34 F.4th 1105
D.C. Cir.2022Background
- Section 11A of the Exchange Act authorizes the SEC to create a national market system and to ensure prompt, accurate, reliable, and fair collection and distribution of market data.
- Since Regulation NMS (2005) the market used a centralized consolidation model: exchanges supply limited "core" data to centralized processors; exchanges also sell faster, richer proprietary feeds.
- Technological advances made proprietary feeds far more informative and lower-latency, creating information asymmetries between users of core consolidated data and subscribers to exchange proprietary products.
- In 2020 the SEC adopted the Market Data Infrastructure Rule: (1) expand the definition of core data to include more detailed trading information; (2) require exchanges to sell raw data to competing consolidators (fee set by plan committee/SEC approval) and permit self-aggregation by large firms.
- Exchanges (petitioners) challenged the Rule as arbitrary and capricious and inconsistent with statutory duties; the D.C. Circuit reviewed under the deferential arbitrary-and-capricious standard and denied the petitions.
Issues
| Issue | Petitioners' Argument | SEC's Argument | Held |
|---|---|---|---|
| Whether the Rule is arbitrary and capricious because it will exacerbate information asymmetries by creating a multi-tiered market | The Rule will replace a two-tiered system with greater stratification and worsen asymmetries (self-aggregation gives latency advantages) | The Rule aims to reduce asymmetries by expanding core data and creating more affordable, differentiated options; latency advantages exist today and will not meaningfully worsen | Denied—agency reasonably concluded the Rule reduces asymmetries and considered latency concerns |
| Whether the Rule is impermissibly speculative (market entrants, product differentiation, fees) | The SEC relied on conjecture about number of competing consolidators, ability to differentiate products, and fee structures | SEC made reasoned predictive judgments, acknowledged uncertainties, and analyzed barriers to entry, costs, demand, and fees | Denied—predictive analysis was adequate under precedent for forward-looking agency decisions |
| Whether the Rule violated Exchange Act duties re public interest, investor protection, and market fairness (e.g., fragmentation of NBBO, harm to retail investors) | Decentralization will fragment the national best bid and offer (NBBO), confuse retail investors, stifle exchanges' incentives to innovate | Fragmentation already exists; SEC found expanded core data and competition will enhance transparency and innovation overall | Denied—SEC reasonably balanced statutory objectives and found benefits outweighed asserted harms |
| Whether the SEC failed to consider economic impacts (loss of exchange revenue, flow to dark venues, reduced reinvestment) | The SEC did not sufficiently quantify costs and failed to assess downstream harms to exchange operations and market transparency | SEC analyzed potential revenue effects, offsets, competitive benefits, and trade-offs; need not produce precise cost-benefit quantification | Denied—SEC relied on reasonable economic analysis and permissible trade-offs under the statute |
Key Cases Cited
- NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010) (discusses consolidated core data and judicial review of SEC market-structure rules)
- AT&T Corp. v. FCC, 220 F.3d 607 (D.C. Cir. 2000) (deferential arbitrary-and-capricious review requires rational connection of facts and choice)
- Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) (standard for arbitrary-and-capricious review)
- Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984) (agency deference where statute ambiguous)
- Am. Hosp. Ass'n v. Azar, 983 F.3d 528 (D.C. Cir. 2020) (tolerant review of predictive agency judgments)
- Chamber of Commerce v. SEC, 412 F.3d 133 (D.C. Cir. 2005) (agency need not base every action on empirical data)
- Bus. Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011) (agencies must consider economic consequences but need not quantify every effect)
- FCC v. Prometheus Radio Project, 141 S. Ct. 1150 (2021) (agency predictions must be reasonable and grounded in evidence)
- Fresno Mobile Radio, Inc. v. FCC, 165 F.3d 965 (D.C. Cir. 1999) (balancing competing statutory objectives permissible)