The SEC proposed an Order to improve governance of National Market System ("NMS") plans over public consolidated equity market data and trade and quote data.

Currently, there are three NMS plans governing the dissemination by the exchanges of trading information in NMS stocks: (i) the Consolidated Tap Association Plan, (ii) the Consolidated Quotation Plan and (iii) the Joint SRO Plan for Nasdaq-Listed Securities.

Under the proposed Order, market participants would be required to submit a "single, new equity data plan" (a/k/a the "New Consolidated Data Plan") in which all of the exchanges would participate. A governance committee for the new plan would be formed. One third of the votes would be held by entities other than the exchanges.

The SEC proposed amendments to the current Equity Data Plans would (i) enforce current disclosure policies in connection with any conflicts of interest, and (ii) create a policy on the confidential treatment of any data or information in connection with the operating committee.

SEC Chair Jay Clayton approved of (i) the proposed terms for the New Consolidated Data Plan and (ii) requested public comment prior to taking final actions, stating that the New Consolidated Data Plan would substantially change the dissemination of equity market data.

SEC Commissioner Elad L. Roisman supported the proposed Order but noted that it contains, among other things, "only one possible set of solutions" to address concerns regarding equity data plans.

SEC Commissioner Robert J. Jackson Jr. dissented, arguing that "we cannot and should not expect the market to fix the market," but instead should encourage changing the law to address incentives created by allowing exchanges to (i) have control over public feeds and (ii) profit off the selling of private ones.

SEC Commissioner Allison Herren Lee criticized the proposed order for failing to protect the public interest and safeguard Securities Information Processors.

Commentary

Based on the public press release and comments, this proposal seems to unduly elevate procedural issues over substantive ones. (Note the proposal is not yet available on the SEC's website.)

Having one market system plan rather than three is not going to change the reality that the exchanges and the broker-dealers have interests that are fundamentally adverse to one another: each wants to "own" as much data (intellectual property) as possible, give away as little data as possible, and either charge as much as possible or pay as little as possible.

Ordinarily, such conflicts can be worked out through competition in the marketplace, where market participants compete on the basis of the quality and price of their products. That free-market competitive solution cannot be implemented here, since it is the government (the SEC) that must first determine what the product is, who owns it, and, to a good extent, what can be charged for it. Further, there is a strong national interest in not allowing genuine competitive chaos: market participants expect to be able to access current, complete, correct trading data as to all NMS stocks from all exchanges.

So how does the SEC create competition in these circumstances? How does the SEC allow the exchanges to make a reasonable profit, but not allow them to extort the broker-dealers and end investors? How does the SEC facilitate competition between the exchanges? What opportunities does the SEC provide broker-dealers to profit from their own trading data? And where do customers fit into all of this?

There are no obvious answers to any of these questions; nor are there likely to be "correct" answers. The immediate issue is whether the SEC's proposal on the governance of the market data plans moves toward addressing the real substantive issues of the ownership of data and the price of it.