Morningstar | SEC Ruling on Depth-of-Book Data Deals a Blow to Intercontinental Exchange and Nasdaq
On Oct. 16, the SEC dealt a blow to wide-moat Intercontinental Exchange (owner of the New York Stock Exchange) and narrow-moat Nasdaq by finding that the exchanges hadn’t substantiated fee increases on depth-of-book data. The SEC requires that market data fees be “fair and reasonable.†In light of the SEC’s ruling, we’ll be reviewing our forecasts, because it’s not apparent to us how much pricing on market data will be affected or what price level constitutes “fair and reasonable.†That said, we think this is significant, and investors should expect slower growth in data revenue at ICE and Nasdaq. Given this decision, it will result in lower fair value estimates. However, given the limited information we have now, we will be maintaining our fair value estimates for ICE and Nasdaq until we gather more information.Specifically, the SEC found that the "exchanges had not met their statutory obligation to demonstrate that the fees were consistent with the Exchange Act (i.e., that these fees are fair and reasonable and not unreasonably discriminatory).†Basically, exchange customers, including many hedge funds, mutual funds, and exchange-traded fund providers have been complaining that fee increases for market data were excessive and the SEC agreed that the exchanges hadn’t provided adequate basis to charge those fees. Nasdaq and ICE can charge a market rate for data, provided they prove these fees are affected by competition and that higher fees would result in loss of business. The exchanges made the argument that higher data fees result in loss of order flow, but the SEC found the arguments unconvincing.
What worries us more is that the SEC’s ruling affects only fees on depth-of-book data, while the Securities Industry and Financial Markets Association, along with Bloomberg, has challenged more than 400 rule changes. Given the Oct. 16 ruling, we have to think the exchanges have a steep hill to climb to provide basis that other fees are fair and reasonable.
Intercontinental Exchange is a holding company. Through its subsidiaries, the company is a global operator of regulated exchanges, clearing houses and listings venues, and a provider of data services for commodity, financial, fixed income and equity markets. The company operates regulated marketplaces for listing, trading and clearing an array of derivatives contracts and securities across primary asset classes, including metals, equities, bonds and currencies, and also provides mortgage and technology services. In addition, the company provides data services to support the trading, investment, risk management and connectivity needs of customers. The company has two segments: Trading and Clearing and Data and Listings.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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