U.S. stock exchanges won a legal battle with their regulator on Friday when an appeals court ruled some fee increases can’t be challenged by the government after they have taken effect.
The decision by the U.S. Court of Appeals for the District of Columbia Circuit appears to end a 14-year legal dispute over fees that exchanges charge for data that show the most complete view of market activity. Brokers, traders and investors say the information is essential for pricing orders and responding to market conditions.
The case revolves around a decision by the Securities and Exchange Commission to reject price increases by New York Stock Exchange parent Intercontinental Exchange Inc., or ICE, and Nasdaq Inc. The two exchange operators sued to vacate the SEC’s action.
The SEC based its action on a section of law that “makes no mention of fees at all,” a three-judge panel of the court wrote. The ruling is a blow to Washington’s efforts to more closely scrutinize the fees exchanges charge for their market-data products.
Stock exchanges have become more dependent on the sale of market data in recent years as competition made it tougher to make money from trading, a more traditional source of revenue for them.
Companies such as ICE and Nasdaq sell different types of market-data feeds to Wall Street banks, quantitative hedge funds and other trading firms, while also licensing indexes to issuers of exchange-traded funds and offering various products used in financial analysis. Last year such “information services” captured $6.8 billion in revenue for the global exchange industry, or 18.8% of total revenue, up from 12.8% in 2010, according to a report released this month by Burton-Taylor International Consulting, a TP ICAP company.
Exchanges have said the SEC’s recent focus on market data mostly benefits Wall Street banks and securities dealers, which buy the most robust market-data offerings.
The impact of Friday’s decision forecloses one avenue that brokers had to challenge market-data fees. The SEC can still suspend fee increases if it acts within 60 days after the exchanges file a notice indicating they will change prices.
The SEC has taken other steps that could put pressure on exchanges’ revenue from market data, including a rule proposal in February that would force exchanges to expand the information they provide through public data feeds. If the SEC adopts the rule, the public data products could become a substitute for the faster, richer and more expensive “proprietary” feeds that were the subject of the lawsuit decided on Friday.
The D.C. Circuit didn’t pass judgment on whether the fees are fair, but it said the SEC can’t reject them by finding that they amount to a denial of access to the exchanges’ trading services. That process is meant for reviewing decisions to bar or suspend individual brokers or traders from an exchange, the judges said, and doesn’t address fees disputes.
The SEC’s decision to reject the fees in 2018 carved out new legal ground, and it marked the first time the regulator had prohibited fee increases for the exchanges’ most lucrative class of stock-market data feeds. The fees ruled upon Friday were first challenged by several internet companies in 2006 and were later challenged by the Securities Industry and Financial Markets Association, known as Sifma.
An SEC spokeswoman said the decision won’t affect the agency’s broader authority to supervise exchanges. “The court narrowly focused its decision on the question of whether a particular statutory provision authorized a challenge by a third party to the exchanges’ generally applicable fees,” the spokeswoman said.
A trade group representing the ICE, Nasdaq and exchange operator Cboe Global Markets Inc. said it was pleased with the panel’s decision.
“The D.C. Circuit court has ruled the Securities and Exchange Commission overreached its powers when it followed a financial lobby in taking up this case,” the Equity Markets Association said. “This ruling is a victory for the rule of law and free and fair competition.”
Banks and brokers, including those that serve investors such as mutual funds, have pushed for the SEC’s intervention, saying the exchanges have a monopoly over packaged data that includes trades and price quotes. Some investors say they can’t get the best price for their trades if they don’t use the most up-to-date and information-rich data feeds.
Sifma, which represents Wall Street banks and brokers, said it continues to believe the fees don’t meet legal standards and represent a barrier to competition.
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