The NYSE holds a troubling monopoly on trade data

In recent years and across a multitude of policy areas, Washington policymakers are asking questions about who owns the data you provide through online apps or via payment methods. The simplest and arguably best solution so far has been to leave the question to the terms of the contract. If a user freely contracts to allow their data to be sold in exchange for, say, a free email service, then the terms are fairly negotiated.

A brewing debate about data fees at big stock exchanges like the New York Stock Exchange (NYSE) stands to turn that analysis on its head, and merits a response from the Securities and Exchange Commission (SEC).

{mosads}Many would be surprised to learn that the NYSE owns a right to the data generated by trading. This came not through the terms of any contract with brokers executing trades on their platform, but instead via little-known 1975 legislation in which Congress essentially granted the exchanges a property right over stock market data.

The big exchanges now generate more profits from selling data and connectivity concerning the trading of securities than from the trades themselves. It wasn’t supposed to be this way: The 1975 amendments to the Exchange Act in question also gave the SEC authority to police the prices and fees charged for stock market data to guard against any anticompetitive behavior on the part of the exchanges. They have been credibly accused of such behavior. 

A better approach would allow traders and the exchanges to negotiate who owns the data and how it is distributed. However other SEC regulations, like the “trade-through” rule, frustrate such an approach by mandating that trades be routed to the venue with the lowest stock price, regardless of the trader’s preference. 

The current system needs more scrutiny. As long as it’s in place, we must rely on the SEC to ensure that exchanges don’t abuse a monopoly right to market data. A recent fee request from big exchanges like the NYSE is a case in point. 

The big exchanges have recently filed a request with the SEC for a fee increase that would charge those who purchase trading data based on the value it generates for the user of that data. In essence, Bloomberg and other platforms have found a more effective way to profit from the data, and the exchanges are trying to grab a percentage. It brings to mind the percentage-of-revenue model that mafia racketeers used to tax legitimate merchants in the early 20th century.

Or if you prefer, think of it like a region’s monopoly utility provider (like a power company) charging clients based on how many people walk in and out of a customer’s building every month. It’s particularly unfair because in this case the exchanges’ market power was granted directly by the government. It is also prohibited by statute, because discriminatory pricing falls under the SEC’s anticompetitive pricing mandate.

There is a second important reason for the SEC to deny the big exchanges’ price increase. It has recently commenced a transaction fee pilot study on whether anticompetitive practices are harming investors in the execution of stock trades.

These practices gained popular attention through Michael Lewis’s book “Flash Boys.” Part of the problem is that exchanges pay rebates to brokers to send them order flow, which in turn ends up becoming market data that exchanges will sell and which many participants are obligated to purchase.

More recently, a number of large pension funds have filed suit against some of the exchanges regarding anti-competitive practices. And SEC studies have begun to lend credence to certain allegations. The exchanges’ abuse of data fees may make it more difficult for the SEC to reform markets later in response to the pilot study’s results.

The current system for market data on stock market trading certainly isn’t optimal, but as long as it provides large exchanges with a monopoly right over trading data, the SEC should ensure that right is not abused through discriminatory pricing. Further, the SEC shouldn’t allow any data fee increases until the access fee pilot study is completed, and we have an opportunity to chart a new course on market structure reform.

J.W. Verret is an associate professor of law at the George Mason University Antonin Scalia Law School.