² as well as an organizational chart for the applicant

iv. Operational capability (Exhibit E) – a narrative description of each consolidated market data service or function, including connectivity and delivery options, and all the procedures used for collecting and distributing consolidate market data

v. Market data products (Exhibit F) – a description of all market data products offered by the applicant; under the Proposal, competing consolidators may offer a variety of different market data products to suit subscribers’ needs (e.g., providing full DOB data)

vi. Fees/charges (Exhibit G) – a description of fees for the applicant’s services (e.g., subscription, connectivity) as well as variables affecting such fees and price differences among subscribers

vii. Colocation and connectivity (Exhibit H) – a description of any colocation and related services, including connectivity and throughput options offered as well as any other means to increase the speed of communication to the applicant’s services

viii. Specifications (Exhibit I) – a narrative description or the functional specifications (e.g., FIX specs) for subscribers

c. SEC Review of Form CC – the SEC would review initial Form CC submissions pursuant to proposed Rule 614, which generally provides:

i. Initial review – the SEC has up to 90 days to review an initial Form CC submission. The SEC will make public effective Form CCs (or an order declaring a Form CC ineffective) by posting them on its website.

1. A Form CC will be declared ineffective if, after notice to the applicant and an opportunity for hearing, the SEC determines that declaring it ineffective is necessary and appropriate in the public interest (e.g., if the disclosures reveal noncompliance with applicable laws).

ii. Material amendments – a competing consolidator would be required to amend its Form CC prior to implementing a material change to the pricing, connectivity or products offered.

1. The SEC will make public any Form CC amendment within 30 calendar days from the date of filing.²³

2. A change to these offerings is considered “material” if there is a “substantial likelihood that a reasonable market participant would consider the change important when evaluating the competing consolidator as a provider of market data.”²⁴

3. Notably, the Proposal does not contemplate (i) the SEC declaring a Form CC amendment effective or ineffective; (ii) any implementation delay after filing the amendment; (iii) any opportunity for public notice and comment on the amendment.

iii. Annual report – within 30 days after the end of each calendar year, a competing consolidator would be required to correct information that has become inaccurate or incomplete for any reason (e.g., a change to its organizational structure or its officers and directors) and indicate items that have been amended.²⁵

iv. Cessation – a competing consolidator shall provide notice of cessation of operations at least 30 days prior to when it intends to cease operations. The SEC will post such notice publicly on its website.

d. Responsibilities of Competing Consolidators – the responsibilities of competing consolidators include²⁶

i. Consolidated market data – collect and generate consolidated market data

ii. Timestamp – timestamp information upon (1) receipt from the exchange or FINRA, (2) receipt at its aggregation/consolidation mechanism and (3) dissemination to subscribers

iii. Unreasonable discrimination – make consolidated market data available to subscribers on “terms that are not unreasonably discriminatory”²⁷

e. Monthly Report of Performance Metrics – within 15 calendar days of the end of each month, publish in a freely accessible manner on its website performance metrics, as defined by the NMS Plan, that include at least the following:²⁸

i. Capacity statistics – e.g., system tested capacity, system output capacity, total transaction capacity and total transaction peak capacity

ii. Message rate and total statistics – e.g., peak output rates on the following bases: 1 millisecond, 10 millisecond, 100 millisecond, 500 millisecond, 1 second, and 5 seconds.

iii. Network delay statistics – e.g., quote and trade zero window size events, quote and trade retransmit events, and quote and trade message totals.

iv. Latency statistics – with distributions up to the 99.99th percentile, a competing consolidator must provide latency stats regarding

1. Exchange to CC (first leg) – when a SRO sends an inbound message to the competing consolidator and when it is received

2. CC to subscribers (second leg) – when the competing consolidator receives the inbound message from a SRO and when it sends a consolidated message to a subscriber

3. Exchange to subscribers (both legs) – when a SRO sends an inbound message to a competing consolidator and when the competing consolidator sends a consolidated message to a subscriber

f. Monthly Report of Issues and Other Alerts – within 15 calendar days of the end of each month, publish in a freely accessible manner on its website the following:

i. Data quality issues – e.g., delayed message publication, publication of duplicative messages and message inaccuracies

ii. Systems issues – e.g., processing, connectivity and hardware problems

iii. Clock synchronization protocol – to the extent such a protocol is used, it would have to be described

iv. Clock drift averages and peaks – for clocks used to generate timestamps, clock drift averages and peaks and the number of instances of clock drift greater than 100 microseconds

v. Vendor alerts – e.g., systems testing dates or market holiday reminders

g. Recordkeeping – competing consolidators would be required to keep and preserve records relating to its business for a period of no less than five years, the first two in an easily accessible place, and promptly furnish such records to the SEC upon request.

h. Regulation Systems Compliance and Integrity (SCI) – the SIPs are currently subject to Regulation SCI, which is designed to protect critical market infrastructure and address potential systems disruptions and intrusions.

Given that competing consolidators would replace the SIPs and perform the critical function of delivering consolidated market data to the public, competing consolidators would be subject to Regulation SCI under the Proposal, including SEC notification requirements relating to “SCI events.”

Significance – Competing consolidators would be newly registered entities designed to supplant the existing exclusive SIPs. The competing consolidator model is intended to reduce costs for consolidated market data relative to comparable proprietary market data products and reduce latency in the distribution of such data relative to the SIPs. Currently, SIPs receive market data from exchanges via fiber connections, making the resulting consolidated market data significantly slower than proprietary market data products. Under the Proposal, competing consolidators would be able to obtain the market data necessary to create consolidated market data from exchanges via faster wireless connections, reducing latency in delivery to subscribers.

E. Self-Aggregators 

Under the Proposal, only a competing consolidator with an effective Form CC or a SRO may generate consolidated market data for dissemination to any person. However, broker-dealers that wish to use consolidated market data for internal purposes only could do so without registering as a competing consolidator.

The term “self-aggregator” would be defined in the Proposal as a broker-dealer that receives information with respect to transactions in NMS stocks, including data necessary to generate consolidated market data, “solely for internal use.”³³ Only broker-dealers would be eligible to be self-aggregators and not other types of market participants, such as investment advisers.

Significance – In limiting self-aggregators to just broker-dealers, the SEC noted that while it was not requiring self-aggregators to register, broker-dealers are subject to the full broker-dealer regulatory regime, which includes inspections by the SEC and SROs. Accordingly, any expansion of possible self-aggregators would likely have to include voluntarily agreeing to audit rights to prevent consolidated market data from being shared with any other person. These provisions may affect some high-frequency trading investment advisers that currently maintain their own “ticker plants.”

F. Distribution of Market Data by Exchanges 

Under the Proposal, SROs would be required to provide equal access to their market data. Specifically, each SRO would be required to make available to all competing consolidators and self-aggregators its information regarding quotes and transactions in NMS stock “in the same manner and using the same methods, including all methods of access and the same format” as that data is made available to any person.

For example, if an exchange has more than one form of transmission for its proprietary data (e.g., via fiber connection and via wireless connection), then the exchange must offer competing consolidators and self-aggregators those same types of transmission for consolidated market data. Today, exchanges deliver market data to the SIPs via slower fiber connection, while offering proprietary market data through faster wireless connections. Any new form of access established by a SRO must also be offered to competing consolidators and self-aggregators.

Exchanges would still be permitted to sell proprietary market data products, though it seems likely that the value of such products relative to consolidated market data would be diminished given the equalized means of distribution and the inclusion of DOB data as part of core data.

Significance – The proposed requirement that all market data be distributed on equal terms appears to be designed to curb an exchange from favoring certain competing consolidators over others. For example, if an exchange operated a competing consolidator through an affiliate and there was no requirement to provide equal access to market data, an exchange might have incentives to provide latency or other advantages to its affiliated competing consolidator.

G. Fees

Pursuant to Section 11A of the Exchange Act and Rule 603 thereunder, consolidated market data must be offered on terms that are “fair and reasonable.”³⁶ Fees for consolidated market data available through the SIPs have generally be shown to be fair and reasonable if they are reasonable related to costs.³⁷

Under the Proposal, the NMS Plan governing the collection and dissemination of consolidated market data would be responsible for establishing and filing with the SEC the fees for the data used by competing consolidators and self-aggregators to generate consolidated market data.³⁸ However, the fees charged by competing consolidators for consolidated market data would not be subject to SEC review and approval.

Significance – Because there is no review process for the fees competing consolidators charge for consolidated market data obtained pursuant to the NMS Plan, these fees would not be subject to SEC review for being “fair and reasonable.” The Proposal would therefore generally rely on competitive forces and fee disclosures via Form CC to help ensure that competing consolidator fees are fair and reasonable.

¹ Exchange Act Release No. 88216, 85 FR 16726 (Mar. 24, 2020).

² Within the past year and a half, the SEC has, among other things, (i) adopted a transaction fee pilot, currently being challenged by several exchanges; (ii) issued a decision in an longstanding issued guidance on requirements related to fee filings; (iii) remanded 400 challenges to market data and market access fees; (iv) held a roundtable on market data and market access, which helped form the basis for some of the items in the Proposal; (v) issued comprehensive guidance on expectations for exchange fee filings. For a discussion of these updates, please see our client Update available here. The SEC also proposed amendments to the governance structure of the NMS plan governing the distribution of consolidated market data in January 2020. See infra note 5 and accompanying text. .

³ Proposal at 16729. The exchanges that are participants in the NMS plans to distribute consolidated market data via the SIPs also face conflicts of interests insofar as they sell proprietary data products that compete with market data from the SIPs. As a result, the exchanges have not been incentivized to ensure that consolidated market data is delivered as efficiently and effectively as their proprietary market data products.

⁴ 15 U.S.C. 78k-1(c)(1)(B).

⁵ 15 U.S.C. 78k-1. Some market participants buy proprietary data products from exchanges for their own use rather than using the consolidated feeds.

⁶ For an overview of the proposed changes to the governance structure of the NMS Plan governing the collection, consolidation, and dissemination of consolidated market data, please see our client Update here.

⁷ Proposal at 16741; Proposed Rule 600(b)(81).

⁸ 17 CFR 242.611.

⁹ Proposal at n.117.

¹⁰ Currently, the NBBO might differ from the PBBO where an exchange might have a manual quotation (e.g., from an exchange floor) that is priced better than the best electronically displayed quotation. In such case, because the manual quotation is not readily accessible in the same manner that an electronic quotation is, market participants are permitted to trade through the better priced manual quotation. Manual quotations are rare as most equity exchanges have moved to automated trading.

¹¹ 17 CFR 242.611.

¹² Internal citations omitted. Exchange Act Release No. 51808, 70 FR 37495, 37538 (June 29, 2005) (Reg NMS Adopting Release). The Order Protection Rule was originally designed to be a “backstop” to a broker’s duty of best execution. Id. at 37508. Accordingly, the Proposal will generally rely more on the duty of best execution to prevent trade-throughs than the current market structure currently does.

¹³ 17 CFR 242.604.

¹⁴ Under the Proposal, market data related to the overt-the-counter bulletin board (“OTCBB”) that is currently provided through the exclusive SIPs would not be included as part of consolidated market data.

¹⁵ 17 CFR 242.201.

¹⁶ Under the Proposal, the exchange with the greatest number of listing of S&P500 stocks would be responsible for determining whether a Level 1, Level 2, or Level 3 decline has occurred under the Limit-Up Limit Down Plan. For an overview of some of the key aspects of the Limit Up Limit Down Plan, please see our client update here.

¹⁷ Proposed Rule 600(b)(2).

¹⁸ Proposed Rule 600(b)(32). Exchange retail liquidity programs are designed to attract orders from retail customers to exchanges (rather than executing against a wholesale broker-dealer or on an alternative trading system (ATS)).

¹⁹ Proposed Rule 600(b)(20).

²⁰ For a discussion of the filing regime for NMS Stocks ATS, please see our client Update here.

²¹ Proposal at n537.

²² Proposed Form CC defines affiliate to have the meaning provided in Exchange Act Rule 12b-2. 17 CFR 240.12b-2.

²³ Proposed Rule 614(b)(2)(iii).

²⁴ Proposal at 16780.

²⁵ Proposed Rule 614(b)(2)(ii); Proposal at 16781.

²⁶ Proposed Rule 614(d).

²⁷ Proposed Rule 614(d)(3).

²⁸ Proposed Rule 614(d)(5)

²⁹ Proposal at 16873.

³⁰ Proposed Rule 614(d)(6).

³¹ Proposed Rule 614(d)(7) and (8).

³² 17 CFR 242.1000 et seq.

³³ Proposed Rule 600(b)(82).

³⁴ Proposed Rule 603(b).

³⁵ Proposal at 16770.

³⁶ 15 U.S.C. 78k-1; 17 CFR 242.603.

³⁷ Proposal at 16770.

³⁸ Proposal at 16792.