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The Big Stock Exchanges Are Suing Over a New SEC Rule. An Industry Newcomer Says They’re Wrong.

Members Exchange CEO Jonathan Kellner says Nasdaq, NYSE, and Cboe are “throwing up legal roadblocks” to market data reform.

Members Exchange, the stock exchange newcomer backed by BlackRock and Wells Fargo & Co., is breaking with its peers on industry reforms.  

In December, the Securities and Exchange Commission announced changes to its rules that would require certain exchanges to publish some of the currently private data that clients pay to have access to.  

Nasdaq, the New York Stock Exchange, and Cboe Global Markets filed a lawsuit against the SEC on Friday in the Washington, D.C. Appeals Court, asking the court to prevent the rule from going through.  

The lawsuit said that the rule is “arbitrary” and “capricious” and that it “does not promote efficiency, competition, and capital formation.” 

Members Exchange chief executive officer Jonathan Kellner disagrees.  

“The lawsuits filed by the incumbent exchanges to block market data reform, while not surprising, are disappointing,” Kellner wrote in a post published on the exchange’s website Wednesday.  

According to Kellner, the three exchanges that filed the lawsuit are “throwing up legal roadblocks aimed at bolstering competitive moats and preserving a two-tier system of market data.” 

At present, securities information processors, known as SIPs, aggregate and publish real-time trade and quote information from all the exchanges in the United States, linking the markets into a single data feed, according to the Consolidated Tape Association’s website. The CTA is one of two SIP providers in the United States. The other is the Unlisted Trading Privileges Plan.  

However, the same exchanges that share their information with the SIPs also sell proprietary data to investment firms, according to a December statement on the rule changes from SEC Commissioner Caroline Crenshaw.

The SEC’s new rules would broaden the scope of data that exchanges must provide to public data feeds, including depth-of-book data and odd-lot quotations, among other information.  

“The solutions proposed by the SEC may not be perfect, but they are steps in the right direction,” Kellner wrote, adding that individual investors and registered representatives rely on the SIPs to buy and sell stocks.  

He said that the Members Exchange supports efforts to expand the data available to “better meet the diverse needs of the growing investor community.” 

[II Deep Dive: BlackRock, Wells Fargo Invest in Members Exchange

The Members Exchange officially launched in September 2020 after spending over a year preparing to launch and raising money to do so.  

Kellner told Institutional Investor in May 2020 that Members Exchange launched because its supporters believed that there needed to be more competition in the exchange industry. Those members also wanted to have a voice in the market structure debate, he said.

Founding members include Bank of America, Charles Schwab, Citadel Securities, E*TRADE, Fidelity Investments, Morgan Stanley, TD Ameritrade, UBS, and Virtu Financial, according to a January 2019 announcement

Spokespeople for Nasdaq, NYSE, and Cboe declined to comment Thursday. 

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