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Decision looms in U.S. case over market data fees

By Herbert Lash

NEW YORK (Reuters) - Oral arguments are scheduled on Tuesday in a long-pending court case that may determine if U.S. stock exchanges will have to reveal their costs for producing market data, a key cog of high-frequency trading and the electronic marketplace.

A trade association of brokers, bankers and money managers, along with a group of companies including Google Inc, eBay Inc, Yahoo Inc and Bloomberg LP, has accused the Securities and Exchange Commission of abdicating its duty to uphold "fair and reasonable" fees for market data.

The Securities Industry and Financial Markets Association (Sifma) and the NetCoalition technology trade group took the SEC to court for not objecting to new market data fees filed with the agency by units of NYSE Euronext and Nasdaq OMX.

The case before the U.S. Court of Appeals, District of Columbia Circuit could be thrown out because NYSE and Nasdaq, the two largest U.S. exchange operators, say the court lacks jurisdiction to review the complaint.

An amendment to the Securities Exchange Act was inserted into the Dodd-Frank financial reform act that allowed exchanges to file new rules for fees that are "immediately effective," a change that has speeded a review process by the SEC that could take years.

Now the SEC has 60 days to temporarily suspend any new rule if regulators find it necessary or appropriate.

Sifma, which represents about 600 banks, brokers and asset managers, and NetCoalition suspect that the fees NYSE and Nasdaq charge for their market data substantially exceed their costs.

Market data carries the information on quotes and orders that is the lifeblood of the electronic marketplace. The data plays a key role as it provides vital information for trading.

Bloomberg and Thomson Reuters Corp are large distributors of market data. NetCoalition members had obtained data from NYSE unit NYSE Arca in the past for free, sparking an earlier case that is known as NetCoalition I.

Sifma and NetCoalition argue that market data is not subject to competitive forces, and therefore the cost of producing the data should be taken into account. NYSE and Nasdaq, as interested parties in the case, say the sale of their data is in fact constrained by competition.

Nasdaq increased its revenue from U.S. market data products by more than 15 percent in the third quarter from a year earlier following an almost 19 percent boost in the previous quarter.

In NetCoalition I, which addressed similar issues and involved the same parties, the court ruled in August 2010 that a market-based approach to evaluating whether market data fees are "fair and reasonable" was permissible.

But the court said the SEC had not proven that competition actually constrained market data prices and it took issue with the agency's assertion that fees proposed by NYSE Arca were not that of a monopolist.

The court denied a request by NYSE and Nasdaq to appeal its decision, after which Nasdaq said that the Dodd-Frank amendment, issued months earlier, made the court's ruling moot.

NYSE and Nasdaq have argued that the case should be dismissed because their fee filings did not fall under the appeal court's jurisdiction as they were neither a final SEC "action" or "order."

"Because the rule changes are in effect due to a decision by Congress, there is no agency action or order for this court to review," the exchanges said in their legal brief.

Under the Administrative Procedure Act, parties who believe they have been aggrieved by a federal agency can seek a court review, where judges will determine if a regulation is "arbitrary and capricious," or "an abuse of discretion."

(Reporting by Herbert Lash; Editing by Leslie Adler)

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