The first round in the litigation between the Securities Industry and Financial Markets Association against NYSE Arca and Nasdaq regarding the pricing of their respective depth-of-book data feeds has gone to the exchange operators, but it was not a knockout and more rounds are ahead.
Chief Administrative Law Judge Brenda Murray ruled in favor of the exchanges in June 2016 and due to a quirk unrelated to the case had re-affirmed her decision just before the holidays.
From the preponderance of the evidence and expert testimony, Judge Murray concluded that the exchanges have a competitive environment when pricing their depth-of-book feeds, NYSE ARCA's ArcaBook as well as Nasdaq's Level 2, Openview, and TotalView.
She further noted that Nasdaq and NYSE Arca's claim that clients commonly switch between exchange offerings or license data from re-sellers was effective proof of a competitive market. Evidence of clients threatening to re-route order flow away from an exchange due to increased feed pricing only strengthened their argument.
Where SIFMA failed in its argument was convincing Judge Murray that depth-of-book data is a "need" rather than a "want."
“For many market participants having access to depth-of-book data from all exchanges would provide a clearer picture of liquidity that may be useful when engaging in large transactions, but useful information is not essential information,” she wrote. “While depth-of-book data from all exchanges may be required for high-frequency traders who need the fastest feeds, or for traders participating in open and close auctions, both groups reflect only a small percentage of all market participants. The evidence is that nearly 97% of all trades occur at or within the NBBO. Thus most customers do not require any sore of depth-of-book data.”
Murray also found that SIFMA had mischaracterized the exchange operator's pricing increase writing that charging any price for a previously free offering could be characterized as a massive increase.
SIFMA has objected to the exchange's argument that clients can retaliate against the exchanges by re-routing their order flow citing that it would violate Regulation NMS' best execution requirement. The industry organization also noted that the exchanges provided only one incident of that occurring.
SIFMA has appealed Murray's decision to the full SEC, which would have the sitting Commissioners decide the case.
As of earlier this month, the SEC has not set a date to hear the appeal, according to sources familiar with the situation.
After the SEC makes its decision, parties to the case still can seek further relief in the US Circuit Court of Appeals.
However, convincing the Commissioners or a Court of Appeals Judge that depth-of-book data is a necessary tool for the maintenance of fair and orderly markets will be a challenge given that only a relative handful of traders take in depth-of-book feeds from all the equities exchanges.
The price of depth-of-book data likely will remain a standard cost of doing business as market makers or high-frequency traders similar to other elective exchange offerings like server co-location.