Exchanges Win Dismissal of Market-Data Pricing Rule Case

NYSE Euronext, Nasdaq OMX Group Inc. and other exchanges can set prices for proprietary market data, a U.S. appeals court ruled, saying the Dodd-Frank financial reform law limits its power to review regulators’ decisions on the issue.

The U.S. Court of Appeals in Washington today rejected arguments by NetCoalition, a group of Internet companies, and the Securities Industry and Financial Markets Association that the court still had authority to step in when the Securities and Exchange Commission accepted the rates the exchanges set for particular data products.

Under Dodd-Frank, passed by Congress in July 2010, “the language is ‘not ambiguous in any sense relevant here; and this court simply is not at liberty to displace, or improve upon, the jurisdictional choices of Congress,’” U.S. Circuit Judge Karen LeCraft Henderson said, writing for a three-judge panel. Dodd-Frank “ousts us of jurisdiction,” she said.

The coalition and Sifma, the largest trade group for U.S. broker-dealers, had sought court review, contending that the exchanges were charging too much for the market data their members purchased. They argued that the SEC failed to properly investigate the exchange-set pricing and requested a court review of the regulator’s action.

Bloomberg LP, the parent of Bloomberg News, is a member of NetCoalition and Sifma and had independently asked the SEC to set fee standards for market data in 2006.

Sifma ‘Disappointed’

“Sifma is disappointed with the court’s dismissal of our suit today which will likely lead to further unjustified increases in the cost of market data for investors,” Ira Hammerman, Sifma’s general counsel, said in an e-mailed statement. “We are in the process of evaluating our next steps, but hope that this decision will help to open the dialogue between the exchanges, the SEC and industry participants on these important issues.”

NetCoalition will pursue an alternative avenue of appeal at the SEC, NetCoalition’s attorney, Roger Blanc of Willkie, Farr & Gallagher LLP said in a telephone interview.

“There’s enough money here for us to do that,” Blanc said, referring to the fees brokers and others pay for the data.

Exchange Revenue

Market data accounted for $83 million, or 14 percent of revenue, less transaction-based fees and rebates, at NYSE Euronext last quarter. That’s down from $91 million, or 15 percent a year ago. At Nasdaq OMX, market data was $91 million, or 22 percent of net revenue, compared with $87 million, or 21 percent, the year earlier.

Exchange companies make money from what’s called core and non-core data. Core, or public, data includes the last sale price for a security, each market’s best bid and offer, and the national best bid and offer. The data also comprises the number of shares traded and quoted at the best prices. U.S. exchanges and the Financial Industry Regulatory Authority generated $464 million in revenue in 2008 for core market data sold to vendors and investors, according to the SEC.

Non-core data is private trading and quote-related information that exchanges sell to brokers, vendors, high-frequency traders and investors. It includes so-called depth-of-book data, or information from an exchange about bids and offers inferior to the best available price. Brokers and investors use the data to determine supply and demand for a security and where to route orders.

Non-core Data

The NetCoalition and Sifma petitions focused on non-core data. The issue involved fee changes by Nasdaq Stock Market, Nasdaq OMX PHLX and NYSE Arca for proprietary market data products.

The groups asked the SEC to suspend specific fees they instituted, which the Dodd-Frank law allowed to become effective when they were filed with the SEC. Under that legislation the SEC can still suspend rules if it decides that doing so benefits the public interest or protects investors.

“We’re gratified by the court’s decision and we will continue to provide our customers with high-quality data at reasonable rates in this competitive market,” Joseph Christinat, a spokesman for Nasdaq OMX, said in a phone interview.

“We welcome the court’s decision,” NYSE Euronext spokesman Richard Adamonis said.

The case is NetCoalition v. U.S. Securities and Exchange Commission, 10-1421, U.S. Court of Appeals for the District of Columbia (Washington).

(Updates with Sifma comment in sixth paragraph.)
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