Representative Robert Hurt, (R-Va.) is readying a bill that will give broker-dealers a greater voice in the rule making process of the U.S. equities market. The proposed legislation, according to market sources, is expected to be introduced into the House of Representatives very soon.
The idea is to limit the control of governance by the exchanges, who currently are among the handful of entities that can affect changes in governance of the National Market System. These SROs, it is argued by Rep. Hurt, are now for-profit, publicly traded companies that run businesses. As such, the SROs now have a conflict of interest when changes in governance are proposed that can help the market but hurt their bottom lines. Finra and the DTCC can also affect changes in governance.
Rep. Hurt contends that the current NMS governance plan excludes the broker-dealers who represent a large swath of the equity market business model and currently have no representation on governance issues and the board. He seeks to change this and has the backing of the brokers, who not only stand to gain a seat at the rule making table but also a say in how profits are shared when it comes to the lucrative data business.
The issue of governance has come up of late amid discussions surrounding the development of the new Consolidated Audit Trail system and re-engineering and updating of the Securities Information Processor. As debate on the construction of these new systems has come under scrutiny and how to distribute such data is in the limelight, the brokers, who up to now have had little input on these systems, want a larger voice and consequently, a larger slice of the fees they generate.
In a comment letter to the U.S. Securities and Exchange Commission, Brett Redfearn of J.P. Morgan argued last October that corporate governance structure should be reevaluated and updated to fit “ today’s business realities.” He explained that this conflict is evidenced when it comes to the private and proprietary market data feeds provided by the exchanges versus the free and public data feed known as the SIP. SRO Participants of the equity SIP Plans are selling market data products that directly compete with the SIPs.
“Unlike SIPs, 100% of the revenues from competing, proprietary market data products go to the exchanges selling that data,” Redfearn noted. “These proprietary data products are far superior to the product produced by the SIPs, such that broker-dealers -- including my firm -- must purchase these proprietary data feeds from exchanges to provide competitive trading products for our clients.”
Adam Sussman, Liquidnet
Redfearn continued, “The inherent conflicts of interest in NMS Plans must be addressed and balanced to better align interests and to reflect a more holistic view of the market. An important part of the solution is to address the related governance model and to ensure broader industry representation. At a minimum, NMS Plans should include voting representation from broker-dealers and asset managers.”
The proposed bill seeks to amend section 11A(a) of the Securities Exchange Act of 1934, which was designed to provide for representation of members of SROs in national market system governance, and for other purposes. The bill wants to add the following text:
“Any self-regulatory organizations acting jointly pursuant to paragraph to plan, develop, operate, implement, or administer a national market system (or subsystem thereof) shall— include as voting members of such national market system plan at least three, but not more than five, members of a self-regulatory organization; and provide for a process to identify, mitigate, and manage conflicts of interest arising in such planning, developing, operating, implementing, and administering.’’
One lobbyist in Washington told Markets Media that Rep. Hurt’s legislation is not so much about governance but about the brokers, who are facing tougher financial times amid the current commission environment, looking to boost profits.
“The legislation should be called the 'broker bill' as it is not about good governance but rather about brokers looking to lower their market data costs to line their own pockets,” said the lobbyist, who asked to remain anonymous. “It is appalling that an outgoing Congressman would use his position to shop for clients while still in office."
Brokers are anxious to see the initiative move forward, and some industry observers believe it makes sense.
“I am in agreement with those that believe that the NMS plans should have non-exchange representation on them,” said Adam Sussman, head of market structure at Liquidnet. “So if you're writing a rule that affects the NMS plan, it's going to impact the whole industry. The fact that only the exchanges have access to the table doesn't make sense.”
Sussman said that when it comes to rule making there needs to be broader industry participation, and that meant to include more than just brokers like Liquidnet. He added that there should be buy-side representation as well.
“We need broader industry participation when it comes to NMS rule making,” Sussman said. “It's a good thing for the SEC, in a public way, to hear all sides to the story.”
James Overdahl, partner with consultancy Delta Strategy Group and a former chief economist at the SEC, was more neutral in his view on the proposed bill.
“I can’t say whether this proposed change in governance is a good idea or a bad idea, but one effect of the change would be on the NMS plans governing market data (the Consolidated Tape Association Plan and the Consolidated Quotation Plan),” Overdahl said. “Disputes about market data go back decades and this may simply be a new strategy for dealing with an old issue.”
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