How much are you paying for data? This is not a pitch for switching cell phone providers, but rather a question about the cost of market data that determines how Americans invest their money and plan for retirement. Money managers and passive investors alike, even beginners using one of the many low cost or even free mobile finance apps, are paying fees to access data simply to trade stocks and bonds at the most desired prices.
This data is created at two separate levels when used for investing. The most basic level is the most recognizable. These are the ticker symbols at the bottom of your television screen. This information comes from what is known as the securities information processor. This feed is low cost and offers the single best price for buying or selling a stock from across all markets. As such, it runs slower when compared to the proprietary feed of a single exchange because the securities information processor has to collect and consolidate all possible information from more than a dozen different stock exchanges to identify the overall best price for each trade.
{mosads}In contrast, stock exchanges offer proprietary feeds that provide faster and better data on a wide range of prices to buy and sell stocks, which allows traders to execute orders quickly. For brokers, active traders, and even beginners investing with a few hundred dollars in the market, access to this data has become more competitive as trading occurs almost in real time. The difference between buying a stock at a perceived price point and the order being completed can cost investors up to thousands of dollars. In some cases this can even cost brokers millions of dollars.
This has fueled a race for investors to have technology that can respond as soon as the market does. As such, this information is expensive and often includes a separate charge established by the stock exchanges for equipment to access their proprietary data. The cost of this data is passed on to customers in the form of higher prices, including for retirement vehicles like 401(k) accounts and accounts overseen by financial experts. Investors and institutions have expressed concern over the rapidly rising costs to access the data and criticism that the stock exchanges have failed to adequately justify their purportedly increasing internal costs.
The slower speed of the securities information processor feeds have also generated criticism that that stock exchanges have neglected to upgrade them, forcing investors and money managers to purchase access to the proprietary feeds or risk losing out on trades and wealth opportunities for their customers. The stock exchanges have disputed this accusation and maintain the position that the data has been expensive to collect and that no traders or investors are obligated to purchase their proprietary data.
While the differences of cost have been a priority for both parties before their regulator for years, the Securities and Exchange Commission has traditionally taken the approach of letting the market set the price for data and allowing courts to take the lead in determining a resolution. That was the case until 2017, when the United States Court of Appeals denounced the agency, charging that it had “effectively abdicated” its responsibility in reviewing a clearing house plan to share excess fees collected with stock exchanges instead of giving them back to the members who paid extra.
Just over a year later, the Securities and Exchange Commission stepped in for the first time and blocked proposed fee increases on proprietary data at two stock exchanges. The agency postponed hundreds of other fee increases for further analysis. The Securities and Exchange Commission reasoned that the stock exchanges “had not met their statutory obligation to demonstrate that the fees were consistent” with federal securities law.
Earlier this year, nine firms that service both small and large customers and 401(k) savers, including retail firms such as Charles Schwab, Fidelity Investments, and TD Ameritrade, announced that they would create the Members Exchange. This collectively established new stock exchange will feature lower costs and greater transparency, allowing consumers to save on fees and invest more funds in their brokerage and retirement accounts.
The Members Exchange will face regulatory scrutiny that could last a year and beyond before it could be approved. The Securities and Exchange Commission serves an important role in preserving consumer access to the market regardless of asset size and provides certainty that main street investors will not be treated differently than large institutions. This view is reiterated by Chairman Jay Clayton, and in the case of whether or not to approve the Members Exchange, the idea of promoting competition as a solution for rising market data fees should be strongly considered and seen as benefiting all investors and retirement savers across the country.
James Setterlund is a federal affairs manager at Americans for Tax Reform, a nonprofit organization dedicated to lower taxes and limited government.