Tomorrow, Jan. 8, the Securities and Exchange Commission will consider whether to issue for public comment a proposed order that “would require the SROs to propose a single, new NMS plan that would increase transparency and address inefficiencies, conflicts of interest and other issues presented by the current governance structure of the three NMS plans that govern the public dissemination of real-time, consolidated equity market data for NMS stocks.” Details on the proposal are not yet known; however, there is already public debate as to whether another, albeit new, NMS plan is the best path towards resolving the highly contentious issues associated with the quality and cost of market data. While the Commissioners have not yet voted, there is speculation that some will oppose this strategy and express a preferred course of action that involves direct SEC rule-making.

This is not the first time the Commission has had to make a decision on which process to follow for implementing new rules. Unfortunately for the industry, our ability to provide comments on such a decision is limited; that is, we do not have enough information nor a set of criteria needed to make an educated recommendation. This is why we believe that opinions that strongly favor one approach over the other at this early stage are premature. It’s the equivalent to saying a hammer is better than a screwdriver for putting two pieces of wood together without knowing if you have a nail or a screw to complete the task.

Rulemaking and NMS Plans

Rules governing the securities markets today are introduced to the marketplace by either SEC initiatives in the form of direct SEC rule proposals, or rule filings of the SROs either independently or under the direction of the SEC and executed via an NMS plan. While there are similarities in these processes, they are distinct and possess different challenges and efficiencies. The conflicted nature in the governance of NMS plans – specifically concerns that the for-profit entities responsible for designing, implementing and maintaining them will act in their own best interests to the detriment of other market participants, are bona fide. On the other hand, while SEC direct rule making carries fewer conflicts of interest, the amounts of data required for this process has overwhelmed industry participants to the point where the efficiency of this approach has its doubters as well. Results from these two processes over the past decade have been mixed and therefore inconclusive that one is better than the other in any or all circumstances. Both have their flaws and benefits.

In June 2012, STA testified before a House Financial Services Subcommittee on the two processes available to the Commission for introducing rules into the marketplace. We acknowledged then, as we are doing today, that there are efficiencies within both processes which when applied properly can serve the competitive nature of our markets and investor confidence. However, we also stated,
“Our concerns reside in the lack of criteria that are used in deciding which process better serves investor confidence when rules are proposed.”

Even in situations where the Commission is in complete agreement on the goals of a piece of regulation, there is no clear criterion for the best process to introduce it. This void, which remains today, coupled with a lack of details on the Commission’s new proposal, make it extremely difficult for the industry to provide meaningful input.

Neither process is perfect, but both can produce meaningful improvements if executed with transparency into the process and with industry input. We must be confident that both options were considered by the Commission and acknowledge that compromises were likely made to arrive at solutions that can garner sufficient votes to pass.

Managing or Eliminating Conflicts of Interest

Concerns about conflicts of interest arise repeatedly in financial markets. Often they are met with calls to eliminate or mitigate the source of conflict to reduce any potential harm. Generally speaking, STA has always taken a more balanced approach in the presence of conflicts of interest, choosing to find the means to manage them through better transparency and disclosures brought about by competitive or regulatory catalysts. In September 2017, when STA expressed our increasing concern with the Reg NMS Plan process and its impact on investors, including the timeliness and efficacy of such plans, we chose to recommend reforms as opposed to eliminating all or any single plan. We wrote:
“STA believes conflicts between SRO and non-SRO participants, who are essential for a successful NMS Plan outcome, play a role in the shortfalls of these Plans. We believe reforms are needed that address these conflicts, and that such reforms should be guided by improving investors’ interests.”

In our conversations with regulators, one opinion we often get challenged on is that investors can be better off dealing in a regime with conflicted parties when the conflict-free alternative is inferior. This is not to say that conflicts should be overlooked, let alone encouraged; rather, we recommend that regulators consider whether the regime created by a conflict-free process is superior or inferior to one where conflicts exists. Banning a process because conflicts — even meaningful ones —exist, is not a sound practice. 

Therefore, while we recognize the inherent conflicts in NMS plans and that the stakes involving market data are high, we are hesitant to dismiss an NMS plan solution at this point without knowing what the Commission is charging the SROs to deliver in it newest proposal. 

A Good Step

In the absence details on the Commission’s new proposal and the lack of criteria for making a decision on which course of action to take, the question then begs, what does our industry do today and in the immediate days following tomorrow’s decision?

I believe our best response is to respect whatever decision that the Commission makes regarding process and then provide the much needed input to best ensure it achieves its intended goals. Neither process is perfect, but both can produce meaningful improvements if executed with transparency into the process and with industry input. We must be confident that both options were considered by the Commission and acknowledge that compromises were likely made to arrive at solutions that can garner sufficient votes to pass. We need to be satisfied that some progress in the public dissemination of real-time, consolidated equity market data is better than no progress at all and that we should not allow the perfect to be the enemy of the good.

We look forward to tomorrow’s decision and providing the Commission with industry input on how to move forward.