Most of the industry's efforts to prepare for Regulation NMS have been directed at dealing with automating quotes, connectivity and best price protection. However, an equally important component of the rule is the new plan for the redistribution of revenue that is collected by the Consolidated Tape Association (CTA).
Today, CTA uses a simple method of rebating based upon prints. Under the new plan, a combination of prints and quotes will be used. If successful, it will more accurately reward those firms that contribute to the data pool rather than those that take from it. While this clearly is a step in the right direction, many are concerned that gaming of the system will still occur. The practice of "print shredding" could become "print and quote shredding" as participants manipulate their quotes to be counted for revenue purposes while offering limited practical accessibility.
SIFMA is looking at a more fundamental component of market data fees. As not-for-profit organizations, the exchanges are supposed to use collected revenue to cover only the costs of providing the data while ensuring its accuracy. Any money left over is to be redistributed back to the public. However, what we are seeing are the exchanges repackaging data and selling it profitably as a commercial product. This is not what the CTA had in mind.
Industry participants are required to purchase this quote information, regardless of price, to guarantee the accurate pricing of customer orders. Without the assurance that the data is being supplied at as low a price as possible, the industry will find itself captive to the monopolistic pricing power of a few participants. This is exactly what Reg NMS was trying to prevent. --Mark Madoff