D.C. Circuit Upholds SEC’s Market Data Infrastructure Rules, Paving the Way for Competing Consolidators

What’s Next

Implementation of the market data infrastructure rules is tied to SEC approval of conforming amendments to the joint-industry plan(s) (known as NMS plans) for the distribution of consolidated market data. The NMS plan(s) for consolidated market data facilitate the creation and distribution of consolidated market data across exchanges, including setting fees for data content.

There are currently three such NMS plans. However, in May 2020, the SEC issued an order to consolidate these three plans into a single NMS plan and to implement certain changes to the governance of the NMS plans (the NMS Plan Governance Order).⁴ The same exchanges noted above (Nasdaq, NYSE, and Cboe) challenged the NMS Plan Governance Order, which is pending before the D.C. Circuit with a decision expected in the coming months.⁵ The D.C. Circuit stayed the effectiveness of the NMS Plan Governance Order pending resolution of the exchanges’ challenge.⁶

In addition to consolidating the existing three NMS plans into a single NMS plan, the SEC’s NMS Plan Governance Order required that the single NMS plan (i) reduce the voting power of affiliated exchanges groups to no more than two votes (rather than one vote per each exchange); (ii) provide one-third voting representation on the NMS plan operating committee to market participants unaffiliated with a self-regulatory organization (SRO);⁷ and (iii) require that the administrator of the NMS plan be “independent” (i.e., an entity that does not also sell proprietary market data products).

As a result of the exchanges challenge to the NMS Plan Governance Order, there are currently two paths on which implementation of the market data infrastructure will proceed:

1. Single NMS Plan – If the D.C. Circuit upholds the NMS Plan Governance Order, the exchanges (and FINRA) will be required to adopt amendments to the new single NMS plan that conform to the market data infrastructure rules and set fees for data content.⁸
   
   The rollout of the market data infrastructure rules would begin upon the SEC approving such amendments to the single NMS plan.
2. Three NMS Plans – If the D.C. Circuit rejects the SEC’s NMS Plan Governance Order, the three current NMS plans may continue to govern the distribution of consolidated market data.⁹
   
   The three NMS plans have already proposed plan amendments to implement the market data infrastructure rules, although the SEC has raised significant concerns about these proposals, calling into question whether the SEC would approve them in their current form.¹⁰
   
   The rollout of the market data infrastructure rules would begin upon the SEC approving the proposed amendments to the three NMS plans. The SEC has authority to tailor the NMS plans as it believes necessary and appropriate. However, any such rewriting of the three NMS plans could be subject to further judicial challenge by the exchanges.

In either case, following SEC approval of the NMS plan(s) amendments, the transition to a competing consolidator model for the distribution of consolidated market data would unfold over the course of the next two to four years across three phases.¹¹ Still to come is what is likely to be a bitter fight over how much the exchanges can charge competing consolidators for raw market data feeds, including how much regulatory overhead the exchanges can recover. But the resulting changes will be the most dramatic changes to the provision of consolidated market data since the initial adoption of current NMS plans in the late 1970s.

¹ The Nasdaq Stock Market LLC, et al v. SEC, No. 21-1100 (D.C. Cir. May 24, 2022).

² For more information on the SEC’s market data infrastructure rules, please see Sidley’s client alert available here: https://www.sidley.com/en/insights/newsupdates/2021/01/sec-adopts-rules-to-modernize-equity-market-data-content-and-infrastructure.

³ The national best bid and offer is generally the best bid and best offer across all exchanges at a given point in time. See 17 CFR 242.600(b)(50).

⁴ See Exchange Act Release No. 88827, 85 FR 28702 (May 13, 2020). For more information on the governance changes to the NMS plans for consolidated market data, please see our client alert here: https://www.sidley.com/en/insights/newsupdates/2020/01/sec-proposes-amendments-to-governance-of-market-data-plans.

⁵ See New York Stock Exchange LLC, et al v. SEC, No. 21-01169 (D.C. Cir.). Oral argument was held on March 24, 2022.

⁶ The SEC approved the governance structure of the single NMS plan in August 2021, but the stay order from the D.C. Circuit has suspended the single NMS plan becoming effective.  Exchange Act Release No. 92586, 86 FR 44142 (August 11, 2021).

⁷ The non-SRO voting representatives would consist of (i) an institutional investor, (ii) a broker-dealer with a predominantly retail investor customer base, (iii) a broker-dealer with a predominantly institutional investor customer base, (iv) a securities market data vendor, (v) an issuer of NMS stock, and (vi) a person who represents the interests of retail investors. 

⁸ The SEC approved the governance structure of the single NMS plan for consolidated market data in August 2021.  However, the D.C. Circuit stayed the effectiveness of the NMS Plan Governance Order pending resolution of the exchanges’ challenge.

⁹ Depending on the nature of the D.C. Circuit’s ruling on the NMS Plan Governance Order, there may be other courses of action. For example, the court might invalidate only part of the NMS Plan Governance Order that eliminates the three existing NMS plans in favor of a single NMS plan but require a rewrite of the governance provisions of the single NMS plan before or in parallel with amendments to such plan to conform to the market data infrastructure rules.

¹⁰ See, e.g., Exchange Act Release No. 94307, 87 FR 11787 (March 2, 2022). On May 19, 2022, the SEC extended the time period for its review of the NMS plan amendments to July 24, 2022. The SEC can extend the time period for its review by an additional 60 days, meaning that September 22, 2022, is the final date by which the SEC must approve (with any changes or subject to any conditions the SEC deems necessary or appropriate) or disapprove the proposed amendments to the NMS plans.

¹¹ For an overview of the implementation timeline, please see part III of Sidley client alert, available here: https://www.sidley.com/en/insights/newsupdates/2021/01/sec-adopts-rules-to-modernize-equity-market-data-content-and-infrastructure.