For-profit stock exchanges abusing their power

By Dominic Jones

THE inherent conflict of interest between stock exchanges’ unique regulatory status and their new standing as for-profit companies is causing problems for US regulators.

Critics are questioning separate proposals by the New York Stock Exchange (NYSE) and NASDAQ to raise fees for services that are mandated by the Securities and Exchange Commission or the exchanges’ own rules.

On Friday, the powerful Securities Industry and Financial Markets Association (SIFMA), which represents and regulates investment dealers, called on the SEC to more closely scrutinize and monitor the for-profit exchanges to ensure that they are not abusing their power.

“Profit without threat of competition”

SIFMA was responding to proposals by the NYSE to levy fees for market data that the SEC requires broker-dealers to provide to the exchange, and which the exchange then aggregates and redistributes.

“The exchanges’ unique regulatory status allows them to profit from their market data without the threat of competition,” SIFMA co-Chief Executive Marc Lackritz said in a statement.

I raised similar concerns in a comment to the SEC about the NASDAQ’s proposal to increase issuers’ listing fees while also bundling required services like news releases and webcasts into the fee.

NASDAQ’s regulations require companies to issue information via news releases and webcasts at the same time that the exchange owns a news release distribution company and a website services provider.

The exchange’s near-monopoly on smaller U.S. company listings enables the exchange to raise its listing fees without a real threat of competition. Furthermore, it can use its increased listing fees to subsidize the costs of its newswire and webcasting services and gain an unfair advantage over competing services.

Impossible to be impartial on news release requirements

Indeed, NASDAQ has proposed to include a variety of services free to listed companies as part of their increased fees, prompting protests from competing newswire and webcast services as well as many listed companies who see the move as an abuse of the exchange’s power.

I have also argued that NASDAQ owning a newswire at the very time when the SEC is reviewing the continued necessity for news releases under Regulation FD makes it impossible for the exchange to approach the issue impartially.

The problems that arise when exchanges move from not-for-profit organizations to profit-driven corporations shouldn’t be unexpected. In his statement on Friday, Lackritz of SIFMA said the “SEC cannot simply ignore the conflicts of interest inherent in today’s for-profit exchanges.”

He has a point, but the SEC should also take a harder look at the reasonableness of NASDAQ’s listings fees and its conflicts of interest in owning Prime Newswire and Shareholder.com.

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