SEC Should Stop Coercing Brokers to Buy Data From Exchanges


There are many types of burdensome government mandates, but of all the Ten Thousand Commandments, regulations that coerce the purchase of a particular product or commodity are among the most destructive.

Take the individual mandate of the Affordable Care Act, aka Obamacare, which forced consumers to buy health insurance policies with what the law deemed to be “essential benefits.” This purchase mandate led to people losing their insurance plans and being forced to pay both higher premiums and increased deductibles for new plans that mandated coverage for services many people didn’t need or want. Things are getting slightly better in the health care market now that the individual mandate was repealed—starting this year—under the Tax Cuts and Jobs Act, and since the Trump administration began letting insurers sell short-term plans that are less costly.

But proposed “Medicare for All” plans could again force the purchase of expensive health plans, and this time from a monopoly provider—the government. The “Medicare for All” bill introduced in the previous Congress by Sen. Bernie Sanders (I-VT)—and cosponsored by quite a few prospective presidential candidates—features automatic enrollment and premiums to force the purchase of the plan and does not allow private-sector insurers to offer any plans that are “duplicative” of the federal government. Other “Medicare for All” legislation may modify this a bit, but would still make the federal government the dominant seller of plans for captive American buyers.

In the debate about forcing people to purchase a product for “their own good” from a dominant or limited number of providers, it is also instructive to take a peek behind the opening and closing bells of the U.S. stock market. Since the 1930s, government mandates have forced broker-dealers to join one or more stock exchanges to trade U.S. stocks. And over the past few years, new regulations from the Securities and Exchange Commission (SEC) have coerced the purchase of expensive data products from exchanges such as the New York Stock Exchange and Nasdaq.

The costs of these data products filter down to middle-class investors, hitting everyone from those who trade individual stocks to those who save for retirement through a 401(k). The Committee on Capital Markets Regulation, a group of business and academic finance leaders led by Harvard Law Professor Emeritus Hal Scott, found in a recent report that fees for such data products cost investors more than $2 billion a year, and have increased 55 percent since 2014.

The driving force for demand for such products is the SEC regulation known as the National Market System (NMS), a 2005 rule that mandates an all-encompassing “best execution” that broker-dealers must fulfill when handling orders from investors. As the SEC recently put it, “Best execution requirements require brokers to have access to the best quotations at all trading centers so that they can achieve best execution of their customers’ orders.” Given the open-endedness of this mandate, broker-dealers fear that the SEC could deem them negligent if they don’t buy the exchanges’ latest products on data, such as buying and selling patterns and the volume of particular stocks.

Exchanges have responded by creating all sorts of new data products that brokers frequently feel compelled to buy due to the SEC’s NMS. According to SEC Chairman Jay Clayton, the exchanges have raised or levied new fees approximately 400 times since the process of issuing data fees was fast-tracked by the Dodd-Frank “financial reform” law rammed through Congress in 2010.

In October, however, the SEC blocked two fee increases from NASDAQ and the NYSE’s Arca Exchange, which trades stock and options. Though it was a unanimous vote, market-leaning Republican Commissioners Hester Peirce and Elad Roisman maintained in a statement that they were applying securities laws as written, but that they were uncomfortable with the SEC being a price-setter. They urged their fellow commissioners to remove barriers to competition and the mandates from the NMS that coerce brokers to purchase data from the exchanges. The NMS, they write, “motivates demand for these and other proprietary market data products and may make it more difficult for firms to exert market pressure on exchanges.”

Indeed, the upstart exchange operator IEX, whose founders were the heroes of Michael Lewis’ bestselling book “Flash Boys: A Wall Street Revolt,” recently issued a white paper arguing that it could provide brokers data for more than 90 percent less than the big exchanges. All the more reason for the SEC to drop the “best execution” mandate of the NMS, let brokers buy the whatever data they feel is appropriate, and let investors choose the brokers that they feel will best execute their trades.

As I wrote nearly 15 years ago in one of my first studies for CEI, “Exchanges … as well as new forms of alternative trading systems should be free to compete with their own policies for the best execution of a trade.” Purchase mandates, whether for the health care market or stock market, result in a loss of quality and a loss of freedom.

CEI research associate Gavi Greenspan contributed to this blog post.