* Exchanges could be forced to disclose data production cost
* Case likely to turn on whether court has jurisdiction
By Herbert Lash
NEW YORK, Nov 12 Oral arguments are scheduled on
Tuesday in a long-pending court case that may determine if U.S.
stock exchanges will have to reveal their costs for producing
market data, a key cog of high-frequency trading and the
A trade association of brokers, bankers and money managers,
along with a group of companies including Google Inc,
eBay Inc, Yahoo Inc and Bloomberg LP, has
accused the Securities and Exchange Commission of abdicating its
duty to uphold "fair and reasonable" fees for market data.
The Securities Industry and Financial Markets Association
(Sifma) and the NetCoalition technology trade group took the SEC
to court for not objecting to new market data fees filed with
the agency by units of NYSE Euronext and Nasdaq OMX
The case before the U.S. Court of Appeals, District of
Columbia Circuit could be thrown out because NYSE and Nasdaq,
the two largest U.S. exchange operators, say the court lacks
jurisdiction to review the complaint.
An amendment to the Securities Exchange Act was inserted
into the Dodd-Frank financial reform act that allowed exchanges
to file new rules for fees that are "immediately effective," a
change that has speeded a review process by the SEC that could
Now the SEC has 60 days to temporarily suspend any new rule
if regulators find it necessary or appropriate.
Sifma, which represents about 600 banks, brokers and asset
managers, and NetCoalition suspect that the fees NYSE and Nasdaq
charge for their market data substantially exceed their costs.
Market data carries the information on quotes and orders
that is the lifeblood of the electronic marketplace. The data
plays a key role as it provides vital information for trading.
Bloomberg and Thomson Reuters Corp are large
distributors of market data. NetCoalition members had obtained
data from NYSE unit NYSE Arca in the past for free, sparking an
earlier case that is known as NetCoalition I.
Sifma and NetCoalition argue that market data is not subject
to competitive forces, and therefore the cost of producing the
data should be taken into account. NYSE and Nasdaq, as
interested parties in the case, say the sale of their data is in
fact constrained by competition.
Nasdaq increased its revenue from U.S. market data products
by more than 15 percent in the third quarter from a year earlier
following an almost 19 percent boost in the previous quarter.
In NetCoalition I, which addressed similar issues and
involved the same parties, the court ruled in August 2010 that a
market-based approach to evaluating whether market data fees are
"fair and reasonable" was permissible.
But the court said the SEC had not proven that competition
actually constrained market data prices and it took issue with
the agency's assertion that fees proposed by NYSE Arca were not
that of a monopolist.
The court denied a request by NYSE and Nasdaq to appeal its
decision, after which Nasdaq said that the Dodd-Frank amendment,
issued months earlier, made the court's ruling moot.
NYSE and Nasdaq have argued that the case should be
dismissed because their fee filings did not fall under the
appeal court's jurisdiction as they were neither a final SEC
"action" or "order."
"Because the rule changes are in effect due to a decision by
Congress, there is no agency action or order for this court to
review," the exchanges said in their legal brief.
Under the Administrative Procedure Act, parties who believe
they have been aggrieved by a federal agency can seek a court
review, where judges will determine if a regulation is
"arbitrary and capricious," or "an abuse of discretion."