The Securities and Exchange Commission's recent rejection of Nasdaq and New York Stock Exchange fee increases has institutional investors optimistic that the agency is taking a broader — and more critical — look at exchange practices.
On Oct. 16, a unanimous commission ruled against the exchanges in a 2013 challenge brought by the Securities Industry and Financial Markets Association, finding that the NYSE Arca and Nasdaq Stock Market did not provide enough justification to continue charging the rates imposed for depth-of-book data, which is used to gauge market demand. The decision also affects more than 400 similar price-increase requests that were on hold pending the decision, and for which the two exchanges now have to provide justification.
"It's a sea change in terms of the SEC's attitude about all 400 filings," said John Ramsay, chief market policy officer at IEX Group Inc., New York, a lower-cost exchange competitor. He sees the ruling as creating a higher standard for transparency and disclosure, in addition to the fee-specific justification.
Robert J. Jackson Jr., a Democratic SEC commissioner who said he thinks past commissions have tended to rubber-stamp fee increases, is pleased that the SEC's ruling "speaks for itself" in its call for exchanges to justify price increases.
Commission Chairman Jay Clayton made a point of cautioning that the ruling does not mean the fees in question were too high, only that the exchanges so far have not provided sufficient factual and legal support to continue to charge those fees. But he did note that all fees have been the subject of numerous commission and court proceedings over the past decade. Given the technological and other changes in markets, taking a harder line protects both markets and Main Street investors, he said.
Ken Bertsch, executive director of the Council of Institutional Investors in Washington, agreed the ruling's impact is much broader, with the potential to lower fees and change market data access practices. CII members, who represent pension and benefit funds, endowments and foundations with a combined $4 trillion in assets, have long worried that market competition is distorted by the exchanges' competing obligations as a utility providing access while also profiting from providing market data, and from the controversial practice of offering rebates to certain brokers, he said.
Exchange critics are reading even more into the fact that Republican commissioners Hester Peirce and Elad Roisman concurred, in part because of what they said was the exchanges'"oversimplified analysis" that prevented the SEC from evaluating how competitively the exchanges handle distinct customer groups' needs.