The SEC proposed on February 14th to modernize the infrastructure for the collection, consolidation, and dissemination of market data for exchange-listed market system (NMS) stocks. The proposal would update and expand the content of NMS market data, which would better suit the diverse needs of investors in today’s equity markets. The rules that govern the content and dissemination of NMS market data have not been significantly updated since their initial implementation in the late 1970s. In addition, the proposal seeks to introduce competitive forces into the national market system for the first time. The introduction of and competition among these new data consolidators could, in turn, allow all market participants, including investors, to access and benefit from the expanded content of NMS market data.
Tuesday, March 10. 2020
In 1975, one of Congress’ principal objectives for the national market system was to assure the availability of information with respect to quotations and transactions in securities. Regulation NMS addresses the content of and the means by which NMS stock quotation and transaction information is collected, consolidated, and disseminated. Currently the national securities exchanges and the Financial Industry Regulatory Authority (collectively, the SROs) act jointly under three NMS plans (the Equity Data Plans) to collect, consolidate, and disseminate information for NMS stocks. The SROS are required to provide specific market data (the NMS market data) to exclusive securities information processors (SIPs), who consolidate that data and make a national best bid or national best offer (NBBO) publicly available.
U.S. equity markets are dynamic and, as a result of a variety of factors, have changed dramatically since the initial adoption of the national market system. In particular, the combination of technological advances, order routing, and trading strategies have greatly increased the speed and automation of markets. This results in trading becoming more market data dependent in terms of content, access, and speed of analysis. Exchanges have developed enhanced proprietary data and connectivity products to contend with this that in various circumstances are viewed as superior to the data and access provided by the exclusive SIPs. These content and latency differentials between SIP data and the proprietary market data products have become increasingly material to the functioning of the NMS market itself.
The suggested changes are designed to improve the NMS market data infrastructure by reducing the current disparity in content and latency between NMS market data and the proprietary data that are sold by some exchanges to market participants. The proposal would replace the “exclusive SIP” model with a decentralized model of “competing consolidators”. This proposal comes as part of the SEC’s ongoing effort to modernize the national market system to better fit the needs of investors (both retail and institutional) and other market participants. In October 2019, the SEC published a proposal designed to improve the procedure for public comment and SEC review of proposed fee changes. Also, in January 2020, the SEC proposed an order that was meant to address conflicts of interest in the
governance of the NMS plans and to expand the opportunity of investors and other non-SROs to participate in NMS plan governance. The new changes would extend these efforts further by seeking to modernize NMS market data from both content and availability perspectives, including by introducing competitive forces to key components of the system. This would better enable investors, broker-dealer, and other market participants to have timely access to robust data.
Specifically, the proposal would update and expand the content of NMS market data to include: 1) information about orders in share amounts rather than the current round lot size for higher priced stocks, 2) information about certain orders that are outside of an exchange’s best bid and best offer, and 3) information about orders that are participating in opening, closing, and other auctions. The following table highlights the proposed changes and how they differ from the current system:
|Last sale data/transaction reports||The price, size, and exchange of the last sale of the NMS stock, including odd-lot transactions.||No change.|
|Best bid and best offer (BBO)||BBOs for each SRO in current round lot sizes.|
BBOs for each SRO in revised round lot sizes based on the proposed new “round lot” definition:
|National best bid and national best offer (NBBO)||Based on the current round lot size quotations.|
Based on the proposed new round lot size quotations.
|Protected quotations||Expressed in current round lots.||Would be amended to be 100 shares or more, regardless of round lot size. Protected quotations would be included in proposed NMS market data.|
|Book data depth||Not included.||Proposed new “depth of book data” would include for each SRO an aggregation of all quotes (regardless of share amount) at each price between the BBO and protected BBO (if different) and at each of the next 5 prices lower than the protected bid and higher than the protected offer.|
|Auction information||A limited range of auction information (such as reopening auction information following Limit-Up Limit-Down (“LULD”) pauses and certain NYSE auction information) provided by Equity Data Plans||Proposed new “auction information” that would include any information specified by SRO rules or effective NMS Plans that is generated by a SRO leading up to and during an auction (including opening, reopening, and closing auctions) and disseminated during the time periods and at the time intervals provided in such rules and plans.|
|Exchange-specific program data||Information regarding exchange-specific programs, such as retail liquidity programs.||All current exchange-specific data elements plus any additional data elements defined as such pursuant to the effective national market system plan(s) required under Rule 603(b).|
|Over-the-counter bulletin board (“OTCBB”) and concurrent use data||Offered in connection with current NMS market data.||Would not be included in NMS market data under the proposal.|
|Regulatory data||Includes information regarding short sale circuit breakers, trading pauses, regulatory halts, and official opening and closing prices of the primary listing exchange.||All current regulatory data plus a new indicator for applicable round lot sizes. Also any additional regulatory data elements defined as pursuant to the effective national market system plan(s) required under Rule 603(b).|
|Administrative data||Includes messages specifying identifiers for market centers and issue symbols and messages regarding the beginning and end of trading sessions.||All current administrative data plus any additional administrative data elements as pursuant to the effective national market system plan(s) required under Rule 603(b).|
The proposal would also introduce a decentralized consolidation model under which competing consolidators, rather than the existing exclusive SIPs, would collect, consolidate, and disseminate NMS information. To support the decentralized model, each SRO would be required to make available all of the data necessary to generate NMS market data to two new categories of entities: 1) competing consolidators, which would be responsible for collecting, consolidating, and making consolidated market data available to the public; and 2) self-aggregators, which could be brokers or dealers that elect to collect and consolidate market data solely for their internal use. SROs as currently registered and non-SROs could operate as competing consolidators. SRO competing consolidators would not be required to register separately with the SEC, but non-SRO competing consolidators would be required to register under proposed new Rule 614 of Regulation NMS. All competing consolidators would be subject to certain standards with respect to the promptness, accuracy, reliability and fairness of their operations, including Regulation SCI. Self-aggregators would be registered broker-dealers who are subject to the full broker-dealer regulatory regime and would therefore not be required to register again with the SEC in a separate capacity.
The SEC seeks public comment on these proposed changes. The public comment period will be open for 60 days after publication in the Federal Register. You can submit comments using the form available on the SEC’s website or by e-mailing firstname.lastname@example.org with the proposed rules’ reference number in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send your comments by mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. In all cases, be sure to reference File Number S7-03-20.