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Time to revisit stock exchanges, SEC Commissioner Jackson says

The Securities and Exchange Commission should rein in the lopsided power of for-profit stock exchanges, SEC Commissioner Robert Jackson Jr. said Wednesday.

"The SEC has stood on the sidelines while enormous market power has become concentrated in just a few players. That's a key reason why among our 13 public stock exchanges, 12 are owned by just three corporations. And that's how the stock exchanges that are a symbol of American capitalism have developed puzzling practices that look nothing like the competitive marketplaces investors deserve," Mr. Jackson said at a conference sponsored by the Healthy Markets Association and George Mason University in Arlington, Va.

"It's time to put the 'exchange' back in the Securities and Exchange Commission," he said, highlighting four practices that warrant regulators' attention: the two-tiered system for stock price information, legal limits on exchange liability when investors are harmed, the structure of stock exchanges, and rebates made to certain brokers who direct orders to exchanges.

One of the first steps in that direction is an SEC transaction fee pilot to study the effects of maker-taker rebates on equity trade execution, which pension funds and money managers have come out strongly in favor of in comment letters submitted on the proposal.

Mr. Jackson also questions exchanges' ability to run the public data feed while they sell private data feeds. "Unsurprisingly, exchanges have underinvested in the public feed — a product they compete with. It's like letting Barnes & Noble run our public libraries. Nobody should be surprised to find that our libraries don't have enough books," he said.

The SEC has had a hands-off approach to exchanges that until a decade ago were collectively owned non-profits, instead of today's private corporations, Mr. Jackson said, but now there is growing bipartisan support in Washington to revisit that attitude. "This is not a partisan issue. Commissioners of all stripes, members of Congress and our current chairman have all said it is time for us to take a hard look at the structure of our stock markets. We have a rare bipartisan opportunity to move this forward," he said.

Recent legal opinions emphasizing the SEC's authority and even obligation to address anti-competitive behavior will also help, he and other legal scholars at the event said.

Kenneth E. Bentsen Jr., president and CEO of the Securities Industry and Financial Markets Association in Washington, said his organization has urged regulators to act "for years," and supports the call for a closer look at market data and the role of exchanges as self-regulatory organizations. SIFMA supports reforms to ensure that the public market data feeds are robust and that fees for proprietary market data products are fair, and preventing exchanges from applying regulatory immunity or low liability limits, Mr. Bentsen said.

Chris Concannon, president and chief operating officer of Cboe Global Markets, said in an emailed statement that its connectivity offering "has been significantly enhanced" since 2013, when a free connection covered two equity markets and one new options exchange. Now, that same connection provides access to four equity exchanges and three options exchanges, and customers choose how they connect to those exchanges "based on their own trading needs and their own demand for additional capacity to our markets," he said.

Calls to the Equity Markets Association, which represents the New York Stock Exchange and Nasdaq, were not returned at press time.