January 09, 2020 / 05:17AM / By Robert J. Jackson Jr
/ Header Image Credit: Compliance Periscope
Being a Statement on
Reforming Stock Exchange Governance by SEC Commissioner Robert J. Jackson Jr." on Wednesday, January 08, 2020.
Flynn, John Roeser, and Jennifer Colihan, for their extensive work
on today's proposed order. I'm also deeply grateful to Division Director Brett
Redfearn, whose leadership in this area-and so many others-continues to reflect
the very best in public service.
As today's release explains,
America's stock markets are riven by a fundamental conflict of interest:
exchanges both operate public data feeds and profit from
selling superior private ones. Because exchanges have no economic reason to produce robust
public data on stock prices, investors have long demanded a vote on how the
public feeds are run. Rather than give investors a real say over the data that
drives our markets, today's release merely invites for-profit exchanges to
draft their own rules on these questions.
Because that approach has failed investors before, and there's no
reason to expect it to succeed now, I respectfully dissent.
In 1934, American investors struck a fundamental bargain with our
stock exchanges. The Commission was created to oversee the markets, and
nonprofit exchanges were given the special legal status they needed to play a
role in protecting ordinary investors. But over a decade ago the deal changed: Exchanges became
for-profit entities with powerful incentives to maximize profits, not protect
That's how we ended up with the
two-tiered system for market data we have today. Congress mandated the creation
of a public feed when exchanges were still nonprofits, but today's for-profit
exchanges also sell their own private feeds. So it's unsurprising that
exchanges underinvest in the public feed-it's a product they directly compete
The only question is what the Commission should do about it.
Rather than recognize the reality of the exchanges' incentives,
the Commission today chooses hope over experience, asking exchanges to act
contrary to their own economic interests. For two reasons, we should not expect that approach to
produce the robust public data that American investors deserve.
First, by proposing an order under a
national market system (NMS) plan, we're asking the exchanges to tell us how
best to address the conflicts of interests that currently allow them to profit
by controlling the public feed while selling superior private data. No one should be surprised when the exchanges respond that,
rather than give investors votes on the operation of the public feed, they'd
rather continue controlling it themselves. Instead of a clear solution to an obvious problem, today's
proposal will produce little more than a long process that will benefit
lobbyists and lawyers-but not the ordinary investors living with the tax of rising
data costs in our markets.
Second, our history governing markets through NMS plans is hardly
encouraging. One need look no further than the consolidated audit trail to see
what happens when the Commission replaces real regulation with mere hope that
stock exchanges will act against their own interests. The CAT was launched in
the wake of a terrifying market event nearly a decade ago. Both Chairman
Clayton and Director Redfearn have done tremendous work to move it forward. But
our predecessors left the construction of the CAT to the NMS process. And the
CAT will protect investors, not produce profits. So it's no surprise that the
CAT is still not complete. I hope our successors won't someday say the same about
today's attempt to reform exchange governance.
Those who, like me, are frustrated by today's failure to require
real reform may be tempted to direct their ire towards our stock exchanges. But
it's a mistake to blame private enterprises for maximizing the profit
opportunities the law gives them. Instead, we should change the law to address the incentives
produced by giving exchanges both control over our public feeds and the
opportunity to profit by selling private ones. Without changing those incentives, we cannot and should not
expect the market to fix the market.
That's why I hope commenters will come forward and urge the
Commission to do more than merely hope that stock exchanges will act contrary
to their private interests. Until we do, our stock markets will continue to
fall short of the level playing field that ordinary American investors deserve.
-  See Securities &
Exchange Commission, Action Memorandum: Proposed Order Regarding the
Creation of a New Consolidated Market Data Plan for Equity Market Data
(Jan. 8, 2020), at 72 ("[C]onflicts of interest are inherent to the [data
feeds'] current governance structure because some exchange[s] have a dual
role as both a [self-regulatory organization] and part of a publicly held
company that offers proprietary data products."). Throughout this
statement I refer to the two exchange-run centralized securities
information processors ("SIPs") as the "public feed."
-  See Commissioner Robert J.
Jackson, Jr., Unfair Exchange: The State of America's
Stock Markets (remarks at George Mason University, Sept.
19, 2018) (citing Commissioner Daniel M. Gallagher, Market
2012: Time for a Fresh Look at Equity Market Structure and
Self-Regulation (remarks at SIFMA's 15th Annual Market
Structure Conference, October 4, 2012) and Commissioner Kara M.
Stein, Remarks Before Trader Forum 2014 Equity Trading Summit (Feb.
6, 2014)); see also SIFMA, Statement on Commissioner
Robert Jackson's Call for Exchange Reform (Sept. 19,
2018) (noting the market's consensus on the need for decisive action in
-  Since exchanges have become profit-seeking entities,
some of our most thoughtful predecessors have wondered whether that
special status continues to make sense. See Gallagher, supra note
2; Stein, supra note 2 ("[T]he exchange-based SRO model
warrants significant reconsideration.").
-  United States v. Stanchich, 550
F.2d 1294, 1300 (2d Cir. 1977) (opinion of Friendly, J.) (noting that the
law does not "require[ us] to exhibit a naivete from which ordinary
citizens are free").
-  Indeed, one former Member of the Commission has
described the NMS structure as responsible for "enshrin[ing] the ability
of exchanges to charge customers monopolistic prices for 'direct' data
feeds," arguing that the system we're using today to address a crucial
conflict of interest in our markets is "the SEC's poster child for
unintended consequences." Daniel M. Gallagher, How to
Reform Equity Market Structure, Heritage
Foundation White Paper (Feb. 23, 2017). While Commissioner Gallagher is
certainly correct that NMS plans have often come with consequences the
Commission could not foresee, it's not hard to predict that asking
exchanges to reform their own governance through the NMS process is a bad
idea. No: "This wolf comes as a wolf." Morrison v. Olson,
487 U.S. 654, 688 (1988) (opinion of Scalia, J.).
- Importantly, today's proposal does nothing to address the
fact that exchanges enjoy a local monopoly on their private feeds.
Investors who want to know the best price on a particular exchange can
only buy that information from one source, so it's no surprise that
investors complain about consistently rising prices for market data. Any
serious market reform would necessarily address this lack of competition.
Gallagher, supra (calling for a "truly holistic review" of
the Commission's oversight of equity market structure).
-  In fact, the exchanges have already suggested in a
filing before the Commission that "a disclosure-based regime is a
pragmatic step to address potential conflicts of interest." NMS Plan
Regarding Conflicts of Interest (published January 8, 2020). Because
market participants already know, and nobody seriously disputes, that exchanges
profit from private feeds that compete with the public feed they run, it
is hard to see what disclosure could accomplish. That filing does,
however, offer a preview of the lengthy and unproductive process likely to
follow today's action. We should not be so naÃ¯ve as to think that this
process will end in a way that's good for investors.
-  Notably, today's action is merely a proposed order,
so actually today's majority is merely inviting comment on the possibility
that we might someday tell stock exchanges to propose their own rules on
how to make less money. What is certain, however, is that pursuing a mere
proposal will impose months of additional delay. We are apparently doing
so to invite comment on a subject that we have studied for over a decade
through a concept release, advisory committee, and an industry-wide
roundtable. Securities & Exchange Commission, Concept Release on Equity
Market Structure, File No. S7-02-10 (Jan. 14, 2010); Securities &
Exchange Commission Equity Market Structure Advisory Committee,
Recommendations Regarding Enhanced Industry Participation in Certain SRO
Regulatory Matters (July 8, 2016); Securities & Exchange Commission,
Roundtable on Market Data and Market Access (Oct. 25-26, 2018).
-  Indeed, this past Fall the Commission was forced to
propose new rules on transparency and financial accountability in order to
give market participants real incentives to move the CAT ahead. Securities
& Exchange Commission, Proposed Amendments to the National Market
System Plan Governing the Consolidated Audit Trail, Release No. 34-86901
(Sept. 9, 2019). When the Commission first proposed proceeding with the
CAT under the NMS structure, at least one commentator presciently observed
that, "given all of the governance issues with NMS plans," it was unclear
whether that path made sense. Letter of Dr. James J. Angel, Associate
Professor of Finance, Georgetown University, File No. S7-11-10 (Aug. 9,
2010). See also Letter of Better Markets to Vanessa A.
Countryman, File No. S7-13-19 (Oct. 28, 2019) ("[O]utsourcing the construction
and operation of th[e CAT] to the private sector-and putting some of the
very market participants it is supposed to police and punish in charge of
its governance structure-were grave mistakes that embedded conflicts of
interest into the very core of the CAT.").
-  Milton Friedman, The Social Responsibility of
Business is to Increase its Profits, N.Y. Times Mag. (Sept.
13, 1970) (providing the seminal case for corporate profit maximization
within the bounds of the law).
-  To provide an impression of the value the exchanges
assign to a single vote on the committee overseeing the production of the
public feed, note that the New York Stock Exchange recently paid some $70
million to acquire the Chicago Stock Exchange, a venue with little
volume-but a valuable medallion entitling its owner to another vote on the
SIP operating committee. See Austen Hufford &
Alexander Osipovich, NYSE Parent to Buy Chicago Stock Exchange,
Wall St. J. (April, 5, 2018).
-  Important recent research shows that, even when the
market for trading is perfectly competitive, exchanges can extract
supra-competitive rents from selling speed technology in the form of
proprietary data feeds. See Eric Budish, Robin S.
Lee & John J. Shim, Will the Market Fix the Market? A Theory of
Stock Exchange Competition and Innovation, National Bureau of
Economic Research Paper No. w25855 (2019).
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