At first blush the two leading U.S. stock exchanges won a sweeping victory this week in a long-running legal battle over market data - the stock quotes, share prices and other trading information that are highly prized in the electronic marketplace.
But a ruling by the U.S. Appeals Court for the District of Columbia Circuit may also have opened the door for the Internet companies, brokers and others in the case to achieve a decade-old goal of cutting the fees the exchanges charge for the data.
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The court ruled in a decision earlier this week it had no jurisdiction over a case brought by the NetCoalition of some 20 Internet companies, including Google Inc and Yahoo Inc, and the Securities Industry and Finance Markets Association, a 600-member lobby for brokers, bankers and asset managers.
The decision appeared to slam the door on the petitioners and remove a potential obstacle to efforts by the New York Stock Exchange and the Nasdaq Stock Market to offset sharp drops in revenue from stock transactions by boosting market data sales.
But the court did offer a path for Sifma and the NetCoalition group to mount a new battle, several people close to the case said.
The court indicated the Securities Exchange Act, which governs exchanges and their responsibilities as self-regulatory organizations, requires that the exchanges provide for the "equitable allocation" of reasonable fees, among other dues and charges.
The petitioners have argued the exchanges are effectively monopolies and competition is not sufficient to restrain prices.
"I intend to submit a ... petition," said Roger Blanc, a lawyer with Willkie Farr who represented the NetCoalition, the name by which the case is also called. "As soon as we can put it together, we'll be back before the circuit court."
The case is notable because of the importance of market data in an electronic market that relies on "signal processing," the analysis of data by high-speed computers, to trade.
Sifma and the NetCoalition had sought judicial review of the proprietary data both NYSE and Nasdaq sell after the Securities and Exchange Commission let stand almost all their filings for new schedules and higher prices for market data in recent years.
The petitioners challenged the SEC over more than a dozen filings, saying the fees were exorbitant and regulators had abdicated their duties to ensure data fees were "fee and reasonable," a loosely defined standard the agency must uphold.
Four of the complaints were combined before the appeals court, which has oversight of the SEC, and the two exchanges with the regulators provided a joint opinion in the case.
Market data has been a thorn in the side of the SEC for years, with regulators unable to resolve the issue despite a series of high-profile hearings and studies from 1999 to 2005.
A former senior SEC official said market data is highly contentious with no easy answer.
Although the appeals court said the Dodd-Frank act stripped it of jurisdiction in the case, the court left intact its August 2010 ruling that there must be evidence that competition is constraining the fees the exchanges charge for the data.
The court also said the exchanges cannot enforce fee rules that are inconsistent with the exchange act, and said fees need to be tied to "some type of cost-based" standard to guard against excessive profits.
The latter point could be a boon for the petitioners' cause. They have long contended the cost of producing the data is negligible and the exchanges charge far in excess of its cost.
"We are pleased that the court has affirmed our ability to provide high-quality data at reasonable rates to vendors who profit from reselling the data to their customers," a spokesman for the Nasdaq said. The NYSE declined to comment.
The NYSE and Nasdaq presented academic studies to bolster their position that competition exists for market data, and they have strongly resisted any cost analysis of their data.
The Nasdaq's chief financial officer has been telling analysts that market data is an "extremely high-margin" business. Revenue from the U.S. sale of proprietary data at the Nasdaq has expanded at a compound annual growth rate of about 10.8 percent since 2007, a period in which data usage has exploded.
The emphasis on market data as a profit center is misplaced, according to former SEC Chairman Harvey Pitt. The exchanges are trying to staunch their hemorrhaging and charging for data is purely a short-term solution to a long-term problem, he said.
A good portion of market data is public and should not be proprietary as the exchanges see it, Pitt said in an interview before the court's ruling this week. Allowing data to be available only for those who can afford it will create hard-to-justify market dislocations, he warned.
"The question is when you've allowed people to treat market data as proprietary for so long, how do you justify making a shift and what accommodations do you make?" Pitt said.
The case is NetCoalition and Securities Industry and Financial Markets Association v Securities and Exchange Commission, U.S. Court of Appeals, District of Columbia Circuit; No. 10-1421.
(Reporting by Herbert Lash; Editing by Steve Orlofsky)