SEC Probes SRO Revenues Derived from Market Data

The surge in online trading by retail investors, coupled with the rise of alternative trading systems (ATSs) applying for exchange status, has caused the SEC to scrutinize the revenues that exchanges earn for providing real time stock market data.

The surge in online trading by retail investors, coupled with the rise of alternative trading systems (ATSs) applying for exchange status, has caused the SEC to scrutinize the revenues that exchanges earn for providing real time stock market data. At the same time, the 63-page SEC report says that the potential conversion of national securities exchanges and associations to for-profit-status, signals a fundamental change in the self regulatory structure of the markets.

In early December, the SEC issued a concept release, titled “Regulation of Market Information Fees and Revenue,” which focuses on the fees charged by Self Regulatory Organizations (SROs)— a.k.a. stock and options exchanges—and the revenues derived from such fees to operate and regulate the markets.

SROs have relied on market information fees as one of their most important sources of funding. In 1998, the SROs had total revenues of $1.97 billion and total operating expenses of $1.68 billion; market information revenues accounted for 21% of the total or $410.6 million.
One concern is that the fees charged to retail investors “must not be unreasonably discriminatory when compared with the fees charged to professional users.” Revenues derived from fees charged to retail investors have grown from $3.7 million in 1994 to $38.9 million in 1998, and represent about 9% of total market information revenues.

Professional fees, which still account for 85% of total market information revenues, also grew substantially from $231.1 million in 1994 to $351.1 million.
Though exchange fees for nonprofessional subscribers and per query fees applied to individuals have been slashed in the past few months, by 50%-80%, the SEC says it’s concerned that retail investor fees have not kept pace with changing technology and increased demand.

While the SEC is inviting the public to comment up until March 31, change may be inevitable because of two developments: 1) “New technology” (a.k.a. the Internet) has given retail investors the opportunity to access real time market information through online accounts with broker/dealers 2) The growth of ATSs, such as Island ECN and Archipelago, which have registered or expressed an interest in registering as exchanges, will cause an increase in the number of SROs. In addition, some of the SROs, like Nasdaq and the NYSE, are exploring the idea of converting from membership organizations to for-profit corporations. The SEC warns, “the advent of for-profit SROs, who will have the financial objective of generating profits for their owners, potentially could result in increased pressure to raise fees and revenues and to cut back on costs not directly associated with a source of revenues.”

In the final analysis, the SEC asks for comment on a number of issues, including a concept of setting a cost-based limit on market information revenues that could establish a link between the cost of market information and the total amount of market information revenues. It also raises the notion of greater public disclosure concerning fees, revenues and the SRO’s uses of revenues, and broader industry and public participation in the process of setting and administering fees.

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 the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio