The United States Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") denied a petition by Intercontinental Exchange, Inc. ("ICE") and several of its affiliates, including the NYSE, challenging the SEC's regulation of wireless connectivity services to and from the NYSE's Mahwah, NJ data center. The decision was unanimous.

The NYSE and other national registered exchanges had filed proposed rules changes with the SEC to establish the fee schedule for (i) wireless bandwidth connections that connect a customer's equipment on the exchanges' premises with the customers' equipment at third-party data centers, and (ii) wireless market data connections that connect a customer to the proprietary data feed of the exchanges. During the public comment period, it became clear that the ICE group's services were being provided by a private pole on the grounds of the Mahwah data center that was physically closer to the data center building than the connections of all competing services. This gave the ICE wireless services a speed advantage over other wireless providers. To address the issue, the SEC required that the length of the fiber optic cable between the data center and the private pole equal the length of cable to the pole of the nearest, off-site competitor.

The exchanges and their corporate parent, ICE, challenged the SEC's jurisdiction to regulate the wireless connectivity services. They argued that the SEC's assertion of authority was based on a misinterpretation of the statutes that define "exchange" and "facility" of an exchange. They also asserted that the SEC had ignored the effect of the regulations on the ability of the wireless services to compete, as well as other Commission regulations defining "exchange," and departed from relevant agency precedent. The D.C. Circuit rejected all of these arguments.

The D.C. Circuit agreed with the SEC that the wireless services were facilities of an exchange because they allowed market participants to transmit market data to effect or report transactions on the exchanges. It rejected the ICE group's attempt to narrow the definition of "exchange" to the NYSE's matching engine and characterized its reading of the statute as "formalistic to a fault." The court also credited the SEC's argument that the NYSE and the ICE subsidiary that maintained the wireless services qualified as a "group of persons" under the definition of "exchange." It noted the close corporate affiliation of the petitioners and the "insuperable latency advantage" conferred on their affiliate. The D.C. Circuit also reasoned that finding otherwise would allow a party to "elude SEC jurisdiction by making simple changes to its corporate structure." As for ICE's argument that the SEC ignored the effect on ICE's ability to compete with other wireless service providers, the court distinguished between the SEC's duties to consider competition in the rulemaking process and whether an entity was subject to the process in the first place. Finally, the D.C. Circuit distinguished the precedents that the ICE group argued compelled a finding that the SEC had broken with its own prior interpretations and precedents, and found ICE's arguments "meritless."

The SEC opposition to the ICE group's petition was supported by amicus briefs submitted by McKay Brothers and SIFMA and FIA Principal Traders Group. Steven Lofchie, Jason Halper, Charles Munn and Hyungjoo Han represented SIFMA and FIA Principal Traders Group.

Commentary

The issue in the case seems esoteric: can the SEC regulate the length of fiber optic cable connecting a communications pole receiving wireless communications to the computer servers that match securities transactions? However, the implications of the case are substantial. If the SEC lost this case, the exchanges would have been able to provide faster communications services to preferred members, an enormous advantage in a market where microseconds are meaningful. This would have allowed the exchanges to charge these preferred members an unregulated (potentially very substantial) amount to obtain faster access to the exchange. The end-effect result would have been to effectively deregulate the exchanges' ability to charge fees to members and to undo the requirement of "fair access" to the exchange trading facilities.

Primary Sources

  1. Amicus Brief: SIFMA and FIA Principal Traders Group in Support of the SEC
  2. S. Court of Appeals for the District Columbia Circuit: INTERCONTINENTAL EXCHANGE, INC., ET AL., PETITIONERS v. SECURITIES AND EXCHANGE COMMISSION, RESPONDENT

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