November 13, 2012

Are exchanges charging more money for market data than they ought to? And are these real-time market data fees subject to competition? These are potent questions that could surface today in a long-running legal case on market data fees.

A long-running legal case on market data fees is scheduled to hear closing arguments today, and it may force large exchange operators to reveal their costs for producing market data, according to a Reuters story.

A group of brokers, bankers and money managers, along with big tech giants including Google, eBay, Yahoo and Bloomberg LP, took the Securities and Exchange Commission (SEC) to court for not upholding its duty to provide "fair and reasonable fees" for market data, Reuters reports.

The Securities Industry and Financial Markets Association (SIFMA), the trade group and the Net Coalition technology group filed a case against the SEC for not objecting to new market data files by NYSE Euronext and Nasdaq OMX. The case is before the U.S. Court of Appeals, District of Columbia Circuit.

But according to Reuters, the case could be tossed out because the NYSE and Nasdaq, the two largest exchange operators, said the court lacks jurisdiction to review the complaint.

This is because an amendment to the Securities Exchange Act was slipped into the Dodd Frank financial reform act which allows exchanges to file new rules for fees that are "immediately effective," which enables the exchanges to implement new fees without waiting for SEC review, a process that could take years.

From Reuters:

Sifma and NetCoalition argue that market data is not subject to competitive forces, and therefore the cost of producing the data should be taken into account. NYSE and Nasdaq, as interested parties in the case, say the sale of their data is in fact constrained by competition.

Bloomberg is a distributor of market data – which is vital information for trading. Members of NetCoalition had previously obtained data from NYSE and Nasdaq for free, which led to earlier litigation known as NetCoalition 1.

In the earlier NetCoalition 1 involving the same parities, a court ruled in August 2010, that a market based approach to measuring whether market data fees are "fair and reasonable" was permissible, reports Reuters.

But the court said the SEC had not proven that competition actually constrained market data prices and it took issue with the agency's assertion that fees proposed by NYSE Arca were not that of a monopolist.

The court denied a request by NYSE and Nasdaq to appeal its decision, after which Nasdaq said that the Dodd-Frank amendment, issued months earlier, made the court's ruling moot.

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It will be interesting to see how round two of the lawsuit plays out. The topic is somewhat controversial because stock exchanges earn lucrative fees from providing low-latency data feeds to high frequency trading firms. Market data fees are an important source of revenues for exchanges in light of lower trading volumes.

As Reuters reports, Nasdaq raised its revenue from U.S. market data products by more than 15% in the third quarter, from a year ago, after an almost 19% increase in the previous quarter.

Nasdaq OMX said that market data accounted for 21% of total net exchange revenues, which were $269 million in the third quarter of 2012.

According to Nasdaq OMX's Q3 earnings release: Market data revenues of $84 million reflect a $1 million increase compared to the year ago quarter. The increase in Market Data revenues was driven by growth in U.S. proprietary products and pricing initiatives, partially offset by lower net revenues in U.S. tape plans and European data.

Another unanswered question is whether exchanges will disclose the cost of producing market data versus what they charge for it. Under the auspices of Dodd Frank, approved by Congress, exchanges have said they can increase market data fees, so it remains to be seen whether the court's ruling will have any clout.

ABOUT THE AUTHOR
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...