SEC Proposes Improvements to Governance of National Market System

National Market System

The Securities and Exchange Commission (SEC) wants to improve the regulation surrounding market data plans. They are seeking public comment on a proposed order that would modernize the governance of National Market System (NMS). According to Wikipedia, “The National Market System (NMS) is the national system for trading equities in the United States. The System includes all the facilities and entities which are used by broker-dealers to fulfill trade orders for securities. This includes: Major stock exchanges, such as NYSE and Nasdaq.” The SEC is hoping to improve how the NMS disseminates data from trading venues.

Of note, the SEC points out “The proposed order states that the current governance structure of these plans perpetuates disincentives to enhance consolidated equity market data feeds, which are often slower and contain less information than the proprietary mark.” Read the Proposal Fact Sheet below:


Governance of NMS Plans

Statutory Authority

In 1975, Congress, through the enactment of Section 11A of the Securities Exchange Act, directed the Commission to facilitate the establishment of a national market system for the trading of securities in accordance with the Congressional findings and objectives set forth in Section 11A(a)(1) of the Act.  Among the findings and objectives of Section 11A(a)(1) are that new data processing and communications techniques create the opportunity for more efficient and effective market operations, and that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to ensure the availability of information with respect to quotations for and transactions in securities.  In 2005, the Commission adopted Regulation NMS.  Rule 608 of Regulation NMS authorizes two or more SROs, acting jointly, to file with the Commission a national market system plan (“NMS plan”) or a proposed amendment to an effective NMS plan.  And Rule 603 of Regulation NMS requires the SROs to act jointly pursuant to NMS plans to “disseminate consolidated information, including a national best bid and national best offer, on quotations for and transactions in NMS stocks.”

Current Equity Data Plans

Therefore, using its authority under Section 11A of the Securities Exchange Act, the Commission has long required the equities exchanges and FINRA (the “Participants”) to act jointly to disseminate consolidated information regarding NMS stocks.  Currently, three national market system plans (the “Equity Data Plans”) approved by the Commission facilitate the collection, consolidation, and dissemination of information regarding NMS stocks.  These plans are (1) the Consolidated Tape Association Plan, (2) the Consolidated Quotation Plan, and (3) the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation, and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privileges Basis.

Market Developments and Concerns

As discussed in the proposed order, the structure of the equity markets and the corporate structure of exchanges have changed dramatically since the adoption of Regulation NMS in 2005.  The speed and dispersion of trading activity have increased substantially, most exchanges have converted from entities mutually owned by their members to demutualized entities that are owned by shareholders and that also offer proprietary market data products, and “exchange groups” have emerged, consolidating much of the voting power and control of the Equity Data Plans.

In the Commission’s preliminary view, these market developments have heightened conflicts of interest between the exchanges’ commercial interests and their regulatory obligations under the Exchange Act and the Equity Data Plans to produce and provide consolidated market data.  In particular, the operation of the Equity Data Plans appears not to have kept pace with the efforts of the exchanges to expand the content of—and to employ technology to reduce the latency and increase the throughput of—certain proprietary data products.  The Commission also preliminarily believes that there have not been adequate improvements made to address important differences between consolidated market data and proprietary data products.  Also, the Commission does not believe that, in today’s equity markets, having multiple Equity Data Plans, which need to be separately maintained and operated, is necessary or efficient.

Proposed Order

To begin the process of addressing these concerns, the Commission is publishing for comment a proposed order that would require the Participants to propose a single, new equity data plan (the “New Consolidated Data Plan”).  The Commission’s proposed order includes governance provisions that the Commission preliminarily believes would enable the New Consolidated Data Plan to address concerns that have been raised about the governance of the existing Equity Data Plans and the provision of equity market data to market participants.  To the extent that the Participants have additional insights into the concerns and issues discussed in the Proposed Order, or are able to identify and suggest additional or alternative measures to those that the Commission has preliminarily set forth in the Proposed Order, the Commission will consider such information and suggestions, as well as any other comment received on the Proposed Order.

After considering any comments received on the proposed order, the Commission will consider what action to take, including whether to issue a final order requiring the Participants to file a New Consolidated Data Plan.  If the Commission issues such a final order, the New Consolidated Data Plan would be published for public comment.

After considering any comments received on the New Consolidated Data Plan, the Commission would consider whether to approve the New Consolidated Data Plan with any changes or subject to such conditions as the Commission may deem necessary or appropriate.  Until a New Consolidated Data Plan has been approved by the Commission, the current Equity Data Plans will continue to govern the collection, processing, and dissemination of equity market data.

The Commission is also publishing for comment proposed amendments to the existing Equity Data Plans submitted by the Participants that would (a) make mandatory their current disclosure policies with respect to conflicts of interest, and (b) establish a policy regarding the confidential treatment of any data or information generated, accessed, transmitted to, or discussed by the operating committee.

This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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Boca Raton, Florida 33432
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