CT Plan Operating Committee Proposes Cap on Quote-Based Market-Data Revenue
Commentary by Steven Lofchie
particular markets, shows the need to modify the revenue allocation formula to reduce the potential for distortive quoting activity."
particular markets, shows the need to modify the revenue allocation formula to reduce the potential for distortive quoting activity."
The consolidated equity-market-data plan ("CT Plan") operating committee asked the SEC to approve a cap limiting how much of an exchange's market-data revenue can come from quoting rather than trading.
The CT Plan is the national market system ("NMS") Plan to govern the public dissemination of real-time consolidated equity market data for NMS stocks. The proposal to amend the CT Plan, published in the Federal Register, is aimed at venues that post heavy quotes, but rarely trade.
Under the plan, member exchanges and FINRA share consolidated market-data revenue, with roughly half allocated to quoting and half to trading. The amendment would cap any member's quote-related revenue at five times its trade-related revenue each quarter, redistributing the excess to other members. FINRA would be exempt, and the cap would not apply to members whose annual quoting revenue stayed below $50,000.
The operating committee said some venues had quoted heavily at the national best bid and offer with little corresponding trading, distorting the revenue split. It pointed to NYSE Chicago, now NYSE Texas, where quote-to-trade ratios topped 20-to-1 starting in 2021, and to the Long-Term Stock Exchange, whose 2024 ratio reached about 107-to-1 on one data tape, against a typical level below 5-to-1. The operating committee said the pattern undermined the goals of Regulation NMS, which rewards quotes that contribute to price discovery while guarding against "abusive quoting behavior."
The proposal followed the SEC's recent move (see previous coverage) to propose rescinding the trade-through rule, Regulation NMS Rule 611("Order Protection Rule") in which the SEC noted criticism that the revenue formula "subsidizes exchanges that quote but rarely trade."
Comments are due by July 8, 2026.
Commentary
This is a significant step towards the dismantling of Reg NMS, as it was originally adopted. Critics of the Reg NMS have long argued that the proliferation of exchanges was significantly driven by small exchanges gaming the manner in which the SEC rules allocated trading fees, and particularly by the fact that the rules rewarded quoting even when the quotes did not result in a trade.
By reducing the reward to exchanges for providing quotes that do not result in a trade, combined with the proposed elimination of the Trade-Through Rule, the SEC will make it much more difficult for an exchange to be profitable if the exchange can not capture actual trades, as opposed to merely posting quotes that are largely ignored. In short, expect to see a number of the small exchanges close their doors.
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The SEC proposed to rescind the "trade-through" prohibition for national market system stocks and the "access to quotations" rule on "locking and crossing quotations."