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How Low Can You Go?

Reg NMS' proposed formula for allocating market-data revenues among exchanges isn't getting a warm welcome on the Street.

Charging that market-data fees are too expensive and calling for disclosure of audited financials from exchanges and securities-information processors (SIPs) to reveal their operating costs, brokerage officials have been critical of the SEC's market-data proposal contained in Reg NMS. They assert that the proposal is too complex and does not revamp the system enough. They also say that a new market-data formula for sharing tape revenues with exchanges is too burdensome to calculate.

Retail brokerage firms like Charles Schwab and Ameritrade have said for more than a decade that market-data fees charged by stock exchanges are too expensive.

At an April 21 public hearing on Reg NMS called by the SEC to gather feedback from the industry on the proposed rule change, Robert Greifeld, chief executive officer of Nasdaq, testified that Nasdaq likely could lower its $20 monthly charge for professional investors to $5 or $7 because of technology advances and productivity increases over the past 20 years - and still make a decent return.

According to Reg NMS, the three main networks that distribute market data for securities listed on the New York Stock Exchange, the American Stock Exchange, regional stock exchanges and Nasdaq collected $424 million in revenues derived from market-data fees last year. After deducting network expenses, the networks distributed $386 million to their individual self-regulatory organization (SRO) participants. Critics contend that if the cost to produce the market data is only $38 million, then the profit margin exceeds 1,000 percent and exchanges are charging too much for the data.

To reduce the burden of compliance on exchanges, Reg NMS seeks to streamline the standard data that exchanges are required to disseminate to investors. Today, exchanges provide a consolidated quote-feed that shows every price level for a given security, as well as a montage of the best bids and offers for each SRO, including all the regional stock exchanges.

Reg NMS suggests paring down the data to the national best bid and offer (NBBO) and the price and size of the last sale in a stock. Additionally, it would authorize individual market centers to independently distribute additional data. "In turn, exchanges [and market centers] would be allowed to sell much richer data products to professional investors at a much higher rate," says Jeff Brown, director, product development at UNX, an institutional brokerage firm based in Burbank, Calif. This opens the door for Nasdaq and the NYSE to charge a higher price for proprietary depth-of-book products, he says. Nasdaq and NYSE today offer Total View and Open Book, respectively.

Jodi Burns, a senior analyst with Celent Communications in New York, questions whether the SEC is putting too much weight on the NBBO. "To describe it simply, the SEC is trying to make a distinction between the top-of-book and the depth-of-book - the top-of-book being the NBBO and depth-of-book [being] prices away from the NBBO," she says.

In the wake of decimalization, Burns says, the NBBO is less important. Today, "It's not the case that traders can get by with just the NBBO. There's so much liquidity outside the five price levels that are next to the NBBO. That's really where the information is," she explains. If the SROs had to place a value on their NBBOs, "It's the peanuts you get on an airline," she says. "It's not relevant. It's the depth-of-book, and the SEC is leaving that for competitive forces."

Testifying that the duration of the NBBO is changing in milliseconds, Leo McBlain, chairman of the Financial Information Forum (FIF), an industry association that specializes in market data policy and technology, warned that it's difficult for a human being watching the screen to make trading decisions. In an interview with WS&T, he says, "More than likely, it's the black boxes that benefit." He suggests that the NBBO is somewhat misleading, since investors may not get the NBBO as the execution price.

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

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