The SEC's proposed rule to revamp the way public data is disseminated in U.S. equity markets is "too risky to adopt," Nasdaq said in a comment letter, but other stakeholders applauded the initiative.
The rule, proposed Feb. 14, would update and expand the content of National Market System data and establish a "decentralized consolidation model" under which competing consolidators would collect, consolidate and disseminate certain NMS information, according to an SEC fact sheet.
Currently, exchanges are required to provide specified market data, which the SEC refers to as NMS market data, to exclusive securities information processors, known as SIPs. The SIPs then consolidate that information and make it available to the public, the SEC fact sheet said.
In its comment letter filed May 26, the date letters were due, Nasdaq said the equity markets have functioned "remarkably well during the historic volumes, volatility and stresses of the COVID-19 pandemic when the stakes are as great as they've ever been" and there "couldn't be a worse time to jeopardize this success than now."
The SEC has failed to recognize how the proposed rule would essentially rewire the equity markets, Nasdaq said. "The proposal gives short shrift to the intricacies, market dynamics and interdependencies that characterize the U.S. equity markets and determine how they operate and perform over time," the exchange added.
Cboe Global Markets also cautioned against "unnecessary tinkering with critical market infrastructure without demonstrating that there are proven benefits for investors" in its May 26 comment letter.
When outlining its proposal in February, the SEC said the rule would reduce "the current disparity in content and latency between NMS market data and the proprietary data products that some of the individual exchanges sell directly to market participants" and would replace the "exclusive SIP" model with a decentralized model of "competing consolidators."
Also under the proposal, public data feeds would be expanded to include more information on best bid and offer prices. Currently, the public sees those prices in 100-share lots, no matter the share price. Under the proposal, share prices between $50.01-$100 would be quoted in lots of 20, while shares from $100.01 to $500 would be quoted in lots of 10, shares between $500.01-$1,000 in lots of two and shares more than $1,000 in lots of one.
Cboe and Nasdaq said decoupling "round lot" sizes from protected order sizes would result in a system that is considerably more complex than what exists now.
Fidelity Investments supported most of the proposal in its May 26 comment letter. Specifically, it welcomed proposed changes to the SIPs. "The SIPs have not kept pace with the U.S. equity markets which, through technological and market developments, now offer more products, faster and at a lower cost," Fidelity said. "Moreover, exchange plan participants face conflicts of interests insofar as they sell proprietary data products that compete with the SIPs."
In its May 26 comment letter, Charles Schwab welcomed the SEC proposal. "Under Reg. NMS, the equity market data infrastructure evolved into a two-tiered system that put individual investors at a relative disadvantage," its letter said. "The proposed rule seeks to reverse this dynamic by adding several levels of quotes to the tape and creating a methodology for adding odd lot prices as well. Individual investors would clearly benefit from the addition of depth of book and Schwab strongly supports the change."
But it wasn't all positive from Schwab as it raised a criticism similar to Nasdaq and Cboe. "We are concerned, however, the proposed treatment of odd lots would lead to a level of complexity that would not be offset by a corresponding benefit."