U.S. Lawmakers Add Fuel to Old Spat Between Brokers, Exchanges

  • New bill would give brokers more say in stock market rules
  • NYSE, Nasdaq say only exchanges should have voting power

New legislation is intensifying an old fight between two powerful forces on Wall Street: stock exchanges and brokers. So far, the brokers seem to be winning this battle.

A bipartisan bill under development in Washington would weaken stock exchanges’ grip on a key part of trading: the data feeds that provide the backbone of the market. Brokers complain exchanges have abused their control of the services to pad their revenues. If passed, the legislation would give brokers a greater voice in overseeing those information sources and other critical features of the stock market.

“The notion that only exchanges should have a say in their governance is flawed,” said Jamie Selway, managing director at Investment Technology Group Inc., a New York-based brokerage.

Data feeds have been a particular flash point. Critics assert the feeds -- known as securities information processors, or SIPs -- are too slow. Brokers argue that giving for-profit exchanges an exclusive role in overseeing them sets up a conflict of interest: the SIPs are left to languish while exchanges charge rapidly increasing prices for faster data sources that they sell. Exchanges say brokers’ views are already adequately represented.

Representatives Robert Hurt, a Republican from Virginia, and Brad Sherman, a Democrat from California, are sponsoring the legislation.

‘Public Utilities’

“This bill will simply allow the broker-dealers, the exchanges’ customers, to have a voice,” Sherman said in an e-mailed statement. “Public utilities should always consider the views of its customers.”

Currently, exchanges including the New York Stock Exchange and Nasdaq Stock Market govern the data feeds and other aspects of the so-called national market system, and they’re fighting to preserve the status quo.

Spokesman for Sherman and Hurt declined to comment on when the legislation would be introduced. There’s no guarantee the legislation will become law, but momentum on Capitol Hill signals a victory for banks who have been fighting for years to cap their spending on market data. At stake is hundreds of millions in annual revenue the exchanges generate from charging fees for this information, as well as control over some of the most important aspects of the U.S. stock market.

“Market-data disputes go back to the early days of when the exchanges began,” said Jim Overdahl, a former economist at the Securities and Exchange Commission who is now a partner at the government affairs firm Delta Strategy Group. “This is just a new strategy of dealing with those issues. The exchanges are playing hard, the firms that use their data are playing hard.”

Wall Street firms and lobbying groups including the Securities Industry and Financial Markets Association have been advocating for the change. Financial information companies including Bloomberg LP, the parent company of Bloomberg News and a Sifma member, have also accused exchanges of charging too much for data feeds.

‘Outdated Structure’

“It’s an outdated structure,” said Dave Oxner, managing director of federal government affairs at Sifma. “The introduction of a bill would help encourage a more robust public discussion.” It could also put pressure on the SEC to act on the issue as well, he said.

Two of the biggest exchange operators, NYSE Group and Nasdaq Inc., argue brokers and investors already have enough of a say on how the system operates. Expanding membership to brokers is “unnecessary because the investing public is already well-represented,” Joan Conley, senior vice president and corporate secretary at Nasdaq, wrote in a letter this week to the SEC. It could also pose disruption and litigation risks, Conley said.

NYSE Group, which owns the New York Stock Exchange, sent a similar letter to the SEC earlier this month, and CBOE Holdings Inc., the Chicago Stock Exchange, the International Securities Exchange Inc. and Options Clearing Corp. have also opposed changes.

One notable exception among exchanges is Bats Global Markets Inc., who has argued that market-data fees do need broader oversight.

“The industry spends a lot of money complying with these plans,” said Eric Swanson, general counsel of Bats. “So, is it helpful to have the rest of the industry involved in the process? It’s unfair that they’re not.”

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