Reforming Stock Exchange Governance


By Robert J. Jackson Jr / Header Image Credit: Compliance Periscope

Being a Statement on Reforming Stock Exchange Governance by SEC Commissioner Robert J. Jackson Jr.” on Wednesday, January 08, 2020.

Flynn, John Roeser, and Jennifer Colihan, for their extensive work on today’s proposed order. I’m also deeply grateful to Division Director Brett Redfearn, whose leadership in this area-and so many others-continues to reflect the very best in public service.

As today’s release explains, America’s stock markets are riven by a fundamental conflict of interest: exchanges both operate public data feeds and profit from selling superior private ones.[1] Because exchanges have no economic reason to produce robust public data on stock prices, investors have long demanded a vote on how the public feeds are run.[2] Rather than give investors a real say over the data that drives our markets, today’s release merely invites for-profit exchanges to draft their own rules on these questions.

Because that approach has failed investors before, and there’s no reason to expect it to succeed now, I respectfully dissent.

In 1934, American investors struck a fundamental bargain with our stock exchanges. The Commission was created to oversee the markets, and nonprofit exchanges were given the special legal status they needed to play a role in protecting ordinary investors.[3] But over a decade ago the deal changed: Exchanges became for-profit entities with powerful incentives to maximize profits, not protect investors.

That’s how we ended up with the two-tiered system for market data we have today. Congress mandated the creation of a public feed when exchanges were still nonprofits, but today’s for-profit exchanges also sell their own private feeds. So it’s unsurprising that exchanges underinvest in the public feed-it’s a product they directly compete with.

The only question is what the Commission should do about it.

Rather than recognize the reality of the exchanges’ incentives, the Commission today chooses hope over experience, asking exchanges to act contrary to their own economic interests.[4] For two reasons, we should not expect that approach to produce the robust public data that American investors deserve.

First, by proposing an order under a national market system (NMS) plan, we’re asking the exchanges to tell us how best to address the conflicts of interests that currently allow them to profit by controlling the public feed while selling superior private data.[5] No one should be surprised when the exchanges respond that, rather than give investors votes on the operation of the public feed, they’d rather continue controlling it themselves.[6] Instead of a clear solution to an obvious problem, today’s proposal will produce little more than a long process that will benefit lobbyists and lawyers-but not the ordinary investors living with the tax of rising data costs in our markets.[7]

Second, our history governing markets through NMS plans is hardly encouraging. One need look no further than the consolidated audit trail to see what happens when the Commission replaces real regulation with mere hope that stock exchanges will act against their own interests. The CAT was launched in the wake of a terrifying market event nearly a decade ago. Both Chairman Clayton and Director Redfearn have done tremendous work to move it forward. But our predecessors left the construction of the CAT to the NMS process. And the CAT will protect investors, not produce profits. So it’s no surprise that the CAT is still not complete.[8] I hope our successors won’t someday say the same about today’s attempt to reform exchange governance.

Those who, like me, are frustrated by today’s failure to require real reform may be tempted to direct their ire towards our stock exchanges. But it’s a mistake to blame private enterprises for maximizing the profit opportunities the law gives them.[9] Instead, we should change the law to address the incentives produced by giving exchanges both control over our public feeds and the opportunity to profit by selling private ones.[10] Without changing those incentives, we cannot and should not expect the market to fix the market.[11]

That’s why I hope commenters will come forward and urge the Commission to do more than merely hope that stock exchanges will act contrary to their private interests. Until we do, our stock markets will continue to fall short of the level playing field that ordinary American investors deserve.

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