[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
      THE CONSUMER AND INVESTOR ACCESS TO INFORMATION ACT OF 1999

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                    FINANCE AND HAZARDOUS MATERIALS

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                                   on

                               H.R. 1858


                               __________

                             JUNE 30, 1999

                               __________

                           Serial No. 106-35

                               __________

            Printed for the use of the Committee on Commerce



                                


                      U.S. GOVERNMENT PRINTING OFFICE
 58-309CC                    WASHINGTON : 1999
------------------------------------------------------------------------------
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                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

            Subcommittee on Finance and Hazardous Materials

                    MICHAEL G. OXLEY, Ohio, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     EDOLPHUS TOWNS, New York
  Vice Chairman                      PETER DEUTSCH, Florida
PAUL E. GILLMOR, Ohio                BART STUPAK, Michigan
JAMES C. GREENWOOD, Pennsylvania     ELIOT L. ENGEL, New York
CHRISTOPHER COX, California          DIANA DeGETTE, Colorado
STEVE LARGENT, Oklahoma              THOMAS M. BARRETT, Wisconsin
BRIAN P. BILBRAY, California         BILL LUTHER, Minnesota
GREG GANSKE, Iowa                    LOIS CAPPS, California
RICK LAZIO, New York                 EDWARD J. MARKEY, Massachusetts
JOHN SHIMKUS, Illinois               RALPH M. HALL, Texas
HEATHER WILSON, New Mexico           FRANK PALLONE, Jr., New Jersey
JOHN B. SHADEGG, Arizona             BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York              JOHN D. DINGELL, Michigan,
ROY BLUNT, Missouri                    (Ex Officio)
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)



                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Bell, Stuart, Bloomberg Financial Markets....................    28
    Bernard, Richard P., Executive Vice President and General 
      Counsel, New York Stock Exchange...........................    39
    Dwyer, Carrie, Executive Vice President, Corporate Oversight, 
      Charles Schwab and Company.................................    48
    Furbush, S. Dean, Senior Vice President and Chief Economist, 
      National Association of Securities Dealers.................    32
    Hogan, Michael J., Senior Vice President and General Counsel, 
      DLJdirect..................................................    16
    Nazareth, Annette L., Director, Division of Market 
      Regulation, Securities and Exchange Commission.............     6
    Ricketts, J. Joe, Chairman and Co-CEO, Ameritrade Holding 
      Corporation................................................    20

                                 (iii)



      THE CONSUMER AND INVESTOR ACCESS TO INFORMATION ACT OF 1999

                              ----------                              


                        WEDNESDAY, JUNE 30, 1999

                  House of Representatives,
                             Committee on Commerce,
           Subcommittee on Finance and Hazardous Materials,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, Hon. Michael G. Oxley 
(chairman) presiding.
    Members present: Representatives Oxley, Bilbray, Shimkus, 
Fossella, Towns, Engle, DeGette, Barrett, Luther, Capps, and 
Markey.
    Staff present: Linda Dallas Rich, majority counsel; Brian 
McCullough, professional staff member; Bruce Gwinn, minority 
professional staff member; and Consuela Washington, minority 
counsel.
    Mr. Oxley. The subcommittee will come to order. The Chair 
recognizes himself for an opening statement.
    People love to talk about the dramatic ways in which the 
Internet has transformed the world. It is certainly no 
exaggeration that the Internet has led to the most significant 
changes in our securities markets, not only since the invention 
of the ticker tape, but indeed since their creation.
    As one of our witnesses here today observes, each day one 
of every three trades is executed online. Millions of Americans 
invest online today and the 4- and 5-year-old kids today, who 
astonish their parents, not only with their VCR programming 
ability, but also with a computer and keyboard who will be the 
online investors of tomorrow.
    Online investing has empowered investors and given them 
greater personal control of their finances. Only a few years 
ago, information that investors could get today at the click of 
a mouse was available only to professionals like brokers and 
institutions. As a result of not only online brokerages, but 
also the development of numerous online sites that provide 
financial information to consumers, average investors have 
ready access to investors that is vital to their financial well 
being.
    H.R. 1858 is designed to preserve that access. The central 
component of the information that investors need is the price 
of what they are buying or selling, namely stock prices. In the 
105th Congress, this subcommittee held a hearing to learn more 
about the implications of the growth of online investing. One 
of the issues that arose from that hearing was who owns real-
time stock prices. Real-time stock prices are, as one astute 
commentator who testified before this subcommittee last year 
noted, like oxygen to investors. Without access to this 
information, investors have no ability to make rational 
economic decisions about whether to buy or sell a security.
    Concerns have been raised that investors could be denied 
access to this information if Congress or a court were to say 
that this information belongs to the stock exchanges or some 
other entity. After all, stock prices are facts just like any 
facts. As on op-ed writer at the Washington Post asked today, 
should the major league baseball association own the fact that 
Ted Williams batted .406 in 1941? With no objection, I would 
like to insert this article into the record.
    [The information referred to follows:]

              [Wednesday, June 30, 1999--Washington Post]

               Putting a Meter on the Flow of Information
                           by David Ignatius
    Here's a business puzzler for you: Who owns the stock quotations? 
Are they the property of the stock exchanges that administer the 
market, or the individual traders who ``create'' it by buying and 
selling stocks?
    That turns out to be a hot issue these days, thanks to our 
peripatetic friend the Internet. As data swirl around the new 
Information Economy, the ability to establish property rights--and 
charge a fee every time someone accesses a particular piece of data--
has become a big business.
    It's like staking claims in a gold rush, this matter of defining 
ownership rights in cyberspace. The smallest changes in boundaries can 
end up costing hundreds of millions of dollars. So, inevitably, 
different lobbying groups are taking their claims to Congress and 
battling over precisely where the property lines should be drawn.
    Take the matter of stock quotes. The New York Stock Exchange has 
been charging users a penny every time they access a ``real-time'' 
stock quote. They recently announced a plan to cut those fees to 0.75 
cents, but for big brokerage concerns, it still adds up to a lot of 
money. The discount broker Charles Schwab, for example, says it paid 
the NYSE nearly $20 million last year. Overall, the Securities Industry 
Association reports that the NYSE, Nasdaq and other exchanges took in 
$413.7 million from sale of market data in 1998, up from $358 million 
the previous year.
    The NYSE says it doesn't want any new property right but simply a 
congressional endorsement of its longstanding practice of selling stock 
quotations. Its executives argue that the quotes exist only because of 
the market-making power of the exchange, and that they should be free 
to sell that product.
    ``The trading floor is a factory floor, and we're in the business 
of manufacturing prices,'' says Robert G. Britz, an executive vice 
president of the NYSE. Putting it another way, he says, ``The brokerage 
firms send us wheat and we turn it into bread.'' Nonsense, argue Schwab 
and other brokers that must pay for the information. They contend that 
the market information belongs to everyone. They don't object to paying 
a modest user fee. But they insist that stock quotes are facts, like 
car accidents or the weather, which anyone should be free to report 
instantly--without having to pay a fee.
    What worries some big financial-data firms, such as Bloomberg, is 
that the NYSE and Nasdaq might someday try to assert ownership, not 
simply of real-time quotes but of the historic database of past 
transactions. In that event, Bloomberg might have to pay a fee whenever 
it summarized the price history of a particular stock. (An NYSE 
spokesman says the exchange has no plans to do anything like that.)
    A House Commerce subcommittee is scheduled to hold a hearing today, 
debating the merits of the issue. One committee chairman, Virginia 
Republican Tom Bliley, is backing a measure that would protect the 
stock exchanges from hackers and pirates--but wouldn't let them stake 
any ownership claim over the information in their databases. An 
alternative bill, sponsored by North Carolina Republican Howard Coble, 
would give the stock exchanges and other concerns more control over 
databases,
    The stock market quotes are just one example of the ``intellectual 
property'' issues that arise in the new Information Economy.
    Take sports scores. Several years ago, the National Basketball 
Association claimed, in effect, that it owned the scores to basketball 
games while they were being played. The NBA sued Motorola, which was 
transmitting the scores in real time over its pager network. But a 
federal appeals court sided with Motorola two years ago, arguing that 
the NBA had no proprietary right to the scores.
    Or consider historical sports data, of the kind beloved by fans. 
Should Major League Baseball be able to assert a property right to the 
fact that Ted Williams batted .406 in 1941? Some analysts think the 
Coble bill would give data collectors the power to protect a 
compilation of batting averages--or an index of poisons, for that 
matter. Bliley's bill, in contrast, would require a data-base company 
to add more creativity to its package--allowing a user, say, to compare 
Williams with other left-handed hitters in the American League--before 
getting protection.
    The danger is that in cyber-space--where information can be copied 
and retransmitted instantly--no one will own anything. Everything will 
be free for the picking.
    Congress will be struggling over the next few months to find a 
balance between simple facts, which should belong to everyone, and 
creative compilations of those fact's--which should belong to the 
people who do the work. Intellectual property protection is important--
it's the incentive that encourages writers to turn simple words into 
books, and musicians to turn random notes into songs. But finding the 
right balance won't be easy.
    The intellectual property debate now gathering strength in Congress 
is the kind of complicated issue that only a lawyer could love. But the 
rest of us, who have a big stake in the outcome, should start paying 
attention.

    Mr. Oxley. Similarly, should a stock exchange own the fact 
that an investor has just sold a stock at $25.2? That's after 
decimalization, of course. I don't think that we should raise 
barriers to the free flow of information to the public by 
creating ownership over facts and information, including stock 
prices that are contained in databases. H.R. 1858 does not do 
that.
    At the same time the exchanges and others that are required 
by the Federal securities laws to provide this information to 
the public should be protected from hackers and pirates who 
would undermine the integrity and value of the databases they 
publish. H.R. 1858 strikes the right balance between preserving 
investor access to market information and protecting the 
exchanges and others that disseminate that information.
    It provides a new Federal remedy for exchanges and other 
disseminators of market data to stop misappropriation of the 
databases they publish. And it preserves all of the remedies 
that currently exist under contract law so the exchanges and 
market participants remain free to structure their business 
relations as they deem most mutually beneficial, subject to the 
oversight of the Securities and Exchange Commission.
    This legislation provides an important tool to protect not 
only the quality and timeliness of market information, but also 
the access by investors everywhere to that information. I 
commend the Full Committee Chairman, Tom Bliley, for his 
leadership in introducing this bipartisan legislation. I also 
thank my colleagues on both sides of the aisle, including 
ranking member Dingell, my friend and ranking of the 
subcommittee, Ed Towns, and vice chairman of the subcommittee 
Billy Tauzin, Roy Blunt, and Ed Markey for their contribution 
and cosponsorship of this bill.
    I am pleased that this legislation enjoys the support of 
the SEC, as well as Consumers Union whose letter of endorsement 
of H.R. 1858 sent yesterday to me and Chairman Bliley--I would 
like to include it in the record and without objection it will 
be included as part of the record--as well as numerous 
electronic brokerages and financial information services and 
Internet companies.
    [The information referred to follows:]
                                            Consumers Union
                                                      June 28, 1999
Honorable Thomas Bliley
Chairman, Committee on Commerce
U.S. House of Representatives
Washington DC 20515

Honorable Michael G. Oxley
Chairman, Subcommittee on Finance and Hazardous Materials
Committee on Commerce
U.S. House of Representatives
Washington DC 20515
    Dear Chairmen Bliley and Oxley: Consumers Union, the nonprofit 
publisher of Consumer Reports magazine, wishes to state its support for 
H.R. 1858, the Consumer and Investor Access to Information Act of 1999, 
which is the subject of Commerce Committee hearings this week. 
Consumers Union also wishes to state its opposition to H.R. 354, the 
Collections of Information Antipiracy Act, which has been acted upon 
favorably by the Committee on the Judiciary.
    Consumers Union is both an owner of proprietary databases and a 
users of databases. It believes that any new protections for data bases 
must carefully balance the right of database owners not to have their 
work misappropriated by potential competitor data bases against the 
right of the public, researchers and others to have ready access to 
data that are in the public domain, as well as ``fair use'' rights 
regarding proprietary data. H.R. 1858 achieves this balance. H.R. 354 
does not.
    H.R. 1858 would prevent unfair competition; H.R. 354 would 
facilitate noncompetitive pricing for access to facts that belong to 
the public. H.R. 1858 would preserve the fair use of information; H.R. 
354 would not. Specifically applied to stock price quotations, H.R. 
1858 would protect the interests of small investors; H.R. 354 would 
not.
    Therefore, Consumers Union urges the Committee to act favorably on 
H.R. 1858 and the House to pass this bill, rather than H.R. 354.
            Sincerely,
                                            Mark Silbergeld
                                     Co-Director, Washington Office

    Mr. Oxley. We are fortunate to have several of these 
esteemed supporters of the legislation here before us today. I 
would like to welcome Ms. Annette Nazareth, the Director of the 
SEC's Division of Market Regulation who will be our first 
witness. I would also welcome and thank our second panel of 
witnesses, including representatives from DLJdirect, 
Ameritrade, Bloomberg, Charles Schwab and Company, the National 
Association of Securities Dealers, and the New York Stock 
Exchange for joining us today as the subcommittee considers the 
Consumer Investor Access to Information Act of 1999.
    That ends the opening statement of the Chair. I now 
recognize the gentleman from New York, Mr. Towns, for an 
opening statement.
    Mr. Towns. Thank you very much, Mr. Chairman. Let me say 
for probably the only time I ever do this, I would like to 
associate myself with your remarks.
    Mr. Oxley. Thank you.
    Mr. Towns. Today the subcommittee will consider a 
fascinating issue, market data and its protection from piracy. 
The markets of vast collections of transactions, the market 
data is the juice that makes the market tick. My home State in 
New York is the world capital of finance and home to the New 
York Stock Exchange, the world's biggest stock market and 
biggest producer of market data. It is important that data be 
protected from theft by third parties.
    Today we will hear testimony on how we can accomplish that 
important goal. We have a number of important witnesses today 
representing new electronic brokers, the exchanges and 
regulators. I am interested to hear the testimony because of my 
great concern that all investors get easy and fair access to 
market data.
    I would like to commend you, Mr. Chairman, for holding this 
hearing at this busy time of year. I know what your schedule is 
like these days because I know of some things that are 
happening here like H.R. 10. I have heard about that. I would 
like to welcome all of our witnesses and to say that I am 
anxious to hear from them. On that note, Mr. Chairman, I am 
going to yield back.
    Mr. Oxley. I thank the gentleman. Does the gentleman from 
New York have an opening statement?
    The gentlelady from California?
    Mrs. Capps. I just want to associate myself also with your 
remarks and I am pleased to be part of this hearing.
    Mr. Oxley. Thank you. It's good to have you with us.
    [Additional statements submitted for the record follow:]
 Prepared Statement of Hon. John Shadegg, a Representative in Congress 
                       from the State of Arizona
    Thank you Mr. Chairman. I commend Chairman Bliley and Chairman 
Oxley for their leadership on this issue and for conducting this 
hearing today. I am a strong supporter of H.R. 1858, the Consumer and 
Investor Access to Information Act of 1999, and believe this 
legislation provides necessary protections to America's stock exchanges 
without compromising access to stock quotes needed to facilitate 
trading. Providing open access to stock information is a longstanding 
practice within America's equity markets and a cornerstone of a free 
market society.
    H.R. 1858 offers certain protections to stock exchange databases 
without providing ownership rights. This, I believe, is an important 
distinction that will prevent future instances of fraud or misuse of 
stock exchange databases while continuing to provide consumers the 
access to stock trading information they currently enjoy.
    The provision of H.R. 1858 which grants stock exchanges a limited 
right of action against unauthorized use or misuse of database 
information is an appropriate method for combating fraud of exchange 
databases and an improvement to current securities law. Most 
importantly, this change does not impose any substantial regulatory 
burden on the exchanges or the brokerage firms.
    While the protections offered in Title II of H.R. 1858 are helpful 
for preventing misuse of exchange databases, the bill includes several 
limitations to preempt any potential overburdensome regulations imposed 
on investors and brokerage firms who depend on this information. 
Specifically, these limitations only allow for a right of action for 
non-contractual use of database information. If a current contract 
exists between an exchange and a brokerage firm or television network, 
a right of action provided by this bill cannot be used to dispute the 
contract.
    Furthermore, the bill applies only to real-time stock quotes and 
not delayed quotes which are typically used for analytical research of 
the various stock exchanges. Finally, H.R. 1858 places a priority to 
federal law regarding ownership of stock exchange databases so that a 
state law may not be used to circumvent limitations placed on ownership 
under this legislation.
    Again, Mr. Chairman, I wholeheartedly support the provisions 
included in Title II of H.R. 1858. This legislation strikes a necessary 
balance between combating fraud and misuse of exchange database 
information and continuing the tradition of providing accurate real-
time stock quotes to investors which is arguably one of the greatest 
factors contributing to the success of America's stock exchanges and 
the strength of our nation's economy.
                                 ______
                                 
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Mr. Chairman, thank you for holding this hearing on H.R. 1858, the 
Consumer and Investor Access to Information Act of 1999, specifically 
to address the issues in Title II of the legislation.
    The securities markets have been one of the biggest beneficiaries 
from electronic commerce. Title II of the legislation addresses the 
important role of databases as they relate to the stock markets and the 
real time market information that is the fundamental information that 
investors need.
    More and more investors have adopted a self-directed approach to 
investing, doing so through online brokers. The ease of access to 
information, as well as the quality and quantity of that information, 
has allowed them to become better educated investors. The efficiencies 
of technology have flowed down to the average investor with tangible 
benefits, as evidenced by the low cost of trading commissions today. 
But the most notable benefit is the access to real time market 
information that was previously only available to market professionals. 
It is hard to determine if this is a cause and effect relationship, but 
the availability of real time market information has coincided with the 
greatest bull market of our time.
    H.R. 1858 protects the conduits of this vital information--namely 
the exchanges and other disseminators of stock prices--by providing a 
new federal remedy against pirates and hackers who undermine the 
integrity and value of the databases they publish.
    Importantly, this legislation does not give anybody new property 
rights over facts and information. It preserves public access to facts 
and information, like stock prices. Access by the public to this 
information is essential to ensuring American investors have the tools 
they need to manage their finances.
    I look forward to hearing the comments of our witnesses today, and 
commend Subcommittee Chairman Oxley for holding this hearing. I also 
thank my cosponsors on H.R. 1858, including Chairman Oxley, Ranking 
Member Dingell, Subcommittee Ranking Member Towns, Mr. Markey, and 
others from both sides of the aisle.

    Mr. Oxley. We now turn to our first witness, the 
aforementioned Annette Nazareth, the director of the Division 
of Market Regulation of the SEC. Welcome, Ms. Nazareth, and 
thank you for appearing as our lead witness.

STATEMENT OF ANNETTE L. NAZARETH, DIRECTOR, DIVISION OF MARKET 
         REGULATION, SECURITIES AND EXCHANGE COMMISSION

    Ms. Nazareth. Thank you. Chairman Oxley, Congressman Towns 
and members of the subcommittee, I am pleased today to testify 
on behalf of the Securities and Exchange Commission concerning 
H.R. 1858, the Consumer and Investor Access to Information Act 
of 1999. This testimony will focus specifically on title II of 
the bill which relates to securities market information.
    In many important respects, a market can be defined most 
simply as the exchange of information about the buying and 
selling interest in a product. In particular, quotations as to 
the price and size at which buyers and sellers are willing to 
trade, the interaction of individual buy and sell interests, 
and the price and volume of transactions that are taking place.
    A market's quality depends on the extent to which this 
information is timely, comprehensive and reliable. In the U.S. 
securities markets, on an average trading day in 1998, reports 
of more than 12 million transactions and quotations were 
disseminated on a real-time basis.
    This real-time stream of information is then taken by 
vendors and broker-dealers and distributed through a myriad of 
different delivery devices to the millions of retail investors, 
institutions, securities firms, traders, derivatives markets, 
and other participants in the U.S. securities markets. The end 
result is that, regardless of where investors may be 
geographically, they are in the midst of the exchange of 
information concerning buying and selling interest and 
therefore are part of the market itself.
    The worldwide exchange of consolidated real-time 
information concerning transactions and quotations on the U.S. 
securities markets must be considered one of the great 
regulatory and technological achievements of our era as well as 
one of our national resources. It is this resource that H.R. 
1858 is designed to protect.
    The bill would prohibit the misappropriation of real-time 
market information and would provide new remedies against those 
who violate this prohibition. The bill also is carefully 
crafted to address the new problem of information theft from 
high technology systems without disturbing the regulatory and 
contractual regimes that are responsible for producing the 
benefits that we already have.
    The Commission therefore supports the bill as a balanced 
and reasonable legislative approach to continue the widespread 
availability of real-time market information. The need for H.R. 
1858 cannot be fully appreciated without pausing to consider 
the extent to which consolidated real-time market information 
did not just happen by chance. Rather, it was the result over 
the last 30 years of planning and concerted effort by the 
Congress, the Commission, the self-regulatory organizations, 
and securities industry as a whole.
    Moreover, these plans and efforts were brought to fruition 
only though an enormous investment of capital by the self-
regulatory organizations and the industry. The benefits of this 
information stream are as important as they are familiar. 
Consolidated market information increases transparency, 
addresses fragmentation and facilitates the best execution of 
customer orders. The success of the U.S. securities markets in 
providing efficient sources of capital is due in no small part 
to the quality and timeliness of market information.
    Of course, success in the past does not ensure continued 
success in the future. The nonstop change associated with 
innovative technology can produce problems as well as benefits. 
Recently, some aspects of the current system for collecting and 
disseminating market data have been questioned. In particular, 
the rising number of online investors has focused attention on 
their need for information that is easily available on terms 
that are fair, reasonable, and nondiscriminatory.
    To address this and other developing issues, the Commission 
has undertaken a review of the structures for obtaining market 
data and the role of data revenues in the operation of the 
markets. As part of this review, the Commission intends to 
issue a release describing the existing market data fees and 
revenues as well as their relationship to the funding of the 
self-regulatory organizations.
    While we have gathered a significant amount of data on 
these subjects, we are just in the preliminary stages of our 
analyses. Unfortunately, without the benefit of completing this 
review, we are unable to make judgments on specific issues on 
data collection and distribution costs or any suggested 
structural improvements. Nevertheless, it is clear that the 
extensive system for collecting and disseminating real-time 
market information must be protected from those who would 
pirate the information without contributing to the costs of 
supporting the system. It is, therefore, important to protect 
real-time market information against misappropriation and 
outright theft.
    The Commission supports title II of H.R. 1858 as a 
reasonable means to help achieve this objective.
    That concludes my testimony. Thank you.
    [The prepared statement of Annette L. Nazareth follows:]
Prepared Statement of Annette L. Nazareth, Director, Division of Market 
             Regulation, Securities and Exchange Commission
    Chairman Oxley, Congressman Towns, and Members of the Subcommittee: 
I am pleased to testify on behalf of the Securities and Exchange 
Commission (``Commission'') concerning H.R. 1858, the ``Consumer and 
Investor Access to Information Act of 1999.'' This testimony will focus 
specifically on Title II of the bill, which relates to securities 
market information.
Introduction
    In many important respects, a market can be defined most simply as 
the exchange of information about the buying and selling interest in a 
product--in particular, quotations as to the price and size at which 
buyers and sellers are willing to trade, the interaction of individual 
buy and sell interests, and the price and volume of transactions that 
are taking place. A market's quality depends on the extent to which 
this information is timely, comprehensive, and reliable.
    In the U.S. securities markets, on an average trading day in 1998, 
reports of more than 12 million transactions and quotations were 
disseminated on a real-time basis.1 This information was 
made available pursuant to joint securities industry plans for 
collecting, verifying, and distributing consolidated market information 
as mandated by the Securities Acts Amendments of 1975.2
---------------------------------------------------------------------------
    \1\ Sources: American Stock Exchange; Nasdaq Stock Market; New York 
Stock Exchange; Options Price Reporting Authority.
    \2\ Pursuant to rules adopted by the Commission under Section 11A 
of the Securities Exchange Act of 1934, the self-regulatory 
organizations jointly have filed plans providing for the consolidated 
dissemination of market information.
---------------------------------------------------------------------------
    The real-time stream of information is then taken by vendors and 
broker-dealers and distributed, through a myriad of different delivery 
devices, to the millions of retail investors, institutions, securities 
firms, traders, derivatives markets, and other participants in the U.S. 
securities markets. The end result is that, regardless of where 
investors may be geographically, they are in the midst of the exchange 
of information concerning buying and selling interest and therefore are 
part of the market itself. The worldwide exchange of consolidated, 
real-time information concerning transactions and quotations on the 
U.S. securities markets must be considered one of the great regulatory 
and technological achievements of our era, as well as one of our 
national resources.
    It is this resource that H.R. 1858 is designed to protect. The bill 
would prohibit the misappropriation of real-time market information and 
would provide new remedies against those who would violate this 
prohibition. The bill also is carefully crafted to address the new 
problem of information theft from high-technology systems without 
disturbing the regulatory and contractual regimes that are responsible 
for producing the benefits we already have. The Commission therefore 
supports the bill as a balanced and reasonable legislative approach to 
continue the widespread availability of real-time market information.
Genesis of Consolidated Market Information
    The seemingly ever-expanding flow of information produced by 
innovative technology has become so much a part of modern life that we 
perhaps have begun to take it for granted. The need for H.R. 1858 
cannot be fully appreciated, however, without pausing, at least 
briefly, to consider the value of what we have and the extent to which 
consolidated real-time market information did not just happen by 
chance. Rather, it was the result of planning and concerted effort over 
the last 30 years by the Congress, the Commission, the self-regulatory 
organizations, and the securities industry as a whole. Moreover, these 
plans and efforts were brought to fruition only through an enormous 
investment of capital by the self-regulatory organizations and the 
industry.
    The New York Stock Exchange first published reports of trades, by 
teletype, in 1867. Other markets later published trade reports also, 
but no central source of information on trading in a security existed. 
Exchanges also began making quotes known beyond their floors, but only 
market by market, and only to their members.
    In February 1972, the Commission issued a ``Statement on the Future 
Structure of the Securities Markets'' in which it emphasized the 
central role that consolidated information would play in the 
development of a national market system. Although the markets at that 
time were described as ``scattered'' and the technology for a 
communications system to link the markets was merely ``said to be 
available,'' the goal for the future was clearly enunciated: ``to make 
information on prices, volume and quotes for securities in all markets 
available to all investors, so that buyers and sellers of securities, 
wherever located, can make informed investment decisions.'' 
3
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    \3\ Securities and Exchange Commission, ``Statement on the Future 
Structure of the Securities Markets,'' at 9 (February 2, 1972).
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    Three years later, as part of the Securities Acts Amendments of 
1975, Congress created the legislative framework that was necessary to 
make this goal a reality. Emphasizing the critical importance that 
investors have access to ``accurate, up-to-the-second'' market 
information, 4 Congress greatly expanded the Commission's 
authority over the processors and distributors of securities 
information by adding Section 11A to the Securities Exchange Act of 
1934 (``Exchange Act.''). Specifically, the Commission was authorized 
to require the self-regulatory organizations to act jointly to develop 
the systems necessary to provide consolidated market information. In 
addition, Section 11A granted the Commission rulemaking authority to 
assure the prompt dissemination of market information on terms that are 
fair, reasonable, and non-discriminatory.
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    \4\ S. Rep. No. 75, 94th Cong., 1st Sess. 9 (1975).
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    Using its authority under Section 11A, the Commission has adopted a 
number of rules that require the collection and dissemination of 
consolidated information concerning transactions and quotations in 
equity securities. In addition, the rules create a framework under 
which the self-regulatory organizations are encouraged to act together 
to expand the availability of consolidated market information for 
equities. Pursuant to these rules, the self-regulatory organizations 
have designed and funded the technology systems that now put real-time 
market information on equities and options in the hands of investors 
around the globe.
    Recently, the Commission has encouraged efforts to increase 
transparency in the debt markets. The Municipal Securities Rulemaking 
Board, with the approval of the Commission, has developed next-day 
reporting for active municipal securities. Industry efforts, with the 
support of Congress and the Commission, developed GovPX, enhancing 
market information on government and agency securities. The Commission 
has asked the National Association of Securities Dealers to develop a 
reporting and surveillance system for corporate bonds, an initiative 
supported by this Committee in hearings and subsequent legislation, 
which passed the House earlier this month.
    The benefits of this information stream are as important as they 
are familiar. Consolidated market information increases transparency, 
addresses fragmentation, and facilitates the best execution of customer 
orders. In sum, the success of the U.S. securities markets over the 
last three decades in providing efficient sources of capital is due in 
no small part to the quality and timeliness of market information, and 
this market information is provided pursuant to the legislative 
framework Congress established in Section 11A of the Exchange Act.
Commission Study of Market Data Fees and Their Role in Funding the 
        Self-Regulatory Organizations
    Of course, success in the past does not ensure continued success in 
the future. The non-stop change associated with innovative technology 
can produce problems, as well as benefits. Recently, some aspects of 
the current system for collecting and disseminating market data have 
been questioned. In particular, the rising number of on-line investors 
has focused attention on their need for information that is easily 
available on terms that are fair, reasonable, and non-discriminatory. 
In addition, new technologies for trading securities have created 
pressures on market structure that may have implications for the 
current system of providing market information.
    To address these developing issues, the Commission has undertaken a 
review of the structures for obtaining market data and the role of data 
revenues in the operation of the markets. As part of this review, the 
Commission intends to issue a release describing existing market data 
fees and revenues, as well as their relationship to the funding of the 
self-regulatory organizations. While we have gathered a significant 
amount of data on these subjects, we are just in the preliminary stages 
of our analyses. Unfortunately, without the benefit of completing this 
review, we are unable to make judgments on specific issues regarding 
data collection and distribution costs or on any suggested structural 
improvements.
    Nevertheless, it is clear that the extensive system for collecting 
and disseminating real-time market information must be protected from 
those who would ``pirate'' the information without contributing to the 
costs of supporting the system. It therefore is important to protect 
real-time market information against misappropriation and outright 
theft. The Commission supports H.R. 1858 as a reasonable means to help 
achieve this objective.
Strengths of H.R. 1858
    Section 201 of the bill adds a new paragraph (e) to Section 11A of 
the Exchange Act. It prohibits the misappropriation of real-time market 
information and provides a variety of remedies for market information 
processors against persons who violate this prohibition, including 
monetary damages, disgorgement of ill-gotten gains, and injunctive 
relief. The bill thereby provides important new remedies to address a 
serious new problem--the vulnerability to theft of information 
distributed through high-technology systems.
    Moreover, H.R. 1858 preserves the two principal attributes of the 
current system for providing market information that have produced the 
benefits we have secured over the last thirty years--(1) the 
Commission's regulatory authority over the collection and dissemination 
of market information, and (2) freedom of contract for self-regulatory 
organizations and market participants to structure their business 
relations.
    The bill expressly provides that it is not to be construed to 
either limit the application of the federal securities laws or to 
impair the authority of the Commission. As noted earlier, Congress' 
decision in 1975 to direct the creation of a unified, national market 
system and to grant the Commission plenary authority to achieve this 
goal was perhaps the single most important decision that led to the 
current widespread availability of consolidated, real-time market 
information. The bill reaffirms the authority of the Commission in this 
regard.
    H.R. 1858 also would grant rulemaking authority to the Commission 
to prescribe the extent to which market information is considered to be 
``real-time'' market information for purposes of Section 11A. If 
necessary, therefore, the Commission would be empowered to ensure that, 
on the one hand, a narrow definition did not threaten the integrity of 
current systems for providing real-time information, and, on the other 
hand, that an overly broad definition did not unnecessarily restrict 
the free flow of information.
    The bill enumerates three factors that the Commission is to 
consider in defining real-time information--the present state of 
technology, the different types of market data, and how market 
participants use the data--all of which would be important if the 
Commission found it necessary to exercise its rulemaking authority. In 
exercising this authority, the Commission of course would consider the 
goal of preserving and expanding the availability of real-time market 
information.
    Another important strength of the bill is that it does not disturb 
the ability of market information processors, information vendors, and 
information users to fashion their own arrangements for distributing 
real-time market information. The freedom of parties to choose the 
terms on which they contract and the remedies available for breach, as 
well as the highly-developed law of contracts that supplements these 
agreements, is a tested regime for implementing efficient commercial 
arrangements.
    H.R. 1858 wisely leaves these arrangements intact. It preserves the 
rights of parties freely to enter into licenses or other contracts with 
respect to the dissemination of real-time market information. The bill 
also does not allow a market information processor to substitute the 
bill's remedies for contractual remedies in actions against those 
parties with whom the processor has chosen to enter into contractual 
relations. Instead, by focusing on the peculiar nature of market 
information, and its susceptibility to misappropriation and theft by 
parties that have no contractual relationship with a market information 
processor, the bill provides new remedies that are tailored to respond 
to new problems.
Conclusion
    In conclusion, the Commission believes that Title II of H.R. 1858 
represents a balanced and reasonable legislative approach to address 
the problem of information theft.

    Mr. Oxley. Thank you very much. The Chair will recognize 
himself for 5 minutes for questions.
    Ms. Nazareth, how significant is the use by retail 
investors of real-time quotes today, and how has online 
investing affected the use of this information by investors?
    Ms. Nazareth. I don't think there is any question but that 
with the incredible proliferation of online trading, we have 
seen a much greater increase in the use of real-time data by 
investors. That is why that we are in the process of studying 
the issue of dissemination of that data and the cost 
structures.
    Mr. Oxley. In fact, it's really been an exponential growth?
    Ms. Nazareth. Yes, it has.
    Mr. Oxley. Has the SEC done any studies in terms of where 
that is leading us in the future and what those numbers might 
look like a few years out?
    Ms. Nazareth. I don't think we have specifically studied 
where we think it is going. We have certainly done a lot of 
reviewing of the issues of online trading. But certainly one 
thing that has been very clear is that the growth has been 
exponential.
    Mr. Oxley. Why is it important then for the Commission to 
attain regulatory authority over the dissemination of stock 
quotes and the fees charged?
    Ms. Nazareth. Well, a key element of section 11A is not 
only the gathering and dissemination of the information, but 
the consolidation of the information. The value of the real-
time data here to the investor is that regardless of where the 
trading activity occurred, an investor would be able to see on 
a real-time basis where the buy and sell interest is on a 
particular security. So what has made this system so successful 
over the last 30 years is that we have effectively provided 
consolidated real-time information to investors throughout the 
marketplace no matter where they are geographically.
    Mr. Oxley. What information do the SROs provide to you and 
the public about the cost of the collection and dissemination 
of stock quote information, as well as, the uses of the 
revenues generated by fees for this data?
    Ms. Nazareth. Historically, the statute provides that the 
Commission has authority to determine whether the fees charged 
are fair and reasonable, and we have historically obtained the 
information that we thought was necessary to make that 
determination.
    I think what has happened more recently is that we have 
seen not only an exponential increase in the amount of online 
trading and therefore a very large increase in the use and the 
public interest in obtaining this real-time information, but 
also we had a number of pilot programs that were permissible 
under our regulations that permitted the SROs to test different 
pricing structures.
    Those pilot programs did not require us to determine the 
fairness of the pricing at the time. And so the combination of 
the fact that there were pilot programs now coming under more 
scrutiny as a result of the changing environment is causing us 
to really reexamine the whole issue to determine that this 
information is being appropriately disseminated in a fair and 
reasonable way.
    Mr. Oxley. I understand that the Commission is examining 
the transparency of market data, cost and uses of this ongoing 
study. Do you believe there should be greater transparency of 
this information and greater accountability of the SROs for 
their uses of the revenues generated by these fees?
    Ms. Nazareth. Certainly, as part of our study, we are going 
to shed a great deal of light on the cost structures and the 
pilot programs that I mentioned before that currently the SROs 
are operating under. I think also at that time we will invite 
comment on whether there should be some greater transparency in 
general with respect to the whole manner in which these fees 
are charged.
    Another obviously very important part of our concern as the 
regulatory agency is not only the cost structure but the fact 
that we consider it very important that part of these fees is 
going to support the SRO function itself which is obviously 
terribly important from an investor protection standpoint.
    Mr. Oxley. What type of timeframe do you have with that 
study?
    Ms. Nazareth. I think we are hoping for late summer or 
early fall to come up with the concept release.
    Mr. Oxley. Do online investors pay to access real-time 
stock quotations?
    Ms. Nazareth. For the most part, online investors have not 
been paying directly for those costs. Those costs have 
generally been borne by the firms that are providing them with 
the information.
    Mr. Oxley. What if they pick up the phone and call their 
broker? Do they pay for that?
    Ms. Nazareth. I think in general they probably do not.
    Mr. Oxley. They do not?
    Ms. Nazareth. I don't think for the most part they do.
    Mr. Oxley. At least directly?
    Ms. Nazareth. Yes.
    Mr. Oxley. My time has expired. The gentleman from New 
York, the ranking member, Mr. Towns.
    Mr. Towns. Thank you, Mr. Chairman. In your view, Ms. 
Nazareth, are the fees for market data excessive or unfair?
    Ms. Nazareth. I don't think we are in any position at this 
point to determine. Certainly the fees that the Commission has 
reviewed in the past we have made the determination are fair 
and reasonable. What we are undertaking as part of our study is 
to look at the fee structures that were permitted under the 
pilot programs and to basically open that whole process up for 
comment and to look again at the cost structures and consider 
what other factors should go into our determination as to 
whether the fees are fair and reasonable. We have not made a 
determination at this point.
    Mr. Towns. You say in the event that if the fees were 
lowered, market data fees were lowered, is there any mechanism 
for ensuring that these savings could be passed on to 
consumers?
    Ms. Nazareth. Again that is something that we would have to 
consider as part of the study. Right now, as I mentioned to 
Chairman Oxley, I don't think that the consumers are directly 
bearing these costs now. One of the very positive elements of 
how this whole regime has worked up to now is not only is this 
real-time data being very effectively collected and 
disseminated on a real-time basis, it has also been very widely 
available to the investing public without the investing public 
bearing the direct cost of it.
    Mr. Towns. If a stock exchange were to make a request for a 
reduction in its fees for real-time market data, what process 
would the SEC use in evaluating that?
    Ms. Nazareth. If they requested that the fees go down?
    Mr. Towns. Yes.
    Ms. Nazareth. Again, I think we would determine whether the 
fees were fair and reasonable and that the fees were not 
unreasonably discriminatory.
    Mr. Towns. Let me be specific. What process would the SEC 
use in evaluating the New York Stock Exchange's recent request 
for a reduction in its fees for real-time market data?
    Ms. Nazareth. Again, we would apply the statutory standard, 
is it fair and reasonable. So we would obviously want some 
information. Going forward again we will consider whether to 
add to factors we are considering, but we will look at the cost 
structure and we will look at how those fees are being applied 
and is it in the public interest, is it fair and reasonable to 
apply them on that basis.
    Mr. Towns. Tell me a little more about the pilot program, 
how that works.
    Ms. Nazareth. The pilot program has permitted the SROs to 
experiment with different pricing regimes to see whether they 
might--it gave them an opportunity to test different pricing 
structures to see whether they worked and whether they were 
favorably received. They have had historically various pilot 
programs under which they tested different pricing models.
    Mr. Towns. Thank you, Mr. Chairman. I yield back.
    Let me ask one more thing before I yield back. In your 
opinion, what is the most challenging aspect of overseeing the 
national market system? What is the most challenging?
    Ms. Nazareth. There are so many challenges, it's hard to 
pick. Obviously we are charged with ensuring that we have fair 
and orderly markets, and there are a tremendous number of 
elements that goes into whether one has fair and orderly 
markets. What we are focusing on today is one very significant 
element to that, which is the wide dissemination of market 
information which obviously goes to the whole transparency and 
fairness of the market itself.
    Mr. Towns. So you wouldn't want to list any categories----
    Ms. Nazareth. Certainly things like investor protection 
obviously is very important. Market transparency, best 
execution, all of the things that I am sure you hear us 
testifying about under any number of circumstances. They are 
all quite important.
    Mr. Towns. I yield back, Mr. Chairman.
    Mr. Oxley. The gentleman yields back. The gentleman from 
New York.
    Mr. Fossella. Thank you, Mr. Chairman. Just as a follow-up 
to Mr. Towns's question regarding the collection of the market 
data fees and the cost to consumers. What was the total value 
generated by these market data fees last year?
    Ms. Nazareth. I don't know. I just don't have that number 
handy. I could try to get that for you.
    Mr. Fossella. I guess there are some estimates that it 
exceeds $400 million. Out of curiosity, isn't that arguably a 
cost that otherwise could be saved by investors or consumers?
    Ms. Nazareth. Well, again, I don't think that the investors 
or consumers have been directly bearing that cost. Whether it 
is some way indirectly passed onto consumers, I don't know. But 
generally I think the firms have not been passing along that 
cost so the--those elements of the industry that have been 
unhappy with the current fees are obviously concerned not only 
because they are bearing the cost but they are not passing them 
on.
    From the Commission's perspective, obviously the thing that 
we think is so important is that the investors, in fact, have 
had access, wide access to this information. It has, in fact, 
not been costing them directly at this point. This real-time 
information is quite widely accessible.
    Mr. Fossella. I think all else being equal, the acquisition 
of a $400 million fee associated with any of these 
transactions--let's suppose that number was $40 billion for the 
sake of argument. I think that it could be recognized that it 
could be passed onto the consumer in the form of savings or tax 
on capital in the transaction.
    Ms. Nazareth. Obviously, it is part of the whole issue that 
we need to analyze, which is what are the revenues to the SROs, 
what are the costs associated with collecting and gathering and 
disseminating that information on a consolidated basis. It is 
certainly appropriate to look at all of those issues, but it 
has got to be considered as part of the larger issue of what 
are the costs.
    Mr. Fossella. Along those lines, the Commission recently 
stated that there have been technological developments that 
would allow vendors to provide more cost-effective execution of 
the security transactions?
    Ms. Nazareth. Yes.
    Mr. Fossella. So by extension, would that mean that the 
market data fees should be decreasing as a result from the 
efficiencies?
    Ms. Nazareth. I think again when we review the costs, there 
are a number of elements in our study that we will look at. One 
element of it--and an element that you suggest may be going 
down--are the incremental dissemination costs. Obviously the 
hardware and the infrastructure that has been built to gather 
this information--basically, the computer and hardware costs 
associated with that--also have to be considered.
    Again, I am not making a judgment as to where that is going 
to come out, but there are a number of elements to the cost 
structure.
    Mr. Fossella. I look forward to the release of that study. 
However, if one of these elements given the efficiencies of 
technological developments is allowing for the market data fees 
to decrease, these other elements presumably, if they 
cumulatively or individually allow for more efficiencies, then 
there is no way that the market data fees should be stagnant. 
If anything, they should point to the fact that these fees 
should be reduced, right?
    Ms. Nazareth. I assume that if all of the factors are as 
given, that may be what the study shows. But we will certainly 
keep an open mind about it.
    Mr. Fossella. I yield back, Mr. Chairman. Thank you very 
much.
    Mr. Oxley. The gentleman yields back. The gentlelady from 
California.
    Mrs. Capps. I would posit that investors perhaps are 
bearing the cost, whether directly or indirectly. Perhaps you 
could speak briefly on that. I have another topic that I want 
to bring up, too.
    Ms. Nazareth. The evidence that we have is most firms, 
probably for competitive reasons, for the most part are not 
directly passing the cost along to the retail public. As to how 
they would be doing it indirectly, I don't know. Obviously one 
could argue that there would be other methodologies by which 
they could get back some of those fees, but I don't know 
exactly how they would be doing it.
    Mrs. Capps. Something related to the cost of their doing 
business in general?
    Ms. Nazareth. Yes.
    Mrs. Capps. I am most interested in learning from you your 
advice for Congress as we struggle with how to find a balance 
between whether these are simple facts or a compilation of the 
facts that belong to people who do the work. I think this is 
the area that we are going to be struggling with and wrestling 
with, and I came to learn about that. If you could expand on 
that a little about that would help me.
    Ms. Nazareth. Which isn't addressed in this bill----
    Mrs. Capps. I understand. It is related.
    Ms. Nazareth. Certainly section 11A by its terms states 
that this is information that is important to be gathered and 
that that can be charged for in some way. By providing for fair 
and reasonable fees, it assumes that fees can be charged, so 
the issue is how do we determine what is fair and reasonable 
for real-time data.
    Some of these issues obviously you address a little bit in 
your bill. But it is part of the whole study that we are going 
to have to really analyze what goes into the cost structure, 
what is the real-time data, how should this be working in the 
future, and, obviously, in an environment that changed quite 
significantly over time because of the advantages in 
technology.
    Mrs. Capps. Have you figured out a format for how to do 
this kind of measurement?
    Ms. Nazareth. Not yet. We are in the process of measuring 
it.
    Mrs. Capps. Where would you go to get resources for making 
these determinations?
    Ms. Nazareth. Some of the background information on the 
costs and the cost structures, we have obtained directly from 
the SROs. Then we are opening--the study--we are calling it a 
study. It is actually a concept release. We are opening up the 
whole issue to the public. There will be a notice and comment 
period. We will be getting a number of comments on how people 
think they should be analyzed.
    Mrs. Capps. So you are allowing a lot of different kinds 
of----
    Ms. Nazareth. Oh, yes. We are referring to it as a study, 
but it is actually a concept release that will be open for 
notice and comment.
    Mrs. Capps. Okay. I have no further questions. Thank you.
    Mr. Oxley. The gentlelady yields back. The gentlelady from 
Colorado, Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman. I really have no 
questions for this witness. Let me just say, as I came in a few 
minutes after the opening statement, that I am really glad that 
we are talking about this bill in particular because I think as 
Internet business grows at break-neck speed, the brokerage 
industry is going to have to meet the demands for greater 
access to accurate and timely information. And I know almost 
every day we grapple with this issue in the subcommittee.
    I think the crux of the issue we are talking about today 
and perhaps over time in a broader context is what do we do 
about property rights, as this witness testified, and how does 
that extend to other industries? It is a very real issue; and I 
look forward to dealing with it, both with this bill and other 
issues. Thanks, and I yield back.
    Mr. Oxley. The gentlelady yields backs; and we thank you, 
Ms. Nazareth, for your excellent testimony and helping the 
panel understand this very difficult issue. Thank you very 
much.
    The Chair would now call the second panel to the witness 
table. In the interests of time, I will introduce you as you 
move forward. Mr. Michael Hogan, senior vice president and 
general counsel for DLJdirect from Jersey City, New Jersey; Mr. 
J. Joe Ricketts, chairman and co-CEO of Ameritrade Holding 
Corporation from Omaha, Nebraska; Mr. Stuart Bell of Bloomberg 
Financial Markets in Princeton, New Jersey; Ms. Carrie Dwyer, 
executive vice president for corporate oversight from Charles 
Schwab and Company of San Francisco; Mr. S. Dean Furbush, 
senior vice president and chief economist of the National 
Association of Securities Dealers here in Washington; Mr. 
Richard P. Bernard, executive vice president and general 
counsel of the New York Stock Exchange, New York City.
    Thank you to all of you.
    Mr. Hogan, welcome back. It is good to have you back again. 
We will begin with you, since you are all warmed up from last 
week. Thank you.

   STATEMENTS OF MICHAEL J. HOGAN, SENIOR VICE PRESIDENT AND 
 GENERAL COUNSEL, DLJDIRECT; J. JOE RICKETTS, CHAIRMAN AND CO-
  CEO, AMERITRADE HOLDING CORPORATION; STUART BELL, BLOOMBERG 
 FINANCIAL MARKETS; S. DEAN FURBUSH, SENIOR VICE PRESIDENT AND 
 CHIEF ECONOMIST, NATIONAL ASSOCIATION OF SECURITIES DEALERS; 
   RICHARD P. BERNARD, EXECUTIVE VICE PRESIDENT AND GENERAL 
 COUNSEL, NEW YORK STOCK EXCHANGE; AND CARRIE DWYER, EXECUTIVE 
VICE PRESIDENT, CORPORATE OVERSIGHT, CHARLES SCHWAB AND COMPANY

    Mr. Hogan. Thank you, Mr. Chairman. Good morning, Chairman 
Oxley, Congressman Towns, and members of the subcommittee. My 
name is Michael Hogan, and I am the senior vice president and 
general counsel of DLJdirect, an online brokerage firm with 
over 600,000 online subscribers. I am very pleased to be here 
today to represent DLJdirect and to speak in support of H.R. 
1858.
    As you are aware, my testimony today will focus on title II 
of the proposed legislation addressing the issue of market 
data. I thank you, ranking member Towns, and other cosponsors 
of this bill for your leadership in addressing this critical 
consideration.
    This bill protects market information processors against 
hackers or others who will undermine the integrity of the data 
they disseminate, and it safeguards the ability of consumers to 
access this important information at the lowest possible cost. 
I would like to focus briefly on a few critical points that are 
separate from my full statement which has been inserted into 
the record. The Internet has revolutionized the securities 
industry so dramatically that it is virtually unrecognizable 
from only a few years ago. At least 6.3 million Americans 
currently invest online; at least 20 million households use the 
Internet for investment information. Every day one of every 
three individual trades is executed online. How important to 
the public is readily and affordable access to real-time market 
information? Customer demand speaks for itself. In the most 
recent 30-day period for which figures are available, DLJdirect 
consumers accessed over 53.5 million real-time quotes. That is 
in addition to an uncounted number of delayed quotes that we do 
not track.
    DLJdirect agrees with Chairman Bliley's statement that 
facts cannot be owned. Instead, they are in the public domain. 
In particular, we believe that real-time market information 
should not be owned or be considered property.
    Mr. Oxley. Sorry about that. I didn't reload.
    Mr. Hogan. H.R. 1858 strikes the right tone by rejecting a 
property-right approach to real-time quotes. A few particular 
points deserve mention. First, H.R. 1858 provides a limited 
right to civil action against misappropriation without 
interfering with the existing contractual relationships and 
without creating an unnecessary and chilling criminal right of 
action.
    Second, we support the bill's endorsement of the principle 
that expectations of real-time will change with technology and 
that the Securities and Exchange Commission is the appropriate 
party to deal with this fact. Title II of H.R. 1858 extends 
protection only to real-time market information, but in trying 
through legislation the guiding criteria to be used in making 
and continuously reviewing that determination.
    Third, the explosion of online investing has led to an 
unexpected windfall for securities markets. According to one 
recent report, the markets earned $413 million from the sale of 
market data in 1998. It is inconceivable that the direct costs 
involved in collecting and distributing the information in any 
way approach $413 million.
    Substantial prices for access to real-time market data 
result in additional costs to consumers; frequently in the form 
of higher trade prices or fees for other investment services. 
In a perfect world, real-time market data, like delayed data, 
should be entirely in the public domain. The provision of 
market information collected from the public should not become 
a source of profit for the securities marketplaces which are 
not-for-profit organizations.
    However, compiling real-time information is not without 
some cost. But what is important is that this bill leaves 
intact the SEC's existing authority needed to ensure public 
access at a reasonable price. We at DLJdirect thank the 
subcommittee and the committee as a whole for its direction and 
leadership in protecting consumer and investor access to market 
data.
    Mr. Chairman, I greatly appreciate the opportunity to be 
here with you and would be happy to address any questions that 
you or the other members might have. Thank you.
    [The prepared statement of Michael J. Hogan follows:]
   Prepared Statement of Michael J. Hogan, Senior Vice President and 
              General Counsel, DLJdirect' Inc.
    Good morning, Chairman Oxley, Ranking Member Towns, and members of 
the Subcommittee. My name is Michael Hogan, and I am the Senior Vice 
President and General Counsel of DLJdirect Inc. DLJdirect is the online 
brokerage firm of Donaldson, Lufkin & Jenrette, Inc., with over 600,000 
online subscribers. I am very pleased to be here today to represent 
DLJdirect and to speak in support of H.R. 1858, the ``Consumer and 
Investor Access to Information Act of 1999.'' As you are aware, my 
testimony today will focus on Title II of the proposed legislation, 
addressing the issue of securities market information and real-time 
market data. At the outset, I would like to express DLJdirect's 
appreciation to you, Chairman Bliley, Congressman Towns, and the other 
co-sponsors of this bill for your leadership role in protecting market 
information processors against hackers or others who undermine the 
integrity of the data they disseminate while leaving to the Securities 
and Exchange Commission (``SEC'') the role of assuring the lowest cost 
distribution of real-time quotes by online brokers and others to 
consumers.
    DLJdirect was founded just over ten years ago as a division of 
Donaldson, Lufkin & Jenrette. In the decade since we were founded, the 
financial services industry has undergone a tremendous transformation. 
The Internet has enabled millions of consumers to become self-directed 
investors by lowering transaction costs, increasing access to market 
information, and providing greater convenience and speed. As Chairman 
Bliley noted in introducing this legislation, currently 6.3 million 
Americans invest online, and 20 million households use the Internet for 
investment news, quotes, and ideas. Each day, 1 of every 3 individual 
trades is executed online. Analysts predict that by the year 2000, ten 
million Americans will be managing their investments online.
The Need For Accurate And Timely Information
    DLJdirect's online customers are a different breed of investor than 
past investors who executed transactions through traditional, offline 
brokers. Our online investor is self-directed and desires the same 
access to information that traditionally brokerage firms supplied only 
to their brokers. To be competitive, an online broker must provide both 
customers and potential customers access to all forms of financial 
information, including press releases and news accounts, research 
reports, and price quotes--specifically, real-time price quotes during 
trading hours. DLJdirect customers accessed over 53,500,000 real-time 
quotes, in addition to an uncounted number of delayed quotes, during 
the mid-April to mid-May one-month reporting cycle. This information, 
which only a few years ago was available only to brokerage firm 
salespersons and traders, empowers those self-directed investors to 
manage their own financial affairs using current and accurate 
information in a convenient, ``one-stop shopping'' package.
    And we aren't the only providers of investment information in this 
new online financial universe. Financial information and data also is 
offered by Internet portals and other non-broker financial sites, which 
all make immediately available a plethora of data that just a few years 
ago would have been unimaginable.
    As this brief description indicates, information is an essential 
part of our service. And ``real-time'' quote information is its most 
central component. An online investor, whether considering an 
investment, logging in to monitor an account balance, or checking on a 
news story, wants to know the price of the stock in question at that 
moment in time. The power of the Internet is that it permits us 
immediate access to current information; anything less than ``real-
time'' is for many purposes unacceptable.
    Through access to real-time market information, online investors 
gain the ability to make investment decisions based on the same 
information possessed by brokers and other individuals who are in the 
know. As Chairman Bliley recognized in his background report submitted 
with H.R. 1858, ``This access to information about the stock market has 
empowered investors and given them greater control over their 
finances.''
H.R. 1858 Strikes The Right Balance
    DLJdirect supports H.R. 1858 because it protects rights to 
databases while ensuring the continued free flow of important market 
information to consumers--a flow that has grown increasingly important 
in our Information Age.
    Five aspects of the bill deserve particular mention:

 First, H.R. 1858 provides a limited right of action against 
        misappropriation and leaves contractual relationships 
        unaffected.
 Second, it recognizes that market data belongs in the public 
        domain.
 Third, the legislation distinguishes between ``real-time 
        market information'' and delayed market data.
 Fourth, the bill leaves intact the SEC's authority to 
        implement the national market system for securities and 
        regulate market information processors.
 Fifth, H.R. 1858 provides a sober, measured, yet effective 
        array of civil remedies for violations of its provisions and 
        establishes a reasonable statute of limitations.
H.R. 1858 Creates A Nuanced Right Of Civil Action That Does Not Intrude 
        On Contractual Relationships
    H.R. 1858 addresses what market information processors perceive to 
be a gap in existing forms of protection for data compilations without 
creating wholly new categories of protection that might result in 
impediments to the free flow of the underlying information. The bill 
accomplishes this by creating a limited right of action against 
misappropriation by those with whom the information processor maintains 
no contractual relationship.
H.R. 1858 Recognizes That Market Data Belongs In The Public Domain
    We at DLJdirect applaud Chairman Bliley's ringing affirmation of 
the principle that ``facts cannot be `owned.' Instead, they are in the 
public domain.'' This basic understanding is particularly true in the 
context of the markets and more than justifies the carefully nuanced 
protection extended to market information in this bill.
    Long ago, Congress recognized the importance of a national market 
system. In 1975, it significantly amended the Securities Exchange Act 
of 1934 to coordinate public dissemination of market data by bringing 
together orders and trades from public customers, routed through 
brokers, to exchanges or market makers for execution. The last sale 
data is then routed back through a centralized conduit, the 
Consolidated Tape Association, to brokers, and made available for the 
benefit of the next customers. Congress should ensure that this type of 
data--initiated by consumers, used by consumers, and which clearly is 
of public interest--remains readily accessible at the cheapest possible 
cost to all.
    Moreover, there is no need to ensure an ``incentive'' to the 
information processor to compile this information. The nation's 
securities markets are obligated by U.S. law to do so. Thus, there is 
little reason as a matter of policy to accord them greater protection 
than this bill already embodies.
H.R. 1858 Endorses The Principle That Expectations Must Change With 
        Technology
    Title II of H.R. 1858 extends its protection only to ``real-time'' 
market information. It is our view that many forms of non-real-time, or 
delayed, market information will not receive added protection under 
this bill. As the Subcommittee is aware, section 101(6)(B) of the bill 
expressly excludes databases ``required by Federal statute or 
regulation'' from H.R. 1858's added protection. Thus, because delayed 
market information is not included in Title II and, in many respects, 
is expressly excluded from the scope of Title I, its status will be 
unaffected by this legislation. That is entirely appropriate.
    Even more important is the bill's grant to the SEC of the authority 
to define ``real time'' and its express recognition of the need to 
consider the evolving capabilities of technology and the expectations 
and needs of market participants. As technology advances, and people's 
expectations increase, the appropriate scope of what they consider 
timely or ``real-time'' inevitably will change. In the online world, 
customers demand real-time information that is, indeed, immediate, or 
at least within seconds of the last trade execution.
    In any event, H.R. 1858 wisely leaves the details of what real-time 
includes to the experts, the SEC, but enshrines in legislation the 
guiding criteria pursuant to which the agency should make that 
determination.
H.R. 1858 Leaves Intact The SEC's Authority To Implement the National 
        Market System and Regulate Market Information Processors
    Ensuring that the investing public has access to real-time market 
information is not enough. Congress also must leave in place the 
mechanism needed to ensure public access at a reasonable price, a price 
that does not deter consumer access. The explosion in online investing 
has led to an unexpected financial windfall for securities markets. 
According to a recent report conducted on behalf of the Securities 
Industry Association, the markets earned $413 million from the sale of 
market data in 1998. Just to offer one example of the impact of these 
revenues on a single market, the New York Stock Exchange, Inc. 
(``NYSE'') alone collected $111 million in fees for access to market 
data. This $111 million comprised 15.3% of the NYSE's revenues for 
1998. As usage of the Internet for investment purposes increases, so 
does the revenue gained from sale of the real-time market information.
    DLJdirect and the rest of the online broker community recognize the 
costs involved in maintaining the complex base of data required by law 
and by public expectations. Yet, because maintenance of this data is 
legally required, the classic rationale for enhanced protection--to 
provide adequate incentives so that databases will continue to be 
created--is absent. It is inconceivable that the costs entailed in 
collection and distribution of this data in any way approach the 
revenues received. Moreover, the rapid increase in demand for real-time 
quotes, and concomitant surge in revenues earned from sale of the 
information by the securities markets, presumably entails no additional 
or commensurate cost increase, adding even further to this disparity.
    H.R. 1858 properly leaves the SEC as the arbiter of the correct 
cost recovery formula to ensure the industry can provide real-time 
market information to the public.
H.R. 1858 Adopts A Measured Approach Toward Remedies For 
        Misappropriation
    Finally, DLJdirect also supports the decision by the sponsors of 
H.R. 1858 to provide for civil equitable and legal remedies that are 
flexible enough to deter and compensate for misappropriation, without 
creating the specter of criminal prosecution in a newly created and 
unsettled legal landscape. DLJdirect also believes that a one-year 
statutory limitation period for misappropriation of data that is of 
fleeting value is entirely reasonable and, again, exemplifies the 
measured approach that H.R. 1858's sponsors have embraced.
    We at DLJdirect thank the Subcommittee and the Committee as a whole 
for its direction and leadership in protecting consumer and investor 
access to market data. Mr. Chairman, I greatly appreciate the 
opportunity to be here with you today and would be happy to address any 
questions you or the other members might have.
    Thank you.

    Mr. Oxley. Thank you.
    Mr. Ricketts from Ameritrade.

                  STATEMENT OF J. JOE RICKETTS

    Mr. Ricketts. Thank you kindly for inviting me. It is my 
pleasure to be here. This is an issue that is near and dear to 
my heart, to the heart of my customers, and to the heart of my 
shareholders. I have a prepared statement that I am going to 
deviate from because I find a greater degree of sophistication 
here than I was aware was going to be here.
    Mr. Oxley. Without objection all of your statements will be 
made part of the record, so feel free to give us your best shot 
off the record.
    Mr. Ricketts. Thank you. I have been in this business for a 
long time. To give you an idea of who I am and what the company 
is, I started in the securities business in 1968, started the 
discount broker in 1975. We were the first to bring touch tone 
telephone and trading and quotes to the market in 1988, and we 
were the first to have Internet trade in August 1994. So, 
although I am not a technician, I understand what technology 
does for the benefit of our customers who represent people in 
this room. We don't do business with institutions. Our 
customers are strictly Mr. and Mrs. America.
    We do about 3 percent of the trades in numbers on NASDAQ 
and the New York Stock Exchange. We are fifth or sixth in size 
of online brokers. So we represent a substantial part of the 
market and these quote fees are very important to our 
customers.
    We used to charge our customers. We used to pass on the 
fees directly charged to us by the purveyors in a direct cost. 
Our competitors started giving it away so we started giving it 
away at that time. We took away that direct charge to our 
customers and incorporated that charge into our cost. Every 
time that we reduced the friction to our customers, that is 
bring more information at a lower cost, we increase the 
activity in our customer accounts. It is a benefit. It 
increases the liquidity and the breadth and depth of the 
market. When we have to increase the cost to our customers, of 
course just the reverse is happening. The very discriminatory 
fees that exist today have a very detrimental effect on the 
individual investors, the type of people that we have in this 
room that would want to invest for their own particular 
accounts.
    Now, with respect to this particular bill, protection of 
the database is extremely important. We are all in favor of 
that. It needs SEC oversight. The thing that we want to be 
careful about is setting up a monopoly where we have one 
purveyor of information and we are going to be subject to 
whatever that purveyor is going to charge. We have already seen 
the misuse of the cost in the dollar figures that you and 
everybody else has talked about this morning.
    So my customers and myself purport that that information of 
flow to the marketplace that makes up the bid and ask, that is, 
the orders to place buy and sell orders belongs to my 
customers. So instead of being charged for the bid and ask last 
sale of market information, we should be paid for that 
information because we are the ones providing the flow of 
information to the exchanges and to the purveyors that then put 
together this information and make it available to the rest of 
the world.
    Thanks. I would be open to any questions.
    [The prepared statement of J. Joe Ricketts follows:]
  Prepared Statement of J. Joe Ricketts, Chairman and Chief Executive 
                Officer, Ameritrade Holding Corporation
    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to appear before you today. My name is Joe Ricketts and I 
have served as a director and as Chairman and Chief Executive Officer 
of Holding since 1981. In 1975, I became associated with Ameritrade and 
served as a director, officer and stockholder. Prior to 1975, I was a 
registered representative with a national brokerage firm, an investment 
advisor with Ricketts & Co. and a branch manager with The Dun & 
Bradstreet Corporation. I am a director of Knight/Trimark, the largest 
market-maker in the world, CSS Management, Inc., a software development 
firm for the brokerage industry, and for Net.B@nk, Inc., an Internet 
banking firm. I serve still as a member of the District Committee for 
District 4 of the NASD. I am a member of the Board of Trustees for 
Father Flanagan's Boys' Home (Boys Town) and serve on the Board of 
Directors of Creighton University. I received my B.A. in economics from 
Creighton University.
Ameritrade
    Ameritrade is a leading full-service provider of low-cost, high-
value online discount brokerage services to the rapidly expanding 
population of self-directed investors in the U.S. and abroad. 
Ameritrade was formed in 1997 through the consolidation of three 
previously independent operating units--Ceres Securities, Inc., K. 
Aufhauser & Co. and the Broker division of All American Brokers, Inc. 
In October 1997, we launched a major advertising campaign to introduce 
our revolutionary ``8 bucks a trade'' campaign and began emphasizing 
our Ameritrade brand as the major player in the low commission segment 
of online brokerage. The campaign succeeded in building brand 
awareness, helping us to open 225,000 new accounts and add a net $4.1 
billion to assets in customer accounts during fiscal 1998. Since the 
campaign's introduction, trades per day have grown at a 312% compound 
annual growth rate.
Online Discount Brokerage Industry Overview
    The discount brokerage industry in which we compete has grown 
rapidly in the past decade. This expansion has been driven primarily by 
the enduring strength and recent growth of the U.S. equity markets. 
Equity market capitalization in the U.S. has doubled in size in the 
past five years, to approximately $13.5 trillion. The opportunity to 
earn superior returns and create wealth has attracted an increasing 
number investors to the securities markets. Discount brokerage growth 
has been driven by increased accessibility to and affordability of 
brokerage services made possible by rapid advances in communications 
and processing technology and by increased competition among brokerage 
companies.
    Internet penetration continues to rapidly increase. International 
Data Corporation (``IDC'') estimated that there were 56 million 
Internet users in the U.S. by the end of 1998. The Internet enables 
investors to identify, analyze and transact investment opportunities at 
far lower costs than previously available. These factors have yielded 
tremendous growth also for online discount brokers. According to IDC, 
online brokerage daily trading volume more than tripled during the two 
year period of 1997 and 1998 to more than 300,000 trades per day. Over 
that same time period, the number of online brokerage accounts grew 
from 1.6 million to an estimated 6.4 million. Overall, IDC predicts 
exceptionally strong growth in all key industry metrics for the 
foreseeable future.
    Accordingly to IDC, international markets also present significant 
opportunities for online brokers. While Web usage in Europe trails U.S. 
rates, IDC predicts Web penetration will grow faster in Europe than in 
the United States. Correspondingly, IDC expects Internet commerce in 
Europe to triple over each of the next three to four years.
    We believe that the growth, both past and expected, in our core 
online discount brokerage business results from several fundamental 
factors, including:

 Further increases in the use of the Internet overall, given 
        the accessibility to useful information, convenience, ease of 
        use and continuously expanding resources available on the 
        Internet;
 Increased consumer acceptance of and confidence in the 
        Internet as a reliable, secure and cost-effective medium for 
        financial transactions;
 The ability of online brokerage to provide individuals greater 
        control over investing, driven by enhanced access to investment 
        opportunities and online financial information, including 
        research, real-time quotes, charts, new and company 
        information;
 The appeal of online trading to value conscious investors 
        based on its lower prices as well as a greater range of 
        investment alternatives; and
 Growth of financial assets held by individual investors.
H.R. 1858
    My testimony today will focus on Title II of H.R. 1858, which 
relates to improving access to securities market information databases. 
I will preface my remarks on Title II with a brief discussion of the 
manner in which securities market information currently is created, 
collected and disseminated.
    The most important aspect of H.R. 1858 from the perspective of the 
Internet investor is the protection afforded and public accessibility 
to stock quotes. As Chairman Bliley has stated, millions of American 
investors depend upon these quotes for important investment decision. 
Congress needs to assure them access to this vital information which 
they themselves create through their orders. There is no place for 
monopolistic control over this information or for discriminatory 
treatment of Internet investors.
    We particularly agree with the approach of H.R. 1858 in not 
creating any new property rights over this market information. The 
market information processors' actions should be reviewed by the 
Securities and Exchange Commission so as to reinforce the important 
message which H.R. 1858 sends--namely, do not impede public access to 
real-time stock quotes.
The Consolidated Quotation Reporting System
    The collection and distribution of quotation information for equity 
securities is governed by Section 11A of the Securities Exchange Act of 
1934 (the ``Act'') and the rules promulgated thereunder. Under these 
rules, brokers and dealers must supply their quotations to the 
exchanges and the NASD, which, in turn, must collect and transmit this 
information to information vendors on a real-time basis. These 
quotations are then disseminated by the vendors to the public.
    The national securities exchanges and the NASD (not the brokerage 
firms and their customers) are the participants in the consolidated 
quotation system (``CQS''), and the Securities Industry Automation 
Corporation (``SIAC'') manages the collection, processing, and 
dissemination of quotation information on behalf of the CQS. CQS 
participants derive income from the fees charged to vendors and to 
firms like Ameritrade which subscribe to the consolidated quotation 
system. In general, the revenue generated by the CQS is shared among 
the CQS participants based on a participant's annual share of the total 
number of quotations submitted by all participants.
The Consolidated Transaction Reporting System
    Public transaction reporting for equity securities is also governed 
by Section 11A of the Act and various rules promulgated by the SEC. 
Under these rules, each registered exchange and the NASD must file a 
transaction reporting plan regarding transactions effected on its 
market.
    The exchanges and the NASD have formed the Consolidated Tape 
Association (``CTA'') and established the consolidated tape to 
disseminate last sale transaction information for trades executed on 
any of the participant exchanges or through NASDAQ. The CTA plan is 
administered by the participant exchanges, which determine policy 
matters and oversee operation of the system. The day-to-day operations 
of the consolidated tape, including the collection, processing, and 
dissemination of last sale transaction information, are conducted by 
SIAC subject to the administrative oversight of the CTA.
    CTA participants derive income from the fees charged to vendors and 
to firms which subscribe to the consolidated tape. In general, this 
income is divided among these participants based on each participant's 
annual share of the total number of last sale transactions reported by 
all participants.
Obtaining Market Data
    In order for a broker-dealer to receive real time quote and trade 
information, it must enter into subscriber agreements with the 
administrators of the CQS and CTA plans. These agreements require 
subscribers to describe how they will use the information, the type of 
services the subscriber will provide, and set forth the fees 
subscribers must pay in order to receive real time market information. 
These agreements also contain the terms and conditions under which 
subscribers may redistribute market data to customers.
Title II of the Bill
    In general, we believe that market information has value to the 
extent that investors have the ability to utilize it in making their 
important trading decisions. As you know, the ability of investors to 
trade electronically online has enhanced their execution capability 
significantly. Because of the ease and speed with which customers may 
transact, the demand for and value of real-time market information has 
increased because investors now have the ability to act upon that 
information quickly.
    We recognize in order to collect and process quote and trade 
information efficiently, market information processors must make 
considerable investments in sophisticated technology. However, we also 
recognize that the cost of these investments are passed along to 
broker-dealers like Ameritrade in the form of membership dues, 
transaction fees and market data fees. These fees are passed along to 
customers through the commissions charged for order execution.
    We believe that Title II of the Bill is helpful because it provides 
protection for market information processors without declaring that 
they have proprietary rights to real time market information. In our 
view, this aspect of Title II is critical because that real time market 
information is not their property. Instead, the creation, collection 
and distribution of real time market information represents the 
collective efforts of public customers, the brokerage community and the 
exchanges.
    This point can be clarified by analyzing the nature of quotation 
and transaction information. In essence, a quotation is an order that 
is disseminated to others and is an expression of a person's desire to 
trade. Under federal law, brokers and dealers must supply quotations to 
their exchange or the NASD, which, in turn, must collect and transmit 
this information to vendors on a real time basis. Thus, the creation of 
quotation information is not attributable to market information 
processors Instead, their function is limited to collecting this 
information and distributing it to vendors.
    The same analysis applies to transaction reports. A transaction 
report is a dissemination of the price at which a buyer and seller have 
agreed to transact. While the exchanges provide a facility for the 
buyers and sellers to meet, they are not involved in ensuring that 
buyers and sellers actually agree on a price. Thus, the creation of 
last sale data is attributable to the efforts of buyers and sellers, 
not to the efforts of market information providers, whose function is 
limited to reporting information generated by the efforts of others.
    The exchanges and the NASD have spent a considerable amount of time 
and effort to develop the infrastructure necessary to facilitate 
transactions among market participants. Thus, it is appropriate to 
characterize the process of generating and distributing market data as 
a cooperative venture among the public, the industry and the exchanges. 
By clarifying that the exchanges do not have proprietary rights in 
real-time market information, the Bill accurately reflects the manner 
in which this information is created and distributed.
    Congress should ensure that issues arising with respect to real 
time market information will continue to fall under the purview of the 
SEC and will continue to be subject to review under the federal 
antitrust laws. As the Committee knows, many serious issues exist 
regarding the costs associated with obtaining real time market 
information and the manner in which these costs are allocated. For 
example, the current fee structure for obtaining and redistributing 
real time market information is unfairly disadvantageous to online 
brokers such as Ameritrade. More specifically, if a customer calls a 
broker and asks for a real time quote on a stock, the broker is not 
charged for redistributing this information to the customer. 
Conversely, an online broker that makes available real time quote 
information to its customers electronically must pay a separate fee for 
redistributing this information.
    We believe that this disparity cannot be reconciled with the 
Section 11A of the Securities Exchange Act of 1934, which requires that 
market data be available to all persons on ``fair and reasonable 
terms'' and that all persons may obtain transaction and quotation 
information on terms which are not ``unreasonably discriminatory.'' The 
SEC recently has been encouraging market information processors to 
reexamine their fee structures, and these efforts have been beneficial 
for market participants. We favor reinforcement of the SEC's ability to 
exert its influence over this important matter.
    We are encouraged by the Bill's clear expression of the 
government's continued antitrust authority in the area of real time 
market information. As exclusive processors, the CQS and CTA have a 
monopoly on the collection and distribution of real time market 
information. Further, because these organizations are governed solely 
by the exchanges and the NASD, this situation is not like to change in 
the near future.
    To the extent that the fees charged for access to real time market 
information are not strictly cost-based and nondiscriminatory, these 
fees unnecessarily raise the cost of market access for investors. Thus, 
we believe that the Bill's antitrust provisions will guard against the 
potential for abuse of market power by the exclusive processors.
NASDAQ/Amex and NYSE ``Online Investor'' Quotation Access Fees
    We would like to clear up an apparent misconception about Exchange 
and NASDAQ access fees charged online investors for quotation 
information. The fees do apply to online investors, not the broker as 
suggested in the May 20 Congressional Record at page E-1056. Indeed 
when one of our customers calls on the telephone for quotations no fee 
is charged. Only when an investor receives the information more 
efficiently through our website or direct online connection is an 
investor access fee charged.
    Thus NYSE and Nasdaq/Amex non-professional access fees are charged 
to investors that access quotation and/or trade report information 
online or electronically. Investors that access such information from 
their broker by telephone are not charged such a fee. We believe that 
this is a per se discriminatory practice. As a policy matter, fees for 
access to quotations should not be applied to investors, investing for 
their own account and not re-disseminating the information or otherwise 
using it for commercial purposes. If such fees are charged, then they 
should be charged to all investors, with differential charges supported 
by differential costs of the exclusive processor.
    It is true that, intense service competition among online brokers 
finds the broker paying customers' quotation access fees for active 
accounts; and indeed for all customers just before an order is 
submitted for execution, the market quotation is provided. This merely 
shifts the discrimination from the customer to the broker.
    Until the NASD instituted a temporary 50% reduction in the NASDAQ 
fee, the combined fees were $14.50 per month ($5.25 for NYSE, $4.00 for 
Nasdaq, and $3.25 for Amex); or an alternative of 1 cent per item (i.e. 
bid price, offer price, last trade price etc.). While the size of a 
discriminatory fee or tariff is irrelevant (i.e. it should be 
abolished), the fees are large to small investors. A typical online 
investor executes about 1 trade per month and pays a commission between 
$10 and $20 per trade. Thus, the monthly fees are a large component of 
the typical investor's costs.
    The level of fees is another matter. Clearly the actions of the 
exclusive processors in cutting fees when the House and Senate 
Committees started their inquiries indicate that the fees, in addition 
to being discriminatory, substantially exceeded the exclusive 
processor's costs. HR 1858 would not affect the ability of exclusive 
processors to single out investors that access quotation information 
online or electronically for access fees.
    Fees for information should be charged; they just should not be 
discriminatory as between equivalent users when viewed from the 
standpoint of impact on exclusive processor costs.
Significance of Ensuring Access by the Public to this Data
    Access by the public to real time quotations and trade information 
affects the pricing efficiency of the market and all of the valuation 
of assets that are determined by the bid/offer and trade prices. It 
also affects the regulation of the markets because an important aspect 
of market regulation is the self-policing mechanism of customers 
watching market data around the time of their own transactions.
    As Chairman Bliley has said, responsible decisions respecting the 
pricing and entry of investor orders cannot be made without access to 
the real-time best bid and ask prices in the particular security at the 
time a transaction is contemplated. Brokers have always been in the 
business of apprising their customers of market conditions when orders 
are being priced. Market information has been provided to customers, 
using the technology of the times. The ticker tapes, a prime example of 
that process, continue to this day.
    The CNBC ticker illustrates the desire of the public for 
information and the desire of markets to advertise their listing value 
to issuers. Coincidentally, it illustrates some of the differential 
costs for access noted earlier. Investors and the public generally can 
receive free real time trade reports from the CNBC ticker, but if they 
receive those same trade reports over their broker's website they would 
have to pay monthly NASDAQ/NYSE fees.
    Ironically, a customer in the early 1970's could be on the 
telephone with his broker who was viewing a quotation machine and on 
the second line with a marketmaker giving the customer an instantaneous 
execution against the best available published quotation. Thus, the 
investor had free telephone access to competitive quotations at time of 
placing an order. This is still true.
    In contrast, in 1999, a customer sitting at a computer, connected 
to the broker's website that contains continually updated quotation 
information, may need to enter an order to receive a real time 
quotation. When an inquiry is made for quotations or to place an order 
the inactive customer might not receive a real time quotation until an 
order has actually been submitted to the broker's system. The system 
will then flash a real time quotation; the customer will change the 
order, based on the new information, and click re-submit to enter the 
order.
    If the customer's NASDAQ and NYSE subscriber fee is paid or is 
being automatically assumed by the broker, the tollgate is open and 
quotation information will appear on the screen the first time and the 
order will be correctly composed the first time. If the tollgate is not 
open the information process is temporarily obstructed to minimize the 
information cost being absorbed by the broker to transaction 
situations.
    Thus, competition will optimize economic access to information for 
any given set of circumstances. Unnecessary costs and/or restraints on 
competition will reduce that access and negatively impact the 
efficiency of the market. Therefore, the real question in this 
legislation is does it raise or lower costs or investor access to 
information directly; or by its effect on competition does it 
indirectly affect future costs and access?
    By definition exclusive processors are monopolies. If their fees 
are not strictly cost-based and non-discriminatory, then they affect 
competition and the cost of access. Moreover, if they are insulated 
from future competition that technological change might produce then 
access to information and market efficiency are seriously compromised.
Extent of Use of This Data for Online Securities Trading
    Over 75% of Ameritrade customers update portfolio values, obtain 
quotation information, and/or execute trades online. For transaction 
purposes, data that is not real time is almost worthless. Therefore 
having uncontaminated information and unobstructed access to such 
information is essential.
    Moreover, the competitive process is rapidly increasing the use of 
the information as technology makes the information more readily 
available on a real time basis. More important, data access costs 
affect customer usage of the information and the efficiency of customer 
transaction activities.
    The Securities and Exchange Commission recognized this when 
granting accelerated approval to NASD's 50% cut in online investor 
quotation access fees:
    ``Recent technological developments have allowed vendors to provide 
their customers with more efficient and cost effective methods of 
executing securities transactions. The Commission expects that by 
reducing market data access fees the investor will further benefit by a 
reduction in costs of executing these transactions. For the investor to 
make sound, financial decisions, efficient and inexpensive access to 
market data information is vital. Thus, the Commission believes that 
reducing the market data fees by 50% should enhance investor access and 
may encourage increased investor participation in the securities 
markets.'' 1
---------------------------------------------------------------------------
    \1\ See SEC Release No. 34-41499, File No. SR-NASD-99-25.
---------------------------------------------------------------------------
    With the number of investors shifting to online activities growing 
rapidly, online usage of real time information is certain to continue 
to grow rapidly and become the choice of a large share of the investing 
public. Thus, the potential exists for even small differentials in per 
unit charges to affect activity and alternatively to generate huge 
surpluses for participants like exclusive processors that are protected 
by regulation from competition.
    Therefore, while information costs should be covered, differences 
in fees that are charged to similarly situated participants should be 
cost-based.
The Implications of Creating a Property Fight over this Data for any 
        Entity, including Stock Exchanges
    Absent artificial restraints, competition will assure that 
quotations are published and communicated to public investors over the 
Internet and securities information systems. However, it is impossible 
for anyone to predict how competitive forces will re-configure the 
future structure of information flows.
    For example, will the quotations continue to flow to a central 
processor, a single point of failure, or will each trade executing 
entity be linked with every other through Internet linkages, with no 
vulnerability to outages at particular quotation and execution centers?
    Property rights should be protected but not created by government. 
When government action creates value through regulation of others, then 
there should be no protection beyond the need to recover costs of 
regulation. With regard to securities information there are the 
following considerations:

 Exclusive processor contracts with market participants require 
        them to give up all proprietary rights to quotation and trade 
        report information input into exclusive processor systems. This 
        prevents, unnecessarily, the potential for competition in the 
        combination of such information and generation of best bid/
        offer and ticker tape information. It also may prevent 
        marketmakers and other execution centers from publishing 
        competing quotations on websites that include each others 
        quotations received over Internet linkages. HR 1858 apparently 
        would leave such restraints on competition in place.
 As provided by Title I for other databases, government 
        databases commonly are not protected by copyright equivalent 
        protections. Rather such databases are considered to be 
        proprietary (not public) or part of the public domain.
 Investor orders and trades and proprietary quotations of 
        marketmakers and specialists are the original source of 
        quotation and trade report information combined into the level 
        1 stream commonly accessed by public investors. Costs are 
        incurred in the production of the information over and above 
        the pure byproduct costs of executing trades or complying with 
        necessary regulation. Market data information values should not 
        just be transferred from private to the public domain by 
        regulation; nor should it be captured solely by or for the 
        benefit of government created exclusive processors.
 Legitimate property rights of producers of information should 
        be exertable and recognized by processors in cost covering 
        licensing arrangements between information processors and 
        producers either through competitive forces or through 
        regulation of revenue sharing and cost allocations of not-for-
        profit exclusive processors. Currently, exclusive processors 
        appear to be for profit entities; they are not user-controlled; 
        and information is extracted from participants through the 
        regulatory process and resold without recognition of 
        participant property rights.
 For example, NASD'S OATS (Order Audit Trail System) requires 
        the reporting of every single event associated with the 
        processing of an order from entry to completion; trade 
        reporting is motivated by issuer desires for a visible market 
        for shares as well as investor needs. Similarly, much of the 
        trade report, and quotation regulations require brokers and 
        marketmakers to incur costs that would not otherwise be 
        incurred. It is not always clear which of these costs are for 
        broker/dealer and market surveillance regulation. Some of these 
        costs are regulatory; but the data have a market value and are 
        sold to subscribers. Nonetheless, the producers of the 
        information do not share in the revenues to help pay the costs. 
        Indeed, online investors pay twice for market data: once in 
        commissions and once in access fees.
 Beneficiaries of the market prices data system include issuers 
        and many non-investor groups that use the information for 
        pricing of portfolios, economic analysis, financial research, 
        investment advice, media publication, etc. Also, a vast 
        shareholding public, beyond active direct investors, benefit 
        from the regulatory apparatus that requires the creation of 
        quotation and trade price information for market surveillance. 
        Protection of property rights of original producers and those 
        who combine and modify the information is desirable to capture 
        from non-participant groups the market value of the 
        information. Title II of HR 1858 would provide copyright 
        equivalent protection to exclusive processors, which might 
        otherwise not be covered by government database exemptions.
 However, competitive forces that might exert property rights 
        of the original producers are squelched by exclusive processor 
        contracts. Title II is intended to permit the independent 
        creation of databases; but contracts preclude just that. Such 
        contractual restrictions are anti-competitive and should be 
        removed.
 The above considerations would suggest that property rights or 
        the equivalent should only be granted, if the system is user-
        controlled, cost based, not-for-profit and has appropriate 
        provisions for cross licensing and revenue sharing among data 
        producers. All that should be protected is the combination of 
        information into the best bid/offer and last sale stream, with 
        competitors permitted to compete in performing that function if 
        such competition emerges.
 Quotations have always been provided free by marketmakers to 
        clients. The SEC has said that it considers the NBBO (National 
        Best Bid/Offer) to be part of marketmakers' quotes for trade 
        execution purposes. It is not clear whether SEC policy places 
        NBBO quotations in the public domain, permitting marketmakers 
        to provide their quotations, modified by the NBBO, free to 
        clients over websites or whether exclusive processor contract 
        provisions prevent such free dissemination of quotations. 
        Legislation of property rights or their equivalent may be ill 
        advised because rapidly changing market processes form such a 
        tangled web of information processes that only competitive 
        forces can efficiently rearrange service, revenue and cost 
        issues.
Disclosure of the Revenue and Costs of Exclusive Processor Market Data 
        Activities
    Exclusive processors are not subject to the pervasive "utility" 
type regulation as intended by Congress. Congress did not intend that 
NASDAQ and NYSE would reap surpluses, from quotation access charges 
imposed upon small investors for access to quotation information. Both 
houses of Congress expressed a clear intent 2 that the 
monopoly power of SRO exclusive information processors, which might 
result from the formation of the National Market System (NMS), should 
be subjected to exhaustive ``utility'' type review. Regulation has not 
resulted in the production and disclosure of detailed, audited fee 
revenues and/or the related direct and allocated costs to support the 
specific fees. Nor have analyses been placed in the public record to 
justify differential application of fees to online investors.
---------------------------------------------------------------------------
    \2\ See Legislative History of Securities Acts Amendments of 1975, 
House Committee on Interstate and Foreign Commerce, May 1975, p.93. See 
also House Conference Report No. 94-229, May 19, 1975, p.93.
---------------------------------------------------------------------------
    Large fee cuts made by NASDAQ and proposed by NYSE when 
Congressional interest surfaced indicate the probable existence of 
unsupportable surpluses and fees that are not reasonable.
    Financial statements of SROs are published only annually and in 
insufficient detail to evaluate fee revenues. Also fee submissions, as 
described in SEC releases, contain little information respecting the 
underlying costs and planned uses of the revenues. Fee changes are 
usually approved on an accelerated basis even though SROs have not 
sought comments from the public or members respecting proposed fees. 
Moreover, fees though inter-related are generally changed piecemeal, 
precluding any evaluation of the structure of exclusive processor fees.
    Details of contracts for last sale prices now broadcast over TV on 
a real-time basis are not part of the public record. Is the implicit 
per customer per item charge in those contracts equivalent to the \1/2\ 
and 1 cent per item per viewer access charge imposed on online 
customers by NASD and NYSE respectively?
    No cost and benefit analyses are performed or available in the 
public file. For example, for online investor access fees, broker 
administrative costs are burdensome to keep track of customers' 
(subscribers') use of information. Similarly, there is no analysis of 
the negative impacts of the fees on market pricing efficiency, and no 
analysis of the anti-competitive impact of the differential application 
of fees to online investors.
    Fees are not unbundled and there is no public analysis of this 
issue. A typical investor accesses on average less that 10 NYSE and 10 
NASDAQ stocks per day out of the 18,500 stocks quoted by Knight/Trimark 
Securities Inc. Some may access only last trade; sellers may want only 
the bid price; buyers may need only the offer price. Some may want to 
access only selected groups of stocks pre-determined by them. 
Unbundling is important because the \1/2\ cent and 1 cent charges are 
on a per item basis.
Policy Problems
    Surpluses are used to finance unrelated activities of NYSE and 
NASDAQ such as investment in Optimark, purchase of Amex, markets in 
Japan, New Zealand, and the like.
    Original producers of the information have been prevented from 
exerting copyright claims. They should be permitted to exert those 
claims in the market data process.
    Market data process needs to be insulated from profit incentive of 
the exclusive processors. NMS Market data activities appear to be 
regarded as profit centers for the respective SROs. Indeed ECNs are 
lining up to become exchanges in order to share in the surpluses. 
Producers of information should share in revenues but exclusive 
processor should be a user controlled non-profit activity.
    Congress must not allow this monopoly. In the tradition of our 
nation, Congress should foster competition and free enterprise. This 
will allow systems to evolve relative to market demand adding strength, 
depth and liquidity to our market systems.
    For the benefit of investors and our markets, execution systems 
must compete or be allowed to compete; processors of securities data 
must be allowed to compete. Investors need a choice.
    Brokers must be allowed to distribute real time quotes allowing 
investors access to market data in a system allowing for the lowest 
possible costs.
    HR 1858 must remain consistent with the law establishing a national 
market system for securities and use the free markets for establishing 
efficiency in buying and selling securities. Information flow must be 
non-discriminatory.
    Any legislation should encourage the development of the national 
market for online investing because of the benefits to securities 
markets of such investing-more volume, greater liquidity and depth.

    Mr. Oxley. Thank you very much, Mr. Ricketts.
    Our next witness is Mr. Stuart Bell from Bloomberg 
Financial Markets. Welcome, Mr. Bell.

                    STATEMENT OF STUART BELL

    Mr. Bell. Thank you. Mr. Chairman and members of the 
subcommittee, my name is Stuart Bell and I am pleased to 
testify on behalf of Bloomberg Financial Markets in support of 
H.R. 1858, the Consumer and Investor Access to Information Act 
of 1999. Bloomberg Financial Markets provides multimedia 
analytical, and news services to more than 117,000 terminals 
used by 315,000 financial professionals in 100 countries 
worldwide. Our clients include most of the world's central 
banks as well as investment institutions, commercial banks, and 
U.S. Government offices and agencies. Bloomberg News is 
syndicated in over 900 newspapers and on 550 radio and 
television stations. Bloomberg publishes seven magazines around 
the world and Bloomberg Press publishes books on financial 
subjects for investment professionals and nonprofessional 
readers.
    In a very real sense, the heart of the Bloomberg enterprise 
is the data collection facility that I head in Princeton, New 
Jersey. At that facility, Bloomberg is constantly collecting 
and analyzing data for nearly 5 million securities as well as 
other financial instruments across all markets worldwide. A 
staff of more than 1,000 data professionals maintain the 
Bloomberg database which is the most comprehensive, timely, and 
accurate financial database available.
    We live in what is aptly called the information age. 
Clearly, the basic information policy of our country has served 
us extremely well. Historically, that policy has held that 
facts, the building blocks of the information products, cannot 
be monopolized. The House Judiciary Committee has proposed 
legislation that would fundamentally change this policy. Though 
well intentioned, the Judiciary Committee's proposal would 
create a quasi-property right in facts themselves granting the 
compiler of information an unprecedented right to control 
transformative value-added downstream uses of the resulting 
collection.
    Bloomberg's data profession has culled information from 
thousands of sources to create products with significant value 
added. Much of this data is simply factual information from the 
public domain. In analyzing whether we must seek permission to 
use data to create value-added products, Bloomberg conducts the 
analysis used by all database producers.
    Are we utilizing facts or someone's original selection or 
arrangement of facts? Facts have always been in the public 
domain, whereas the original selection, an arrangement of 
facts, is copyrightable. Under the House Judiciary Committee's 
approach, this analysis would provide no comfort. Bloomberg 
would have to assume that virtually all collections of data 
produced by private parties are proprietary.
    Had this legal regime been in place when Bloomberg was 
launched in the early 1980's, it is unlikely Bloomberg would 
have become the significant news and information provider it is 
today.
    By contrast, the bipartisan leadership of the House 
Commerce Committee has crafted legislation that provides an 
additional enforcement tool for database producers while 
assuring the consumers and investors have continued access to 
factual information. This is particularly critical for the 
continued growth of the financial markets.
    It was not so long ago that a consumer couldn't get a quote 
on a stock or a bond without calling a broker. Ascertaining the 
differences in prices offered and commissions charged by 
different brokers was extremely difficult. By empowering 
investors with information, Bloomberg Financial Markets played 
a major role in accelerating a movement toward more 
transparent, efficient, and publicly accessible financial 
markets.
    We believe that the Commerce Committee legislation will 
permit consumers and investors to remain in power by assuring 
them access to the currency of the age, namely information. In 
a press release I have attached to my testimony, PriceScan co-
founder Jeffrey Trester speaks eloquently to this process of 
information empowering consumers and to Mike Bloomberg's 
visionary role in transforming financial markets.
    PriceScan provides an online search engine to allow 
consumers access to comparative prices for and product 
information on computer goods. PriceScan hopes ultimately to 
provide this information for all consumer goods.
    We need to be sure that any legislation Congress enacts 
nurtures rather than impedes the many young entrepreneurs 
poised at this moment to transform market in revolutionary ways 
for the vast benefit of consumers. Your legislation meets that 
rigorous test of significantly advancing and protecting the 
interests of consumers and investors. We believe the new 
enforcement tools provided by the Commerce Committee bill as 
drafted coupled with technological protections and copyright 
law will provide ample protection for database creators without 
chilling transformative uses and innovation in the field of 
financial information services.
    In conclusion, databases are both items of commerce in 
their own right and critical tools for facilitating broader 
commerce. Given the crucial role of information, not only to 
our economic lives but also to every aspect of our lives, it is 
imperative that the legislation in this area strikes a fine 
balance.
    The bipartisan leadership of the Commerce Committee and 
your very capable staffs should be commended for crafting 
legislation that does exactly that. We applaud your efforts and 
look forward to working with you as this process continues.
    [The prepared statement of Stuart Bell follows:]
  Prepared Statement of Stuart Bell on Behalf of Bloomberg Financial 
                                Markets
    Introduction: Mr. Chairman and Members of the Subcommittee. My name 
is Stuart Bell, and I am pleased to testify on behalf of Bloomberg 
Financial Markets in support of H.R. 1858, the ``Consumer and Investor 
Access to Information Act of 1999.''
    Bloomberg Financial Markets provides multimedia, analytical and 
news services to more than 117,000 terminals used by 350,000 financial 
professionals in 100 countries worldwide. Our clients include most of 
the world's central banks, as well as investment institutions, 
commercial banks, and U.S. government offices and agencies. Bloomberg 
News is syndicated in over 900 newspapers, and on 550 radio and 
television stations. Bloomberg publishes 7 magazines around the world. 
Bloomberg Press publishes books on financial subjects for the 
investment professional and non-professional reader.
    Bloomberg Financial Markets is headquartered in New York City with 
10 sales offices and 80 news bureaus around the world. In a very real 
sense, however, the heart of the Bloomberg enterprise is the data 
collection facility I head in Princeton, New Jersey. At that facility, 
Bloomberg is constantly collecting and analyzing data for nearly 5 
million securities, as well as other financial instruments, across all 
markets worldwide. A staff of more than 1,000 data professionals 
maintains the Bloomberg database, which is the most comprehensive, 
timely, and accurate financial database available.
    We live in what is aptly called the ``Information Age.'' Last week, 
the Commerce Department released a report showing that the information 
technology industry generated at least a third of the nation's economic 
growth between 1995 and 1998. A week before that, the University of 
Texas released a study showing that, in 1998, a mere five years after 
the introduction of the World Wide Web, the Internet generated more 
than $300 billion in revenue. These improvements in technology and 
hence productivity form the foundation of the robust economy that has 
benefitted so many Americans.
    Clearly the basic information policy of our country has served us 
extremely well. Historically that policy has held that facts--the 
building blocks of all information products--cannot be monopolized.
    House Judiciary Committee approach: The House Judiciary Committee 
has proposed legislation that would fundamentally change this policy. 
Though well-intentioned, the Judiciary Committee's proposal would 
create a quasi-property right in facts themselves, granting the 
compiler of information an unprecedented right to control 
transformative, value-added, downstream uses of the resulting 
collection.
    Some have characterized this as placing ``toll booths'' on the 
information superhighway. In fact, given the absence of a compulsory 
license scheme, this approach would constitute a ``toll booth'' if you 
are lucky, a costly detour leading to a dead-end if you are not.
    Bloomberg's data professionals cull information from thousands of 
sources to create products with significant value-added. Much of this 
data is simply factual information in the public domain. In analyzing 
whether we must seek permission to use data to create value-added 
products, Bloomberg conducts the analysis used by all database 
producers: Are we utilizing facts or someone's original selection or 
arrangement of facts? Facts have always been in the public domain, 
whereas the original selection and arrangement of facts is 
copyrightable.
    Under the House Judiciary Committee's approach this analysis would 
provide no comfort. Bloomberg would have to assume virtually all 
collections of data produced by private parties are proprietary. Had 
this legal regime been in place when Bloomberg was launched in the 
early 1980s, it is unlikely Bloomberg would have become the significant 
news and information provider it is today.
    House Commerce Committee approach: By contrast, the bi-partisan 
leadership of the House Commerce Committee has crafted legislation that 
provides an additional enforcement tool for database producers while 
assuring that consumers and investors have continued access to factual 
information.
    This is particularly critical for the continued growth of the 
financial markets. It was not so long ago that a consumer couldn't get 
a quote on a stock or a bond without calling a broker. Ascertaining the 
difference in prices offered and commissions charged by different 
brokers was extremely difficult.
    By empowering investors with information, Bloomberg Financial 
Markets played a major role in accelerating the movement toward more 
transparent, efficient and publicly accessible financial markets. We 
believe the Commerce Committee legislation will permit consumers and 
investors to remain empowered by assuring them access to the currency 
of the age--namely information.
    In a press release I have attached to my testimony, PriceScan co-
founder, Jeffrey Trester, speaks eloquently to this process of 
information empowering consumers and to Mike Bloomberg's visionary role 
in transforming financial markets. PriceScan provides an on-line search 
engine to allow consumers access to comparative prices for and product 
information on computer goods. PriceScan hopes ultimately to provide 
this information for all consumer goods.
    We need to be sure that any legislation Congress enacts nurtures--
rather than impedes--the many young entrepreneurs poised at this moment 
to transform markets in revolutionary ways for the vast benefit of 
consumers. Your legislation meets that rigorous test of significantly 
advancing and protecting the interests of consumers and investors.
    I would like to respond to a few criticisms of the Commerce 
Committee legislation. Some have argued that an SEC enforced law should 
not preempt state laws in policing the misappropriation of real-time 
market information provision of H.R. 1858. As a business that gathers 
market information from every state in the Union, we are convinced the 
SEC should retain the authority to enforce national standards. Congress 
should not create the prospect of 50 different standards for addressing 
the misappropriation of real-time market information that is 
distributed nationally.
    Additionally, some have argued that the legislation should provide 
undefined additional remedies for unauthorized sharing of real-time 
market information. As a business that pays millions of dollars 
annually for real-time market information, it is certainly in our 
interest to curtail unauthorized sharing of real-time market 
information. However, in our own broad experience as both a user of 
data created or collected by others and a creator and provider of our 
own value-added databases, Bloomberg has found existing enforcement 
tools to be sufficient to combat unauthorized use of databases.
    We believe the new enforcement tools provided by the Commerce 
Committee bill, as drafted, coupled with technological protections and 
copyright law--which protects creative expression as well as the 
creative arrangement and selection of data--and contractual 
arrangements--which limit the use customers can make of databases--will 
provide ample protection for database creators without chilling 
transformative uses and innovation in the field of financial 
information services.
    Conclusion: In conclusion, databases are both items of commerce in 
their own right and critical tools for facilitating broader commerce. 
Given the crucial role of information, not only to our economic lives, 
but also to every aspect of our lives, it is imperative that 
legislation in this area strikes a fine balance.
    The bipartisan leadership of the Commerce Committee and your very 
capable staffs should be commended for crafting legislation that does 
exactly that. The Commerce Committee bill protects both the incentives 
to compile important information and the right of the public to access 
that information. We applaud your efforts and look forward to working 
with you as this process continues.

    Mr. Oxley. Thank you, Mr. Bell.
    Our next witness is Dean Furbush, National Association of 
Securities Dealers. Welcome, Mr. Furbush.

                  STATEMENT OF S. DEAN FURBUSH

    Mr. Furbush. Thank you. I am Dean Furbush, senior vice 
president and chief economist of the NASD, which runs the 
Nasdaq Stock Market and the American Stock Exchange. Perhaps 
you get inured to this after you do it a few times, but it is 
been infrequent enough for me that I take pride in representing 
my organization at this venue. I hope that I can be helpful 
today and following today, if there are further questions.
    A fundamental tenet of U.S. Securities regulation is 
disclosure. The manifestation of this for securities trading is 
found in transparent and widespread availability of quote and 
trade information. The success of financial markets, of market 
participants, and particularly of individual investors relies 
largely on the accuracy, the reliability, and the integrity of 
these market data that go out to investors. Without that, of 
course, today's trading couldn't occur.
    The NASD seeks to provide market data as widely and simply 
as possible without compromising Nasdaq's and AmEx's rights in 
the information. We continually reevaluate our market data 
policies and pricing to ensure that this goal is achieved.
    Revenue from the sale of real-time market data allows us to 
operate our markets, to regulate our markets and members in 
order to confirm the integrity of the quotes and trades that we 
send out, to police online trades, and to ensure the 
qualifications of the companies listed on our markets. Market 
data revenue also contributes to the funding of one of the 
largest private communications networks in the world which 
supports the Nasdaq stock market. Those factors are the very 
ones that give the market data their accuracy, their 
reliability and their integrity, and thus their value. Our 
real-time market data is an information product. It is the 
outcome of the entirety of the NASD operations. For these 
reasons, of course, we believe that heightened protection from 
misappropriation of real-time market data benefits every 
investor and is properly the subject of legislative action such 
as that before us today which we fundamentally support.
    There have been several characterizations, implicit and 
explicit, as to the effect of this bill on property rights. It 
is our understanding that with great intent this bill is 
essentially silent on that topic and neither adds to nor 
detracts from the current situation with respect to the 
property rights of these data.
    The need for a Federal misappropriation statute to protect 
market data is obvious when considering competition with 
Europe, the Supreme Court's holding in the Feist case, the 
patchwork of State misappropriation laws, the inability to use 
a contract against someone not a party to it, and the 
clumsiness of technological protections. We, therefore, welcome 
this opportunity to work with the subcommittee and offer our 
suggested changes to H.R. 1858.
    We share the laudable goals of title II of the bill, to 
provide investors with continued access to market data while 
protecting the markets from misappropriation. We have limited 
our remarks to title II, but I want to note that we share the 
concerns regarding title I expressed to the committee by the 
Coalition Against database Piracy.
    I would like to just highlight four changes that we 
recommend in the bill's provisions. The first change is the 
definition of market information processor should include 
everyone in the business of disseminating market data. The 
current definition is limited to markets only, which is unfair.
    The second change is to provide the SEC with the 
flexibility to address changing competitive conditions in the 
market for market data.
    The third change is to maintain in instances of 
misappropriation a choice of causes of action by the market 
information supplier so that pirates cannot escape liability 
simply because a contract is dismissed on a technicality.
    And the fourth change is to modify the preemption clause so 
that causes of action other than misappropriation are 
maintained.
    To finish up, Mr. Chairman, we support enactment of this 
bill because the old protections don't work in the new Internet 
age and due to the changes in Europe. Thank you for the 
opportunity to testify, and I'm available for questions now or 
later.
    [The prepared statement of S. Dean Furbush follows:]
  Prepared Statement of Dean Furbush, Chief Economist and Senior Vice 
      President, National Association of Securities Dealers, Inc.
    I am Dean Furbush, Chief Economist and Senior Vice President of the 
National Association of Securities Dealers.
    The NASD would like to thank the Subcommittee for this opportunity 
to testify on market data and specifically how Title II of HR 1858, the 
Consumer Access to Information Act of 1999, could affect investors and 
the securities markets. More particularly, the Subcommittee's 
invitation to testify today requested that we provide our views on why 
the financial markets require new protective rights of stock quote 
information, the significance of ensuring access to the public of this 
data, and the costs and transparency of such information. We are 
pleased to comply with that request.
                                the nasd
    Let me briefly outline the role of the NASD in the regulation and 
operation of our securities markets. Established under authority 
granted by the 1938 Maloney Act Amendments to the Securities Exchange 
Act of 1934, the NASD is the largest self-regulatory organization for 
the securities industry in the world. Virtually every broker-dealer in 
the U.S. that conducts a securities business with the public is 
required by law to be a member of the NASD. The NASD's membership 
comprises 5,600 securities firms that operate in excess of 66,000 
branch offices and employ more than 569,000 registered securities 
professionals.
    The NASD is the parent company of The Nasdaq Stock Market, Inc., 
the American Stock Exchange, and NASD Regulation, Inc. (NASDR). These 
wholly owned subsidiaries operate under delegated authority from the 
parent, which retains overall responsibility for ensuring that the 
organization's statutory and self-regulatory functions and obligations 
are fulfilled. The NASD is governed by a 27-member Board of Governors, 
a majority of whom are non-securities industry affiliated. Board 
members are drawn from leaders of industry, academia, and the public. 
Among many other responsibilities, the Board, through a series of 
standing and select committees, monitors trends in the industry and 
promulgates rules, guidelines, and policies to protect investors and 
ensure market integrity.
The Nasdaq Stock Market
    The Nasdaq Stock Market is the largest electronic, screen-based 
market in the world, capable of handling trading levels of at least one 
and a half billion shares a day. Founded in 1971, Nasdaq today accounts 
for more than one-half of all equity shares traded in the nation and is 
the largest stock market in the world in terms of the dollar value of 
trading. It lists the securities of 5,100 domestic and foreign 
companies, more than all other U.S. stock markets combined.
The American Stock Exchange
    The American Stock Exchange is the nation's second largest floor-
based securities exchange and is the only U.S. securities exchange that 
is both a primary market for listed equity securities as well as a 
market for equity options, index options, and equity derivatives. Amex 
has been the nation's foremost innovator in structured derivative 
securities and index share securities. The latter are registered 
investment companies that permit an indexed equity investment, as do 
index mutual funds, but afford investors the opportunity to purchase or 
sell on the Exchange at any time during the trading day.
NASD Regulation
    NASD Regulation is responsible for the registration, education, 
testing, and examination of member firms and their employees. In 
addition, it oversees and regulates our members' market-making 
activities and trading practices in securities, including those that 
are listed on the Nasdaq Stock Market and those that are not listed on 
any exchange.
    NASDR carries out its mandate from its Washington headquarters and 
14 district offices located in major cities throughout the country. 
Through close cooperation with federal and state authorities and other 
self-regulators, overlap and duplication is minimized, freeing 
governmental resources to focus on other areas of securities 
regulation.
    NASDR has examination responsibilities for all of its 5,600 
members. In addition to special cause investigations that address 
customer complaints and terminations of brokers for regulatory reasons, 
NASDR conducts a comprehensive routine cycle examination program.
                              market data
    A critical component of the success of the Nasdaq Stock Market and 
the Amex is the integrity and wide spread availability of information 
that we provide about quotations and trading activity. A fundamental 
tenet of securities regulation is disclosure and the hallmark of the 
securities markets in the US is transparency of quotes and trades. The 
success of the financial markets, vendors, and particularly individual 
investors, relies largely on the information we provide about trading 
activity. Without accurate and real time access to information about 
changes in stock prices, today's trading would be impossible. Nasdaq 
and Amex and the trading of the companies that list on these markets 
could grind to a halt. We operate in a global marketplace where the 
integrity, reliability, and accuracy of our data are essential to the 
economy and society as a whole. We are firmly committed to ensuring the 
widest access to our market data. We continually reevaluate our 
existing market data policies and pricing to ensure that this goal is 
achieved. We feel strongly that a federal law to supplement the 
existing protection for databases is not only beneficial, but 
necessary, for the continued general availability of information that 
is essential to the lives and livelihoods of millions in this country 
and around the world.
    The NASD seeks to provide market data as widely and simply as 
possible without destroying Nasdaq's and Amex's rights in the 
information. The revenue obtained from the sale of real time market 
data is vital to the integrity and continued operation of the markets. 
Nasdaq has never charged for delayed data, but in return, it requires 
strong protection for real time data because of the limited time in 
which it can be used. The revenues from market data allow us to 
surveill and regulate our markets and members to confirm the integrity 
of the quotes, to police on-line trades, supervise member conduct, and 
ensure the qualifications of the companies listed on the market. It 
also contributes to the funding of one of the largest private 
communications networks in the world. Our real time market data is the 
product of everything that stands behind the Nasdaq and Amex markets. 
It is those factors that give the market data value and integrity. For 
these reasons, we believe that heightened protection from 
misappropriation of real time market data benefits every investor 
trading in companies listed on the market and should be the subject of 
legislative action.
       the need to protect market information and other databases
    The NASD has previously urged Congress to adopt enhanced protection 
for market data and other databases because of both international and 
domestic developments in this area. The advent of the Internet and the 
huge increases in on-line trading have increased the possibility of 
market data misappropriation and greatly magnified the ensuing 
potential damage from unauthorized dissemination.
    Competition with Europe--The financial marketplace is competitive 
and global. In fact, Nasdaq has recently announced joint ventures to 
expand trading in Asia and to explore options in Europe to provide 
greatly enhanced access for US listed companies to foreign capital. As 
extended trading hours become a reality and the world moves to seamless 
24 hour trading the impact of the European Directive on real time data 
becomes greater. As the need for information grows in all parts of the 
world and technology makes it easier to deliver information across 
borders, other nations will seek to take over our lead in market data. 
Nowhere is the threat to the American database industry more evident 
than in Europe.
    The European Union's Directive on the legal protection of databases 
(``EU Directive''), adopted in March 1996, went into effect on January 
1, 1998, and is being implemented by EU member states. Most of our 
major European trading partners have enacted their own national laws to 
implement the EU Directive.
    The EU Directive was designed to promote increasing investment in 
Europe's database industry, in the hope of overcoming its shortcomings 
in competition with U.S. industry.1 The chosen means for 
achieving this is the law's reciprocity provisions. The EU Directive 
requires that each EU member extend protection to all databases 
produced in any EU country. However, it does not extend similar 
protection to database producers in non-EU nations, unless the database 
company has a significant physical presence in an EU country 
2 or unless their home country offers comparable protection 
to EU database producers.3 While some have advocated that no 
database protection is needed, since companies could move to Europe to 
obtain this protection, we do not believe that Congress would want to 
promote the movement of US jobs overseas.
---------------------------------------------------------------------------
    \1\ Directive 96/9/EC of the European Parliament and of the Council 
of the European Union of 11 March 1996 on the legal protection of 
databases, Recitals (7), (10) and (12).
    \2\ Recital (11). See also, EU Directive, Art. 11(1) and (2).
    \3\ Id. at Art. 11(3): (``Agreements extending the right . . . to 
databases made in third countries . . . shall be concluded by the 
[European] Council . . .'' and Recital (56), which notes that 
protection in Europe ``should'' be granted to other nations databases 
only if those nations ``offer comparable protection to databases 
produced by [EU] nationals . . .'')
---------------------------------------------------------------------------
    Since the United States produces by far the majority of the world's 
databases, the incentives in the EU Directive to increase investment in 
Europe's database industry, combined with a reciprocity provision, may 
soon be interpreted as a free rein to misappropriate by unscrupulous 
European competitors. Without U.S. database legislation, American data 
providers will receive no protection if their products and services are 
stolen by European competitors and marketed against them--whether 
pirated copies appear in Europe, the United States or elsewhere in the 
world. Enactment of a U.S. law to protect databases would thwart this 
strategy.
    Enhanced US Protection--Apart from the concerns that Nasdaq and 
Amex have about developments internationally, there is a compelling 
need to enact federal legislation to establish adequate protection for 
databases.
    Today, the database industry is faced with an intolerable situation 
under domestic copyright law. Legal protection for databases--essential 
to foster their development and dissemination--changed dramatically 
with the Supreme Court's decision in Feist Publications v. Rural 
Telephone Service Co., 499 U.S. 340 (1991). Prior to Feist, producers 
believed their databases to be entitled to copyright protection under 
the ``sweat of the brow'' doctrine. As noted in the 1998 Report on 
Legal Protection for Databases prepared by the U.S. Copyright Office, 
this doctrine was used by many courts to ``prevent the copier from 
competing unfairly with the compiler by appropriating the fruits of the 
compiler's efforts or creativity. In this sense, courts treated 
copyright protection for compilations much like a branch of unfair 
competition law.'' 4
---------------------------------------------------------------------------
    \4\ U.S. Copyright Office, Report on Legal Protection for 
Databases, August 1997, at 5 [hereinafter Copyright Office Report].
---------------------------------------------------------------------------
    In addition to eliminating the sweat of the brow doctrine, Feist 
clarified that ``originality'' forms the linchpin of copyright 
protection in compilations. Even where sufficient originality exists 
for protection, its scope is thin because it extends only to the 
original selection, arrangement and coordination of the database. 
Therefore, the factual contents of the database are not protectable and 
may be copied with impunity. These pronouncements in Feist 
significantly altered the legal landscape for database producers. The 
conclusion reached by the Copyright Office bears special emphasis:
          Consistent with Feist's pronouncement that copyright affords 
        compilations only `thin' protection, most of the post-Feist 
        appellate cases have found wholesale takings from copyrightable 
        compilations to be non-infringing. This trend is carrying 
        through to district courts as well.'' 5
---------------------------------------------------------------------------
    \5\ Id., at 17-18.
---------------------------------------------------------------------------
    Thus, in sharp contrast to the situation before Feist, the database 
industry today can count on only limited protection for databases. A 
database qualifies for copyright protection only if the information it 
contains is selected, coordinated or arranged in a manner that 
expresses originality. Increasingly, databases whose producers attempt 
to meet the growing market demand for comprehensive, logically 
organized collections of information--like the Nasdaq stock market 
reports--risk falling short of the originality standard, at least as it 
is applied in some circuits. Even if a database qualifies for copyright 
protection, the courts have refused to stop wholesale copying of the 
information they contain. In some cases, the courts have held that the 
entire product may be replicated with abandon by others, including 
unscrupulous competitors looking to make a quick profit by charging for 
what they have not produced.6 Alternatively, there has been 
evidence of ``cyberpranksters,'' such as those described in United 
States v. LaMacchia, 871 F. Supp. 535 (D. Mass. 1994) who copy and 
disseminate databases via the Internet without a profit motive, 
although the resulting harm to database providers remains.
---------------------------------------------------------------------------
    \6\ See, e.g., Warren Publishing, Inc. v. Microdos Data Corp., 115 
F.3d 1509 (11th Cir. 1997) cert. denied. 118 S. Ct. 397 (1997), 
(holding that a comprehensive listing of cable systems did not exercise 
sufficient creativity in selecting the information and therefore was 
unprotected against wholesale copying).
---------------------------------------------------------------------------
    The weakness of copyright law leaves database producers with only a 
few important, but limited, possible legal means of protecting their 
investment of money, hard work, and effort. None of these offer the 
general protection that H.R. 1858, consistent with our suggested 
changes, would provide. I will comment on three of the methods that 
Nasdaq must resort to absent federal statutory protection.
Misappropriation
    In the absence of federal legislation, the markets will be left 
with a variety of state laws and judicial doctrines that are lumped 
under the heading of misappropriation and unfair competition. However, 
these state law doctrines suffer inevitably from a lack of national 
uniformity. As the Copyright Office Report noted, misappropriation is 
``somewhat ill-defined and uncertain in scope.'' 7 Further, 
it is not available in all states--a big disadvantage in today's global 
database market. Certainly in terms of the Nasdaq database, whose value 
is primarily in its timeliness, this is an important form of protection 
and one on which we rely wherever possible.
---------------------------------------------------------------------------
    \7\ Copyright Office Report, at 83.
---------------------------------------------------------------------------
    Moreover, claims by critics of database protection legislation are 
off the mark when they say that the 1997 decision of the Second Circuit 
in National Basketball Association v. Motorola, Inc., 105 F. 3d 841 (2d 
Cir. 1997), shows that misappropriation doctrine serves the purpose 
instead. Under the Second Circuit's opinion the misappropriation 
defense can be invoked only if the information taken is ``time-
sensitive'' and only if the data pirate is ``in direct competition with 
a product or service offered.'' 8 Many valuable databases 
contain information that is not ``time-sensitive''--or that is even 
historical in nature. Further, as the LaMacchia decision demonstrated, 
the commercial value of a work can be seriously undermined even if 
misappropriated by someone other than a competitor and not for any 
commercial purpose.
---------------------------------------------------------------------------
    \8\ National Basketball Association v. Motorola, Inc., 105 F.3d 
841, 845 (2d Cir. 1997).
---------------------------------------------------------------------------
Contract Law
    Another crucial protection that Nasdaq relies on is contract law. 
It is an important component of any adequate legal regime, but it has 
its shortcomings. Opponents of database protection contend that 
information providers can simply rely on contract to control misuse, 
but the most obvious defect in that argument is that you cannot enforce 
a contract against someone who is not a party to it. Once the 
information is accessed and used by someone not bound by the contract, 
any contractual control over misuse is lost irrevocably.
    Moreover, like misappropriation, contract law is a state-based form 
of protection, and there are variances among state laws in this area. 
Even if current attempts to enact the Uniform Computer and Information 
Transactions Act (UCITA) to create a uniform law of Internet 
information contracts are successful--and even if successful, it is 
likely to be some years before it is adopted in all states--UCITA will 
give little protection to American database products and services 
delivered in other nations whose traditions and legal protections 
differ from ours.
    We support that part of HR 1858 that would create a federal tort 
against database misappropriators who are not in contract privity with 
the database producer and, as we later state, we would recommend that 
this tort be extended to any misappropriator of our market data.
Technological Protections
    Finally, database producers are relying more on technological 
protections to help assure that their databases are used responsibly. 
However, while technology is helpful for assuring that information is 
not misused, it is also an impediment to increased availability of 
databases. Both producers and users must incur additional costs in 
equipment and software to ``encrypt'' and ``decrypt'' protected 
information. Users will also have to employ greater sophistication in 
operating digital systems. Here, for market information is to be 
useful, it must be receivable with a minimum of sophistication by a 
maximum number of individual investors in real time. Thus, the end 
result of greater technological protections will be to limit access to 
these vital databases. Moreover, one of our hopes for Title II, is 
that, particularly on the Internet, the markets can reduce the length 
and complexity of their contracts, based on a federal tort of 
misappropriation created under this bill.
Comments on HR 1858
    Given our need to protect our real time market data and the current 
difficulties in doing so, we welcome this opportunity to offer our 
views on HR 1858, the Consumer and Investor Access to Information Act 
of 1999. The laudable goals of Title II of the bill--to provide 
investors greater access to market data while protecting the markets 
from market data misappropriation--are shared by the Nasdaq Stock 
Market and the Amex.
    The introduction of this bill and the dialogue it has prompted 
between affected parties is a welcome development, and the NASD is 
grateful to you, Mr. Chairman for your role in its introduction and 
consideration. However, we have concerns with some specific sections of 
Title II and their potential effect to reduce existing market data 
protections or create new situations for misappropriation.
    Market Information Processor--We suggest that Section 201(e)(6)(c), 
the definition of ``market information processor'' be extended to 
include ``any person engaged in the business of collecting, processing, 
distributing or publishing, or preparing for distribution or 
publication, or assisting, participating in, or coordinating the 
distribution or publication of, such market information.'' This change 
would ensure that every market information processor would have the 
same rights and obligations as the markets. In other words, they would 
be treated the same.
    Preemption--Section 201(2)(4)(A)(ii) would preempt ``any other 
Federal or State law (either statutory or common law) to the extent 
that such other Federal or State law is inconsistent'' with the Title 
II. We would prefer no preemption provision applicable to market data. 
However, if such a provision is to be included in the bill, we suggest 
that that language be changed to ``shall supersede any other Federal or 
State law (either statutory or common law) to the extent that such 
other Federal or State law provides legal or equitable rights that are 
equivalent to the rights specified in this subsection.''
    The ``inconsistent'' standard for preemption contained in this 
subsection is not clear to us. It appears that one would be on equally 
firm footing to argue that the standard, in such cases, should be that 
only ``consistent'' laws are being preempted. The equivalent rights 
standard that we are proposing is well established in intellectual 
property law and would provide certainty to the preemption standard. 
Toward the same objective of ensuring certainty we could support, as an 
alternative, preemption that is limited to Federal or State laws that 
proscribe misappropriation, since that is the area addressed by Title 
II.
    SEC Authority--The SEC is the expert federal, independent agency 
with regard to market data and is best situated to deal with 
consequences of the current market data regime. The Commission provides 
a viable forum in which the various views on market data issues can be 
presented and considered. The experience under Section 11, as 
administered by the SEC, has validated Congress' original grant of 
authority. We believe that the current structure is sound and should be 
built upon. The Commission staff is currently engaged in a study of 
market data that includes the pressing issues in this field. The 
conclusions reached following this study should be accorded deference. 
Therefore, we suggest that the following section be added at the end of 
section 201: ``The Securities and Exchange Commission shall have the 
authority to modify the application of this section as it affects 
securities issues over which it has jurisdiction.'' The inclusion of 
this provision will enable the Commission to address the constantly 
changing market data landscape without resort to constant statutory 
modifications. We assume the Commission would continue to solicit 
industry views in an open airing of these issues. This committee would 
remain free to, and we would hope it continues to, oversee activities 
in this area undertaken by the SEC.
    Limitation of Remedies--Section 201(e)(5)(c) provides that: ``No 
civil action shall be maintained under this subsection by a market 
information processor against any person to whom such processor 
provides real-time market information pursuant to a contract or 
agreement between such processor and such person with respect to any 
real-time market information or any rights or remedies provided 
pursuant to such contract or agreement.''
    We are unaware of any compelling reason for such a limitation. 
Under current law, we can bring actions under our contracts as well as 
under State misappropriation or unfair trade practice laws, where 
available. The adoption of section 201(e)(5)(c) would therefore limit 
out potential recourse against misappropriators of our market data 
databases.
    We are also concerned that, as drafted, a large diversified entity 
could have a market data contract with one division that then shares it 
with another division within the entity that, in turn, places the data 
on the entity's web site. As drafted, we believe that the original 
division with which we have contracted could be immune from suit under 
the bill, which we do not believe to be your intent.
    If the Committee should conclude that where there is a contract 
between the parties the misappropriation tort created by the bill will 
be unavailable, we suggest that a more appropriate dividing line would 
be in instances where ``an action under contract against such person 
can be maintained.'' Should a court determine that an action under an 
existing contract is not maintainable, we would be left with no 
available recourse under the bill as introduced. This could occur in a 
variety of situations, such as were US citizens might not be able to 
bring or maintain a contract action in some countries for political 
reasons. To create a federal claim without a remedy is ineffective, 
particularly where an outright market data pirate for profit is the 
perpetrator. The misappropriation tort created by the bill would be 
denied, as would an action under the contract, leaving us less recourse 
than we currently have.
    Remedies--In this same regard, we are concerned that HR 1858 as 
introduced does not include provisions addressing remedies for market 
data misappropriation such as impoundment, standards for awards of 
profits from misappropriation, expanded service of injunctions, 
provision of attorneys fees, criminal proceedings, and a longer statute 
of limitations. Specifically in regard to the one-year statute of 
limitations contained in Section 201(e)(5)(A), we suggest deleting this 
section. The deletion of the section would extend the existing statute 
of limitations under the Securities Exchange Act of 1934 to market data 
misappropriation actions created under this bill.
    While we understand the potential jurisdictional problems with 
these provisions in Congress, it could be beneficial if the Committee 
states its support for those provisions, so that they could more easily 
be pursued in another venue.
    Government Databases--1We suggest that section 101(6)(B) be 
clarified to state that market data that is addressed under Title II of 
the bill is excluded from the definition of ``Government Database.'' 
The failure to include such an exclusion could significantly diminish 
the value of any protections provided under Title II.
    Technical Amendments--We would suggest modifications to two 
technical matters dealt with in Title II. Those suggestions are 
included in the Appendix to this statement.
                               conclusion
    We thank you for your continued interest in this very significant 
area and this opportunity for us to present views on HR 1858. We stand 
ready to work with you and your staff as HR 1858 works its way through 
the legislative process.
                                Appendix
                   nasd technical changes on hr 1858
    Change: 201(e)(1)(B)--add report language that states that both 
free distribution and internal distribution are contemplated to be 
within the language of the statute.
    Reason: This deals with the LaMacchia problem (where someone puts 
information on the Internet but does not charge for it), and the 
problem of a large diversified entity buying one subscription under 
contract with a vendor and distributing the data to all of its 
registered reps in house for the one fee.
    Change: 201(e)(2)(E) ``RELIEF AGAINST STATE AGENCIES.'' The relief 
provided under this section shall be available against a State 
governmental entity to the extent permitted by applicable law.''
    Reason: Without this change, state universities and other agencies 
have a license to misappropriate without penalty.

    Mr. Oxley. Thank you, Mr. Furbush.
    Mr. Bernard, from the New York Stock Exchange, welcome. Use 
that microphone, please.

                 STATEMENT OF RICHARD P. BERNARD

    Mr. Bernard. Mr. Chairman, it is a pleasure to be here to 
see faces that we have seen at the New York Stock Exchange from 
time to time. We welcome any of you who haven't seen our 
factory, our market factory, which I will get to in a minute. 
We are in our 207th year----
    Mr. Oxley. Is it a hard-hat area down there?
    Mr. Bernard. It is, during construction times. We are in 
our 207th year of disseminating market data. We are in our 
130th year of contracting with people for the use of market 
data. So this bill is sitting on top of a lot of history. I 
brought with me a colleague, Mr. Mario Zucchini, who 
unfortunately died earlier this year. But he did something 
worthwhile that the committee should know about. As you can 
see, he is the fellow inside the cannon. In the 1950's or 
1960's, he was at a county fair and a TV station videotaped--or 
whatever they were doing in the 1950's----
    Mr. Bilbray. Filmed it.
    Mr. Bernard. [continuing] his act. He went all of the way 
to the Supreme Court saying that people can look at my act, but 
when you film it, you have taken something, my work, my effort, 
my value added, my sweat of the brow, whatever you want to call 
it. That is what this bill is about. This is a misappropriation 
bill. Whatever properties rights are or are not already there, 
the issue is that we have got a common law on misappropriation. 
As my colleague has said, for a lot of reasons it makes sense 
to make that a Federal uniform law and not be dependent on 51 
jurisdictions on that.
    I would speak to a few points that people have raised. The 
first issue is who owns market data. Investors, including 
broker-dealers, bring in the orders or the interests that 
ultimately result in market data. At the Nasdaq, the other 
markets, the New York Stock Exchange, it is the interaction of 
that data that creates the interest, the orders, that creates 
market data. In the case of a quotation, it has to be the best. 
It then gets added with other volume to become a bid-ask 
quotation.
    In the case of last sale information, there actually has to 
be a transaction before there is a last sale price. And so 
arguments about who owns it really isn't all that relevant. The 
fact of the matter is that a market has to--people have to 
interact in a market to manufacture the market data that we are 
talking about today. Your predecessor committee, as Ms. 
Nazareth has testified, 24 years ago this June, actually, this 
month, looked at this issue very carefully and they put 
together a regulatory scheme designed to make sure that that 
was done on fair and reasonable terms in terms of charging and 
not unreasonably discriminatory.
    That process has worked pretty well. The SEC has been 
vigilant. There has been discussions of pilot programs. Those 
pilot programs, the mechanism was approved by the SEC for the 
express purpose of letting us experiment in the face of 
changing technology. Those pilots, that mechanism was approved 
in the early 1980's before we quite knew what we were up 
against but allowed us to do a whole series of experiments that 
have led today to our filing just a few weeks ago. It will be 
in the Federal Register perhaps later this week, a pervasive 
reduction of our market data fees as they relate to information 
received by investors.
    The NASD has filed and approved a pilot basis for such fee 
reductions. And just to put those in perspective, we now have a 
sliding scale of three quarters of a penny or half of a penny 
or a quarter of penny per quote packet. These, by the way, as 
has been pointed out, are fees to broker-dealers, not to 
investors unless the broker-dealer cares to pass that fee on. 
But of course, they face all kinds of other costs whether it be 
the transaction fees that the stock exchange and Nasdaq 
requires or whether it is heat, lights, employee costs, taxes, 
whatever. All broker-dealers, of course, face a whole array of 
market costs.
    I want to mention there are 100 million people in this 
country who get the market data for free apart from broker-
dealers over the web. There is another 7 million that see it on 
cable television. So market data is quite ubiquitous in this 
country.
    Let me just finish by saying that the Exchange thinks this 
is a good effort that the committee is engaged in. We, like the 
NASD, have a few technical issues that we have discussed with 
your counsel and would be pleased to continue working with your 
counsel, but the approach of the bill is a good one. Thank you 
very much.
    [The prepared statement of Richard P. Bernard follows:]
Prepared Statement of Richard P. Bernard, Executive Vice President and 
             General Counsel, New York Stock Exchange, Inc.
    Chairman Oxley, Congressman Towns and Members of the Subcommittee, 
I am Richard P. Bernard, Executive Vice President and General Counsel 
of the New York Stock Exchange, Inc. (NYSE or Exchange). In this 
capacity, my responsibilities at the NYSE include the management of the 
Office of the General Counsel, and Audit/Regulatory Quality Review. I 
am a member of the NYSE's Office of the Chief Executive and the NYSE 
Management Committee. On behalf of the NYSE and our Chairman, Richard 
A. Grasso, I thank you for the opportunity to testify regarding Title 
II of H.R. 1858, the ``Consumer and Investor Access to Information Act 
of 1999.'' As you know, Title II amends the Federal securities laws and 
creates a new cause of action prohibiting the misappropriation of real-
time securities market data.
                    the unique nature of market data
    The NYSE welcomes the Commerce Committee's interest in protecting 
market data and we commend you, Mr. Chairman, as well as Chairman 
Bliley, Chairman Tauzin and Ranking Members Dingell, Towns and Markey 
for introducing this important legislation and for your foresight in 
handling real-time market data as a distinct issue. NYSE supports the 
principle that all databases, including securities market databases, 
deserve anti-piracy protections. The NYSE also believes that investors 
should have access to real-time market data so that they can be 
empowered to make educated decisions regarding their financial 
portfolios. Ensuring the widespread distribution of market data is good 
business for the NYSE; this data ``primes the pump'' at the market and 
helps to generate additional volume for the Exchange. The widespread 
distribution of market data levels the playing field for all investors 
and it creates interest, and confidence in the capital markets.
    Market data however, is unlike any other collection of information 
in the United States. It is unique because United States securities 
markets have distributed it for over two hundred years. It is unique 
because of the rapidly diminishing value of its usefulness. It is 
unique because of the roles it plays in allowing Americans to make 
investment decisions and in preserving the savings of Americans. It is 
unique because of the role that Congress has assigned to a Federal 
agency, the Securities and Exchange Commission, in regulating, 
monitoring and policing its distribution. It is unique because of the 
vital role that the revenues that derive from its distribution play in 
the financing of the U.S. securities markets, the most liquid, most 
transparent, most reliable securities markets in the world.
    The Exchange believes that these unique aspects warrant the 
treatment that Title II affords to market data. My testimony this 
morning will provide: a brief overview of the NYSE, the lead role that 
the NYSE plays in the equity price discovery process, the importance of 
market data, the NYSE's role in the information age, the regulatory 
framework in which the NYSE operates its market data business, public 
access to market data, recent market data fee reductions, and NYSE's 
involvement in the database protections debate.
    Finally, I will offer some comments regarding the need for this 
legislation.
                              i. overview
A. The NYSE
    The Exchange was founded 207 years ago under a buttonwood tree in 
lower Manhattan. Since that time, it has become the world's leading 
stock exchange, listing the securities of companies with a total market 
capitalization of 15 trillion dollars. NYSE is a not-for-profit 
corporation organized under the not-for-profit law of the state of New 
York. As such, it is a membership organization. Its 1,366 members, all 
individuals, have the responsibility to elect the 26 members that 
comprise the NYSE Board of Directors. Under the Exchange's 
Constitution, the Board is comprised of equal representatives of both 
the securities industry and the public. The NYSE Board of Directors 
approves its operating budget and determines the appropriate allocation 
from all NYSE fees.
    The Exchange's most significant functions include providing 
investors with a sophisticated, efficient and reliable forum for price 
discovery of listed securities and providing companies with a 
sophisticated, efficient and reliable forum to raise capital.
    The structure of the Exchange serves a broad range of investors and 
companies most fairly and efficiently. It is a customer oriented two-
way auction market in which transactions take place as result of a 
combination of open outcry of ``bids'' and ``offers'' made by members 
acting on the trading floor on behalf of their customers and the input 
of ``bids'' and ``offers'' into a sophisticated network of computers. 
Expert representatives of buyers and sellers meet directly on the 
trading floor--whether their orders arrive electronically or are 
handled by a broker--to determine prices by the pure, unadulterated 
interplay of supply and demand.
    On the NYSE trading floor, each stock is traded at a single 
location at a particular trading post. All buy and sell orders from 
every member firm funnel to that central location. The centralization 
of market order flow, as well as the liquidity that the Exchange's 
member firms provide, contribute significantly to price continuity--the 
ability to trade securities with minimum price variation from the 
previous sale. Ninety-eight percent of all Exchange trades occur at the 
same price as the last sale or within a 1/16-point variation--a 
characteristic of an extremely orderly and liquid market, one in which 
stocks can be easily bought or sold. We hope and believe that these 
margins will tighten even more with the advent of trading securities in 
decimals. The long-term, steady rise in the volume of trading on the 
Exchange is testimony to the success of the Exchange in performing the 
above-cited functions.
    Mr. Chairman, the NYSE trading floor is comparable to a factory 
floor. It does not make cars or refrigerators, rather, it produces 
real-time market information. The Exchange's database is a collection 
of last sale prices and quotations in respect of 3200 listed 
securities, prices and quotations that are at the heart of securities 
price discovery. Our agency auction market brings together public 
buyers and public sellers together at the point of sale for the trading 
of securities. Buyers submit bids and sellers submit offers to the 
market when they want to trade. The product of every transaction is a 
continuous update of the quote and last sale prices.
    To meet those ever increasing demands, NYSE has invested over $2 
billion over the past decade in technology. That considerable 
investment has enabled the Exchange to develop and implement a highly 
efficient and dependable network of systems that has the capacity to 
handle 600 messages per second.1 By the end of this year 
that capacity will increase to 1000 messages per second and the 
Exchange expects its systems to be able to handle a day in which 4.2 
billion-shares are traded. The accomplishments of the NYSE's people and 
systems were never more visible than on September 1, 1998, the busiest 
trading day in the NYSE's history, when 1.216 billion shares traded 
hands.2
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    \1\ A message is any discrete entity of information that has a 
specific function such as an order, a report, a cancellation or an 
administrative message.
    \2\ New York Stock Exchange Annual Report 1998 at 7.
---------------------------------------------------------------------------
    That is why over 3200 companies, both foreign and domestic, most of 
them leaders in their respective industry sectors, have given the 
Exchange the privilege of trading their stock. Every trading day NYSE 
provides the world reliable, timely and accurate price information in 
respect of each of these 3200 securities.
    The Exchange is also a ``self-regulatory organization'' or ``SRO'' 
with the power to regulate its members. One-third of the NYSE staff is 
devoted to regulation. Every year the Exchange invests substantial 
resources to improve its regulatory systems. The Exchange monitors 
every transaction that occurs on the trading floor on a real-time 
basis. It examines all member firms to ensure compliance with 
operational, financial and sales practice requirements. It also 
maintains a rigorous enforcement program that can discipline our member 
firms and their employees. NYSE Hearing Panels can fine, suspend, 
censure and bar from employment in the securities industry our member 
firms and their employees when their conduct violates the NYSE 
Constitution and Rules or Federal securities laws.
    Why go through all of the expense and effort? To ensure that we 
have the most efficient, transparent price discovery mechanism in the 
world. At its core, that is the Exchange's business--the discovery and 
distribution of price information. The Exchange is the primary market 
for price discovery. The NYSE price discovery process is the basis for 
all other trading activity in NYSE stocks, regardless of whether that 
trading takes place on the Exchange, or on another exchange, in the 
over-the-counter market, overseas, through the facilities of an 
alternative trading system or otherwise. Trading in NYSE listed stocks 
other than on the Exchange would be far more volatile and less orderly 
without the NYSE pricing mechanism ``discovering'' the current value of 
listed stocks.
B. Market Data
    What is market data?--Market data consists of bid/asked quotations 
and last sale prices on stocks, bonds, options, futures and U.S. 
Treasury instruments. Market data also includes related information, 
such as the identity of the market on which a trade occurred, trading 
volume, quotation sizes, and price changes, index valuations and 
foreign exchange rates. The quote consists of the current ``bid'' and 
``ask.'' The ``bid'' is the highest price that anyone is willing to pay 
for a security at a given time and the ``ask'' is the lowest price that 
anyone will sell for at the same time. The markets constantly update 
all of this information throughout the trading day.
    Why is market data important?--Market data is the beginning and end 
and the heart and soul of every trade. It is the information that 
investors all over the world rely upon in making their investment 
decisions. One key reason why the United States equities markets are 
generally acclaimed as the finest in the world is because those markets 
excel at making market data available to the investing public. That 
widespread distribution creates trust and confidence in our securities 
markets. It allows investors to witness the open and orderly auction 
market price discovery process. Investors can witness through computer 
terminals; television screens or brokers the agency auction market 
price discovery process. That process creates investor interest and 
confidence in our markets and reliable market data is an important 
component of that trust.
    Market data plays a significant role in price discovery, in 
investor decision making and in generating confidence in the 
marketplace. Additionally, the revenues that U.S. securities markets 
generate from the distribution of market data have come to play an 
important role in helping to finance the operations of the securities 
markets. In order to support its operations, the Exchange derives 
revenues from a number of sources, including from transaction fees, 
listing fees, regulatory fees, membership fees, facilities fees and 
market data fees. In 1998, market data fees contributed $112 million to 
Exchange revenues, an amount that represents 15% of the Exchange's 
total revenues.3 In 1998, the NYSE spent $ 202 million on 
systems to support the production and distribution of market 
data.4 In 1998, professional investors contributed 
approximately ninety percent of the NYSE's market data revenues. In 
1998, fifty cents of every one-dollar of market data revenues were 
derived from a source outside of the securities industry, such as 
market data vendors and cable television networks. In recent years, it 
has accounted for at least 15 percent of revenues for al U.S. equities 
markets and over 40 percent of revenue for some of those markets. The 
Exchange believes that the widespread distribution of real-time market 
data is very important and goes to the heart of the National Market 
System. Market data revenues are particularly important to the regional 
exchanges across the United States.5 Without market data 
revenues the securities industry would have to find new ways to finance 
the regional stock exchanges. Deterioration in those revenues would 
reduce the resources available to insure the reliability and quality of 
market data and could thereby damage the liquidity and transparency for 
which those markets are known. Congress' goal of a National Market 
System would be foiled if the regional exchanges' revenue streams were 
placed in jeopardy.
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    \3\ Id. at 43.
    \4\ Id. at 43.
    \5\ The ``regional'' stock exchanges include the Boston Stock 
Exchange, the Chicago Stock Exchange, the Cincinnati Stock Exchange, 
the Chicago Board Options Exchange, the Pacific Exchange and the 
Philadelphia Stock Exchange.
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    The New York Stock Exchange and the Information Age--The NYSE 
shares the concerns of Chairman Bliley and the cosponsors of H.R. 1858. 
We believe that consumers should have ready access to all types of 
financial information, including real-time market data. As Main Street 
converges with Wall Street via the information superhighway, more and 
more Americans are taking personal control of their financial 
decisions, including through direct participation in the equity 
markets. The NYSE wants to disseminate as much real-time market data to 
the public. It is extremely easy to obtain free real-time market data 
on the Internet. After reading and completing a short ``click-on'' 
agreement, investors have access to all the free real-time market data 
they could possibly want. I will discuss the ubiquitous nature of 
market data shortly.
    The Exchange has been making market data available for over 200 
years, making it one of the oldest information distributors in the 
United States.6 In the late 18th Century, the NYSE primarily 
traded government war bonds and securities. The local New York press 
regularly reported fluctuations in the prices of stocks and the volumes 
traded. Samuel Morse's invention of the telegraph in 1844 made possible 
quick market communication throughout the country, thereby providing an 
important link between brokers and investors well into the 20th 
century. Similarly, the successful laying of a transatlantic cable in 
1866 made an international market system feasible. The invention that 
most revolutionized the securities market in the 19th century was the 
stock ticker, introduced to the Exchange in 1867.7 The NYSE 
signed its first market data contract in 1869.
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    \6\ Marketplace: A Brief History of the New York Stock Exchange at 
4.
    \7\ Prior to the introduction of the ticker, messenger boys known 
as ``pad shovers'' distributed reports of sales and purchases, who 
constantly ran between the Trading floor and brokers' offices. No 
matter how quick they were, fluctuations in prices often occurred 
during the fifteen to twenty minutes that it took them to complete 
their circuit.
    The speed and accuracy of the ticker's reports were recognized 
immediately as assets to trading. Several ticker companies were 
permitted to station ``reporters'' on the Trading floor to record 
sales. Their reports went to company operating rooms near the trading 
area where the name of the stock, the price, and the number of shares 
traded were typed on a keyboard. Elaborate electric circuitry 
transmitted the keyboard movements and activated indicator wheels in 
local tickers. The wheel printed letters and numbers on an easy-to-read 
paper tape. By the 1880s there were probably one thousand stock tickers 
installed in the offices of New York bankers and brokers. Because of 
the importance of accurate ticker reports, the NYSE gradually took 
control of the information gathering, and in 1885 its own employees 
began to collect the transaction data to give to the ticker companies. 
In 1890, the members of the Exchange agreed to establish the New York 
Quotation Company in order to buy other ticker companies and so assure 
the accurate distribution of market information. Marketplace: A Brief 
History of the New York Stock Exchange at 14.
---------------------------------------------------------------------------
    The introduction of fully electronic and transmission and storage 
of trading information characterized the 1960s. Quotation devices known 
as ``wall boards'' were first attached to ticker circuits in the early 
1960s to provide bid and asked quotations as well as last-sale prices. 
As the technology became more sophisticated, other data could be 
provided. In 1964, a new stock ticker, capable of printing 900 
characters a minute and able to handle a ten-million-share day without 
delay replaced the ``black-box'' ticker in use since 1930. Information 
was channeled to the ticker and quotation system by a new reporting 
device operated from the trading floor. The old pneumatic tube system 
was finally superseded in 1966 by computer cards. The interrogation 
device revolutionized the distribution of market data. Today, modern 
interrogation devices provide dynamic updates.
    While the stock ticker made market data more readily accessible and 
thereby made trading more efficient, it also created a new problem: 
regulation of the quotation services. During the latter part of the 
19th century, popular gambling enterprises known as ``bucket shops'' 
developed in America. Bucket shops often resembled legitimate brokerage 
offices. The proprietors posted on blackboards current stock 
quotations--sometimes reliable and sometimes rigged--and bet any comer 
that the price of a stock would rise or fall to a certain named price. 
No sales of securities actually occurred, and many bettors were 
swindled. ``Bucket shops'' also engaged in unscrupulous, hard selling, 
manipulative securities selling practices. Because their activities 
cast a bad light on all legitimate brokerage, NYSE deprived such 
establishments of quotation services. Many bucket shops found unethical 
ways to procure the market data that they needed to operate. These 
constituted early examples of market data piracy, a practice that the 
markets have had to combat ever since. Modern technology only enhances 
the ability of pirates to pilfer the data. H.R. 1858 would be a welcome 
tool in that battle.
    Legal Theories--H.R. 1858 would only impact pirates. It would have 
no impact on honest investors. The legislation would impact the 
securities markets by protecting the revenue streams on which they have 
become so dependent.
    The securities markets rely primarily upon four legal theories that 
protect them from the unauthorized taking and use of the market data 
that they have made available for the past 200 years.
    First, the markets look to copyright law. While facts are not 
copyrightable, the manner in which facts are organized or collected are 
copyrightable. In Feist Publications, Inc. v. Rural Telephone Service 
Co., Inc., 499 U.S. 340 (1991), the Supreme Court affirmed the 
copyrightability of a collection of information, so long as the 
collection demonstrates an adequate quotient of creativity and 
selectivity. The Court stated that only a small amount of creativity is 
necessary, but concluded that alphabetizing the listings in a telephone 
book was insufficient. The many decisions that the markets make in 
selecting, creating and formatting the market data that they make 
available afford copyright protection to those databases.
    Second, the markets look to the law of torts and, in particular, 
the tort of misappropriation. Section 301 of the Copyright Act 
generally preempts state law to the extent that it regulates a right 
that is equivalent of a right granted under the Copyright Act. Market 
data however qualifies for the ``hot news'' exception to Copyright Act 
preemption that the Supreme Court created in 1918. (See International 
News Service v. Associated Press.) The Second Circuit Court of Appeals 
limited the ``hot news'' exception in National Basketball Association 
v. Motorola (2d Cir. 1997). However, the markets' data businesses 
present a more compelling case for application of the exception than do 
the basketball statistics that were the subject of the NBA case. Also 
supporting the markets is the following language in the Copyright Act's 
legislative history (House Judiciary Committee, Report No. 94-1476 at 
p. 132):
        [A] cause of action labeled, as ``misappropriation'' is not 
        preempted if it is in fact based neither on a fact within the 
        general scope of copyright . . . nor on a right equivalent 
        thereto. For example, state law should have the flexibility to 
        afford a remedy (under traditional principles of equity) 
        against a consistent pattern of unauthorized appropriation by a 
        competitor of the facts (i.e., not the literary expression) 
        constituting ``hot'' news, whether in the traditional mold of 
        International News Service v. Associated Press . . . or in the 
        newer form of data updates from scientific, business, or 
        financial data bases.
    Third, the markets rely upon the pervasive network of contracts 
pursuant to which they authorize the redistribution and use of market 
data. Note in this regard the Seventh Circuit Court of Appeals' 
decision in ProCD v. Zeidenberg (7th Cir. 1997), which held that the 
Copyright Act does not preempt shrink wrap licenses or other state law 
involving consensual dealings over copyrighted subject matter.
    Fourth, the markets look to Section 11A of the Securities Exchange 
Act of 1934, as amended. Section 301(d) of the Copyright Act makes 
clear that the Copyright Act does not limit any rights or remedies 
under that section or any other Federal statute. While Section 11A 
requires the markets to make their market data available, it also 
recognizes their authority to do so pursuant to fair and reasonable 
terms and terms that are not unreasonably discriminatory. (See Sections 
11A(c)(1)(C) and (D).) After a quarter-century of enforcement and 
monitoring of these standards by the Securities and Exchange 
Commission, distribution pursuant to these standards has vastly 
increased the investment community's access to market data. 
Simultaneously, it has enhanced an equitable source of revenues for the 
financing of United States securities markets. Both constitute 
important public interests.
C. Regulatory and Operational Frameworks
    The Regulatory Framework for the Distribution of Market Data--In 
1975, Congress enacted the most sweeping securities legislation in 
forty years: the Securities Acts Amendments of 1975. Those amendments 
authorize the Securities and Exchange Commission (the ``SEC'') to work 
with the securities industry to create an efficient and competitive 
National Market System. A key element of that system is the markets' 
provision of last-sale price information and quote information on a 
consolidated basis. That means that the markets join together to report 
to the public (1) the last price at which a trade in a security takes 
place regardless of the market on which that last sale takes place and 
(2) the best price that is currently being bid or asked for a security, 
regardless of the market to which the broker-dealer representing the 
quote reports it.
    In enacting the 1975 Amendments, Congress called the broad 
distribution of market data the ``heart'' of our national market 
system. At the same time, Congress reaffirmed the ability of markets to 
support their operations by charging for market data so long as the 
fees are fair and reasonable and not unreasonably discriminatory. In 
compliance with that mandate, the markets submit all rules regarding 
the inter-market distribution of market data, including all fee 
changes, to the SEC for approval. The SEC may deny the changes if they 
fail to meet the statutory criteria.
    We understand that the SEC will soon release a study on market 
data. This study will be the subject of public comment. The NYSE 
welcomes that study and we stand ready to assist the Commission in 
their efforts to compile whatever information they require to complete 
it.
    The Consolidated Tape Association--Since 1975, the SEC has taken 
regulatory action under Section 11A of the 1934 Act to implement 
Congress' design for this new National Market System. The U.S. 
securities markets in turn, have responded to the congressional mandate 
and SEC rulemaking by forming the Consolidated Tape Association (CTA) 
and Consolidated Quotation (CQ) plans and developing of assorted 
systems to fulfill that mandate. The markets formed the Securities 
Industry Automation Corporation or SIAC to develop and operate the 
massive and expensive systems that the markets require to provide all 
price and quote information in a timely manner to SIAC for 
consolidation, processing and distribution to vendors. Vendors 
repackage market information into user-friendly formats and distribute 
the repackaged data to broker-dealers, investors, newspapers, cable and 
broadcast television networks, Internet sites and other elements of the 
public. The SEC takes an active role in the formation of the CTA and CQ 
plans and in monitoring data distribution pursuant to the plans for the 
last twenty-five years. The SEC attends all CTA meetings to ensure that 
the protection of the public interest in all decisions pertaining to 
market data distribution. CTA financial reports are available to the 
SEC for its review. The public has access to NYSE revenue and costs 
through access to NYSE Annual Reports, which are available on the 
Exchange's website: www.nyse.com.
    CTA is the administrative body that oversees the administrative, 
collection; processing and distribution of market data relating to 
exchange listed stocks. CTA is composed of the American Stock Exchange 
(Amex), the National Association of Securities Dealers (NASD), the 
NYSE, and the regional stock exchanges.8 CTA operates two 
networks. Network A disseminates market data of securities that are 
listed on the NYSE. Network B disseminates market data of securities 
that are listed on the Amex or one of the regional exchanges. The 
markets administer the CTA Plan and CQ Plan and have designated the 
Securities Industry Automation Corporation (``SIAC'') as the exclusive 
processor of this market information. SIAC registers with the SEC as a 
securities information processor under Section 11A of the 1934 Act.
---------------------------------------------------------------------------
    \8\ The regional stock exchanges include the Boston Stock Exchange, 
the Chicago Stock Exchange, the Cincinnati Stock Exchange, the Chicago 
Board Options Exchange, the Pacific Exchange and the Philadelphia Stock 
Exchange.
---------------------------------------------------------------------------
    In addition, NASD produces and distributes directly to vendors 
market data related to its over-the-counter market securities. Because 
NASD also trades exchange-listed securities, it is also a member of the 
CTA and CQ Plans, and shares in the Network A and Network B revenues. 
The Options Price Reporting Plan (``OPRA'') does the same in respect of 
market data relating to options.
    The consolidated tape system reports the price and number of shares 
for every trade. The ticker tape is broadcast immediately by news 
organizations and on-demand market data is piped via high-speed 
communication lines to computer terminals and an increasing variety of 
financial information services.
    Ironically, the NYSE must purchase market data from one of our 
vendors and we will spend approximately 3 million dollars to provide 
consolidated real-time market data to the trading floor and to NYSE 
employees. Even though the NYSE produces market data, our product is 
consolidated with the other equity markets in a user-friendly format. 
The Exchange sends its own real-time market data to the SIAC. SIAC in 
turn sends a real-time market data feed of all of the CTA members to 
individuals, market data vendors, broker-dealers, corporations, 
institutions and news organizations. Additionally, the SEC, the Board 
of Governors of the Federal Reserve System, the Commodity Futures 
Trading Commission, the Department of the Treasury, the Federal Housing 
Finance Board, and the Federal Reserve Bank of Chicago receive NYSE 
market data.
    The markets' make considerable expenditures of capital to assure 
that all of the inter-related systems required to make all of this 
happen are ``industrial strength'' so as to minimize outages, errors 
and delays, even in light of an ever-increasing level of volume and 
increasing individual participation in the U.S. securities markets. The 
markets are proud of their record in making data available quickly, 
widely and error-free.
    Public Access to Market Data--In today's information-based society, 
real-time market data is ubiquitous. CTA has as one of its highest 
priorities facilitating access to real-time market data to all 
investors. The markets currently distribute real-time market data to 
individuals, institutions, broker-dealers and market data vendors in 
over 100 countries. In 1996, CTA became the first group to allow 
television networks to broadcast a real-time ticker and 70 million 
people have access to free real-time market data on cable television 
through CNBC, CNNfn and Bloomberg. Alternatively, investors can receive 
market data through personal computers or voice-response technology, on 
their pagers, over fax machines and on other hand-held devices. 
Millions of investors have access to free market data through their 
brokers at no charge to them. Over 100 million investors have access to 
both free delayed or real-time market data via public websites at no 
charge. The widespread availability of this information demonstrates 
that the market place continues to be the best forum for solving 
business problems, even as we move from traditional commerce to e-
commerce. As e-commerce has exploded in the last five years, the 
markets have responded by making market data readily available to 
investors.
    Non-professional Market Data Fee Reductions--The Exchange and its 
fellow securities markets are dedicated to making market data as widely 
accessible to the public as possible. In recent years, two factors have 
facilitated that access and allowed the markets to distribute market 
data to an ever-widening audience at reduced rates. First, the growth 
of individual participation in the equity markets and the attendant 
increase in investor interest in market data have been astounding. 
Second, access to the Internet has given all investors the opportunity 
to gain easy access to market data.9 Many on-line broker-
dealers provide real-time market data to investors at no charge to the 
investors. What's more, the securities markets are in the process of 
significantly reducing the fees that they charge in respect of the 
nonprofessional segment of the investor community.10
---------------------------------------------------------------------------
    \9\ The following are examples of Internet sites offering free 
real-time market data to investors: www.marketguide.com; 
www.tradingday.com; www.quotecentral.com and www.freerealtime.com; 
www.thomsoninvest.net. These sites do require that each subscriber 
complete a short ``click-on'' agreement.
    \10\ The markets impose those charges not on the individual, but 
rather on the vendor or the broker-dealer from whom the individual 
receives the information.
---------------------------------------------------------------------------
    On April 1, 1999, after a year's worth of discussions with all of 
the NYSE's constituent groups that subscribe to market data, the NYSE 
Board of Directors unanimously approved significant reductions in 
market data rates for the non-professional investor. For NYSE-listed 
stocks, the markets have filed with the SEC for permission to reduce 
the monthly rate payable by vendors and broker-dealers in respect of 
their nonprofessional subscriber customers from $5.25 to $1.00. As an 
alternative to the monthly per-subscriber rate, the market permits 
vendors and broker-dealers to provide data by paying a per-quote fee. 
For NYSE-listed stocks, the markets have filed with the SEC for 
permission to significantly reduce the per-quote fee from its current 
one-cent-per-quote rate. In an effort to further reduce market data 
costs paid by broker-dealers, the markets that make available market 
data relating to NYSE-listed stocks have filed with the SEC to cap the 
total fees that broker-dealers pay to provide certain services at 
$500,000 per month. On top of that, the markets permit the distribution 
of last-sale prices that are no less than 15 or 20 minutes old 
(depending on the market) at no charge to vendors, broker-dealers or 
investors. Other markets are similarly reducing costs.
    This rate reduction certainly demonstrates the NYSE's commitment to 
complete and open distribution. Earlier this month, the Securities and 
Exchange Commission approved as a one-year pilot program the National 
Association of Securities Dealers non-professional market data rate 
reductions.
    The increased level of interest on market data, as well as the 
facilitation of distribution made possible by the Internet and other 
technological advances make these fee reductions possible. The markets 
believe that they have priced market data in a manner that makes access 
for individuals easy and inexpensive.11
---------------------------------------------------------------------------
    \11\ Investors that are more intensive users of market data 
subscribe to services that market data vendors provide. Those vendors 
charge investors for the value that they add to market data services, 
charges that normally exceed the fees that the markets charge by a wide 
margin.
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                   ii. the database protection debate
    The debate whether to enact legislation for the protection of 
databases has been ongoing since 1991 with the Supreme Court decision 
in Feist Publications, Inc. v. Rural Telephone Service Co., Inc., 499 
U.S. 340 (1991), (stating that ``originality,'' not effort forms the 
basis for copyright protection). That decision eliminated the ``sweat 
of the brow doctrine,'' 12 holding that expenditures of 
time, effort and money do not afford copyright protection to a 
collection of information. Since Feist, the source and extent of legal 
protections for the ``valuable contents of collections of information 
has been uncertain, requiring reliance on a patchwork of different, 
individual insufficient legal theories.'' 13
---------------------------------------------------------------------------
    \12\ Feist Publications, Inc. v. Rural Telephone Service Co., Inc., 
499 U.S. 340 (1991), (stating that originality, not effort, forms the 
basis for copyright protection).
    \13\ Hearing on H.R. 2652, The Collections of Information 
Antipiracy Act before the Subcommittee on Courts and Intellectual 
Property of the Committee on the Judiciary, United States House of 
Representatives, 105th Congress, Statement of Marybeth Peters, Register 
of Copyrights at 4 (October 23, 1997). See also H.R. Rep. No. 105-225, 
at 8 (1998).
---------------------------------------------------------------------------
    The debate intensified in 1996 with the announcement of the 
European Union Database Directive. Under that Directive, U.S. database 
companies gain no protection from the Directive's provisions unless the 
United States enacts reciprocal protections that the European Union 
deems comparable to its own. The European Union's adoption of the 
Directive therefore jeopardizes the continued development of valuable 
databases in the United States.
    Congressional committees have been examining the database 
protection issue since the 104th Congress. Despite misinformation to 
the contrary, the NYSE did not join the debate until March 1998. The 
Exchange became engaged in this process at the invitation of the House 
Courts and Intellectual Property Subcommittee, only after it determined 
that database protection legislation could do more harm than good to 
the market data business if not properly crafted. Working with Chairman 
Bliley and the Commerce Committee the Exchange helped to draft an 
amendment that would preserve the SEC's jurisdiction over market data, 
and protect the National Market System. The NYSE supported Chairman 
Bliley's amendment and, despite further misinformation to the contrary, 
continues to support the SEC's oversight of market data.
    The NYSE supports the enactment of a national statute that will 
protect securities market data from piracy. A Federal statute will 
clarify any possible ambiguity in the law caused by the Feist decision 
and will hopefully address the issue of reciprocity with the EU 
Directive. Title II of the bill provides a well-balanced approach that 
is forward-looking. It will impose minimal compliance burdens on the 
markets or vendors and users of market data. Yet, at the same time it 
will provide the markets with redress against market data pirates, 
thereby preserving a revenue stream that has come to play such an 
important role in the financing of the markets.
     Just as the ``bucket shops'' of the 1890's took advantage of that 
era's state-of-the-art technology (the ticker), the information 
superhighway could provide enterprising swindlers with a new forum for 
fraud. Given that the Federal securities laws are silent on the piracy 
of data, H.R. 1858 provides the framework for the development of a 
weapon that would aid the private sector in its fight against piracy. 
In so doing, this bill will help to ensure the integrity of the free 
flow of market data, the life-blood of the capital markets.
    While we welcome Chairman Bliley's legislation and support the 
principle it embodies, we do have several concerns with H.R. 1858 in 
its current form. The Commerce Committee staff has been receptive to 
our comments to date, and we have worked with them since January of 
this year to improve the bill and believe that substantial progress has 
been made. We trust that we can continue to address the remaining 
problems as this important legislation moves forward through the 
Committee process. We look forward to working with you, Mr. Chairman, 
and your staff to ensure the ultimate enactment of this crucial measure 
into law. The most pressing of our concerns are discussed below.
Concerns with H.R. 1858
    Crafting legislation to protect the sanctity of data produced and 
distributed by the markets must ultimately operate within preexisting 
business and legal frameworks.
     Preserve state law protection. We support an approach, 
which would permit the markets to continue to avail themselves of 
existing causes-of-action under state contract law or however, pursuant 
to state common law misappropriation theories. Allowing plaintiffs to 
pursue state law misappropriation remedies is particularly important in 
light of the limited remedies provided in this bill.
     Strike the statute of limitation provision. This 
misappropriation cause of action should be subject to the same statute 
of limitation as generally applies for other state misappropriation law 
(3 years) or causes of action under the Securities Exchange Act of 
1934.
     Do not change SEC authority. Section 201(e)(6)(B) would 
grant to the SEC the power to prescribe the extent to which market 
information shall be considered real-time information. This is an area 
into which the SEC has not previously delved, but rather has left to 
the markets to determine. Without determining whether the 1934 Act 
already confers this power upon the SEC, we believe that it would be 
inappropriate to add this authority as part of an anti-piracy bill. 
This important issue merits careful consideration and should not be 
resolved as an unstudied adjunct to anti-piracy legislation. We fear 
that the provision would undermine one of the basic legal precepts that 
supports the markets' ability to recover for the distribution of data, 
a precept that parallels the justification that underlies the ``hot 
news'' doctrine that the Supreme Court established in 1918 
14: The law should grant an entity a sufficient amount of 
time to compensate it for the expenditures for collecting ``news'' (in 
the form of market data in this case) before allowing others to pirate 
that news and redistribute it in competing venues. We believe that 
economic realities should determine the appropriate time period for 
addressing that compensation and that the markets are better able to 
make that determination.
---------------------------------------------------------------------------
    \14\ See International News Service v. Associated Press (1918).
---------------------------------------------------------------------------
     Market data is not a government database: Under Title I, 
Section 101(6)(B), lines 18-20, every exchange and market will qualify 
as a government database. This might have the unintended consequence of 
eviscerating the benefits that Title II affords to the markets and we 
believe that the bill should clarify that this is not the case. While 
the Securities Exchange Act of 1934 requires the securities markets to 
consolidate their data on a real-time basis, this data is not collected 
or maintained to accomplish a governmental function. The U.S. 
securities markets are not public agencies or government entities. We 
suggest an explicit statement in the bill to that effect.
    These changes to H.R. 1858 are necessary to the creation of a 
meaningful statute to enforce the unauthorized taking of real-time 
market data. We remain at the Committee's disposal to work toward 
addressing any issues that arise with respect to this legislation.
    The Exchange welcomes H.R. 1858 and the new cause of action that it 
seeks to create. We thank the cosponsors for introducing this important 
legislation. We want to continue our productive working relationship 
with the Committee on issues affecting the capital markets. We hope 
that the Exchange's concerns can be addressed as the legislation moves 
forward. Thank you again for the opportunity to present this testimony. 
I would be happy to answer any questions that you may have.

    Mr. Oxley. Thank you, Mr. Bernard.
    Our final witness is Ms. Carrie Dwyer from Charles Schwab. 
Welcome.

                   STATEMENT OF CARRIE DWYER

    Ms. Dwyer. Thank you, Congressman Oxley, Congressman Towns, 
members of the subcommittee. I am Carrie Dwyer, general counsel 
and executive vice president for corporate oversight of the 
Charles Schwab Corporation. We are grateful to Chairman Bliley 
as well as you, Congressman Oxley, Towns, Dingell, Markey, and 
the many others who have joined in introducing this bill which 
we think is a good effort.
    This is an issue that has been of great interest to our 
firm almost since its inception. Twenty-five years ago Charles 
Schwab was founded trying to do a new way for investors to 
access the markets. The company's mission was--and is--to 
empower the individual investor to achieve his own financial 
goals.
    Schwab is currently entrusted with the assets of 6.5 
million customers, 2.5 million of which access us online on any 
given day. We believe we are the second largest brokerage firm 
in the country in terms of retail customers, and we are the 
largest Internet brokerage in the world by any measure. In the 
first quarter of this year, for example, our firm processed 
over 200,000 retail trades per day and over our web site, $2.3 
billion is transacted every day; 80 percent of Schwab's trades 
come to us over the Internet now.
    Clearly empowering investors has been something that has 
been well received by investors. This strategy led Schwab to be 
the first broker back in the mid-1980's to offer real-time 
market data directly to customers. Next came the technology to 
allow customers to directly enter their own trades, directly 
access financial information, 24-hour-a-day 7-days-a-week 
access to your account and more recently foreign language 
capability whether you come to us through a broker in our 
Denver call center, through the Web, or as I said, over the 
phone. There is more to come.
    Who owns market data, how much it should cost, and how to 
protect legitimate interests in it are all questions that we 
care a lot about. We think the answers should be the public 
owns market data which is required to be consolidated under the 
1934 act. Market data should be fairly priced at a level which 
recovers the cost of collecting and disseminating it. 
Protections against misuse should be carefully tailored to 
assure that we don't damage the transparency of our markets.
    The sale of market data to investors and vendors is 
probably unique in commerce. Imagine if Walmart charged its 
customers to enter the store and look at the prices of the 
goods on the shelves. It would not really be a successful 
marketing strategy unless you are the only store around. Market 
data may be the only advertising that customers have to pay to 
see.
    Schwab has been at the forefront in providing information 
to its customers, but our ability to do so comes at a cost. We 
pay fees to receive these market data. That is fine to the 
extent that stock markets have incurred costs in getting 
consolidated data to us. But the higher the cost of the data 
whether we absorb it or pass it onto our customer, the more of 
a barrier that cost poses to providing good data, timely data 
to our customers in as many ways as they want it and in the 
form they want it. The higher the cost of real-time data, the 
greater the incentive to use delayed data for certain functions 
which is inherently inferior.
    We are concerned that the charges for market data may not 
be sufficiently related to the cost of delivering it to 
investors. Yet Congress made it clear when it created the 
consolidated system that it expected the SEC to oversee the 
reasonableness of the fees charged by the processors. We have 
asked the SEC to do this in a petition we filed with them 
yesterday. The exchanges have said that the excess market data 
revenues are needed to fund their self-regulatory operations 
or, as we just heard, their fundamental operations.
    We don't find authority in the exchange act for this and we 
don't actually think it is allowed by the exchange act. But 
even so, the exchanges have not shown us that this is so, and 
we have asked the SEC to also examine how the revenues are used 
by the markets in order to determine whether the costs are 
fairly and equitably distributed. We depend on robust self-
regulation to keep our markets honest, but we believe the cost 
should be borne by exchange members directly, not imposed as a 
hidden tax on investors.
    When Congress mandated consolidated market data, it was 
intent on fostering transparency and widespread availability. 
Throughout the exchange act amendments, Congress attempted to 
remove barriers to competition and to improve access to the 
markets. Rather than vest ownership of market in the stock 
exchanges, Congress affirmed its inherently public character. 
Concern that the centralization of the collection and 
dissemination would effectively create a monopoly over market 
data led Congress to regulate the processors' role and to give 
the SEC extensive oversight authority as a first line of 
defense against anticompetitive practices.
    I want to thank the committee for your leadership on a 
critical issue. It affects tens of millions of American 
investors. We look forward to working with you, and I am 
pleased to answer any questions that you may have. Thank you.
    [The prepared statement of Carrie Dwyer follows:]
    Prepared Statement of Carrie Dwyer on Behalf of Charles Schwab 
                              Corporation
    Chairman Oxley and distinguished members. My name is Carrie Dwyer, 
and I am General Counsel and Executive Vice President for Corporate 
Oversight at Charles Schwab & Co., one of the nation's largest 
brokerage firms. Schwab was founded 25 years ago as a pioneer in 
discount brokerage, making Wall Street accessible at a reasonable price 
to ordinary retail investors. Today, Schwab is the second largest 
brokerage in the country in terms of customers. Schwab has over 6 
million active accounts of which 2.5 million are online accounts. 
Schwab is by far the largest online brokerage in the world. In the 
first quarter of 1999, Schwab handled over 200,000 trades per day and 
did more than $2 billion of commerce each day on its website. I would 
like to thank you for this opportunity to discuss the importance of 
market data to the securities industry and the importance of H.R. 1858 
to preserving the integrity of the collection and use of that data.
What is Market Data
    Perhaps the single greatest reason for the success of the U.S. 
capital markets is their transparency. The widespread availability of 
market data is what democratizes our markets. It is what allows 
individual retail investors to make informed investment decisions about 
their savings for college or retirement. Current, accurate, reliable 
market data enables individual retail investors to trade on a level 
playing field with professional institutional investors. It is also the 
backbone of our national market system--a unique system set up by 
Congress in 1975 by the adoption of section 11A of the Securities 
Exchange Act of 1934. This system links all stock exchanges and over-
the-counter markets by making information about securities transactions 
widely available and allows investors to enter orders in one market yet 
still benefit from better prices available on other markets. Market 
data is a critical component in the integration of what would otherwise 
be an unconnected and fragmented collection of securities markets.
    Market data consists primarily of the prices at which investors and 
broker-dealers are willing to buy and sell securities and the prices of 
completed transactions. Real-time market data, that is, data that shows 
transactions and quotations as they are occurring, is collected from 
the broker-dealer members of the stock markets by registered securities 
information processors, like the Consolidated Tape Association. These 
processors package and distribute the market data to information 
vendors, like Bloomberg, and also to broker-dealers. Investors rely on 
this information to evaluate potential investments and to determine the 
best prices available in the market.
The National Market System
    The widespread availability of market data, however, was not always 
a part of the U.S. markets. Prior to 1975, investors were required to 
use an intermediary to get a current quote or last sale. Control of the 
critical information needed to make a trade was vested in a few 
professionals. If an investor wanted to compare prices available on 
each stock market, he would need to have access to price information 
from each market separately. The hidden value of real prices made the 
markets subject to manipulation, and prevented investors from finding 
the best price, or evaluating whether a price was fair. When Congress 
acted in 1975 our markets were badly fragmented and opaque--and 
investors paid the price.
    The 1975 amendments to the Exchange Act were designed to correct 
this imbalance by giving investors the tools necessary to better 
evaluate transactions. This in turn fostered a more efficient, fair and 
orderly national market. Congress accomplished this by requiring the 
collection of price information from all stock markets into a 
centralized location and making that information publicly available 
through registered securities information processors. The stock markets 
were required to enter into joint plans for the collection and 
dissemination of this information and to cooperate in the management 
and implementation of these plans by the processors. Congress did not 
create any ownership interest in the collected data for the stock 
markets, the joint plans or the processors, but instead required the 
cooperative efforts of the stock markets to ensure that the data was 
available for the benefit of all investors and the public generally. 
Throughout the 1975 Act Amendments, Congress acted to remove barriers 
to competition and to improve individual and institutional access to 
markets. Rather then vest ownership of market data in the stock 
exchanges, Congress reaffirmed its public character.
    Congress did express concern that the processors, and accordingly 
the stock markets that administer them, would effectively create a 
monopoly over the collection and dissemination of market data. Congress 
emphasized that the processors should ``function in a manner . . . 
neutral . . . to all market centers,'' and thus entrusted the SEC with 
the job of acting as ``a first line of defense against anti-competitive 
practices'' by granting the Commission broad authority to regulate 
registered processors. The SEC was given the ``responsibility to assure 
[a] processor's neutrality,'' including the reasonableness of the fees 
it charges for access to market data.
    Exchange Act section 11A, and the rules thereunder, are thus 
designed to prevent unchecked monopolistic control over the means of 
collection and dissemination of market data by the processors and their 
participant markets and to ensure that the terms of access to market 
data are fair, reasonable and non-discriminatory to all.
The Importance of Real-Time Market Data to Our National Market System.
    Ensuring the broadest possible access to market data is essential 
to the protection of investors and the fairness of our markets for 
everyone. Schwab believes that access to this data on fair and 
equitable terms is critical to ensuring that all investors, no matter 
where they trade, have the information that is essential to making 
fully informed investment decisions. All retail customers at all firms 
depend on this.
    Schwab, like most brokerage firms, purchases market data from the 
registered securities information processors, which share their 
revenues with the stock markets that participate in their operation. 
Schwab then distributes real-time quotes and transaction prices 
directly to its customers, generally free of charge. For our online 
customers, real-time data is only a mouse-click away. For all other 
customers, real-time data may be obtained over the phone or in-person 
at our branch offices.
    The stock exchanges and the NASD earn substantial revenues from 
their participation in the plans that collect and distribute market 
data. In 1998, the New York Stock Exchange, the American Stock 
Exchange, and the NASD reported $339 million combined market data 
revenues. Schwab alone paid a total of over $19 million dollars, or 5.6 
percent, of this amount for market data in 1998.
    Notwithstanding the large revenues earned for market data and the 
corresponding costs imposed on investors, the Exchanges have never 
shown any correlation between the cost of operating the market data 
plans and the prices charged for data. Nor has the fairness of the 
allocation of market-data fees among various classes of market 
participants been evaluated. This is contrary to Congress' original 
goals for the 1975 amendments to enhance the fairness and efficiency of 
the markets for all investors.
    Moreover, we are in the midst of a technological revolution, in 
which access to technology has enabled investors' costs to shrink 
dramatically, transforming the way in which we deliver products and 
services to them. Our firm has over the past year questioned whether, 
in a time of rapidly decreasing cost in every aspect of our business, 
there is any valid justification for the continuing high cost of market 
data.
    The exchanges have asserted that the excess market-data revenues 
are used to fund their self-regulatory obligations--to surveil the 
markets for fraud, abuse and other violations of the securities laws. 
We don't believe the Exchange Act permits this, but perhaps more 
important, the securities markets have not shown this to be the case. 
Moreover, as important as self-regulation is, it should not be allowed 
to act as a shield to protect the exchanges from charging unfair and 
excessive fees for market data. The costs of self-regulation should be 
borne by exchange members directly, as we believe they are through 
existing fees and dues, and not transferred to retail investors seeking 
access to market data.
    In responding to this argument, stock markets have tried to assert 
a new ``property right'' to market data and have backed H.R. 354, the 
``Collections of Information Antipiracy Act,'' sponsored by 
Representative Howard Coble (R-NC), to secure such rights. We believe 
this is inconsistent with the goal of widespread access to market data. 
To see how a property right in market data is inconsistent with the 
Exchange Act goals, consider what market data is. When an investor 
places an order with his or her broker, that order is typically 
transmitted to a stock exchange or the over-the-counter market to 
locate a matching counter offer. If the investor's order is the best 
price in the market, it is included in the information collected by the 
securities information processors and disseminated back to the broker-
dealers and information vendors as market data. The customer (or the 
customer's broker) must pay to see whether the customer's own order is 
being properly displayed in the market. Even an OTC market maker must 
pay to see his own bid and offer.
    Further, the system of collecting and disseminating market data is 
not voluntary. It is mandated by the Exchange Act and the rules adopted 
thereunder to achieve centralization of market data. But a need for 
central collection and dissemination in effect creating a sole source 
provider, should not become the basis for a property right in the data 
itself.
    No one can legitimately claim to ``own'' market data. Market data, 
such as broker-dealers' bids and offers for a stock, are facts: the 
current prices for securities. Investors and broker-dealers, and not 
exchanges, create these ``facts.'' Granting market data ownership or 
copyright protection to any one party would be antithetical to the very 
purposes of the national market system and to longstanding principles 
of intellectual property law.
    The stock markets have expressed serious concerns, however, about 
potential misappropriation or ``pirating'' of the CTA/CQ databases. All 
market participants have an interest in assuring the integrity of these 
databases. In recognition of this, H.R. 1858 addresses the potential 
problem of market data misappropriation in a straightforward and 
appropriately limited manner. Schwab supports this approach.
Analysis of H.R. 1858, Title II's Key Provisions.
    The goal of Title II of the bill is to protect investor access to 
market information in light of recent developments in database and 
digital technologies. Some believe that advancing technology has 
increased the risk of data piracy. To address this issue, the bill 
prohibits the misappropriation of real-time market information that the 
securities markets collect and disseminate pursuant to section 11A of 
the Exchange Act. It does so by establishing a cause of action for the 
exchanges and SIPs to enjoin and seek damages against anyone who sells 
or distributes market data without authorization.
    The premise of the bill is that any pirating of market data 
unfairly burdens the securities markets and those, such as Schwab, who 
pay for the market data. H.R. 1858 appropriately protects the markets' 
joint investment in data technology and infrastructure against persons 
who, without authorization, take market data without paying for it. 
Schwab supports H.R. 1858 as a measured response to the exchanges' 
concern about market data misappropriation.
    We also support the bill as a commonsense alternative to the 
approach contained in the Coble bill, which would apply extremely broad 
definitions and concepts of ``information'' and ``maintaining a 
database'' to securities market data, and would grant the exchanges 
extraordinary civil remedies (including impoundment) for perceived 
competitive harm from any market data use they do not specifically 
approve. As a result, the Coble bill would grant the exchanges new 
rights and control over market data extending well beyond protection 
from misappropriation. Unnecessary restrictions on the use of market 
data could also chill innovative uses of market data, such as streaming 
quotations or technical tracking.
    Moreover, these new rights would exist outside the framework 
Congress carefully crafted for the national market system and placed 
under SEC oversight. Given the paucity of examples of securities market 
data piracy, and the fundamental purposes of the national market system 
to assure equal and non-discriminatory access to market data, we 
believe the Coble bill's approach is fundamentally misguided.
    Below is an analysis of key provisions of Title II of H.R. 1858, 
including additional reasons why Schwab supports the bill as currently 
drafted.
    Disputes with Market Data Vendors Are Excluded. Paragraph (e)(5) of 
the bill makes clear that information vendors, such as Bloomberg and 
Schwab, are outside the scope of the bill. In other words, because 
vendors receive and distribute market data from the securities markets 
by contractual agreement, any dispute between the exchanges and a 
vendor would be resolved under state contract law. Any such disputes 
about market data distribution would arise as either a contract dispute 
or a matter between an exchange and its member. Such disputes should 
not become a federal cause of action under the Exchange Act.
    No Copyright or Property Rights or Interests Are Created. It would 
be contrary to national market system principles and longstanding 
intellectual property law to confer ownership rights over market data. 
By granting a limited cause of action to the securities markets for a 
limited purpose under section 11A of the Exchange Act, Title II makes 
clear that rights in the data itself are not created.
    The bill only applies to ``real-time'' market data: i.e., data that 
is immediate and current. The limited scope of the bill reflects that 
its purpose is to further the national market system goals of 
transparency and fairness, not to create property rights. In addition, 
paragraph (e)(3) expressly preserves the right of persons other than 
the securities markets to independently gather and distribute real-time 
market information.
    Preemption of Inconsistent State or Federal Law. H.R. 1858 
appropriately balances state law concerns with national market system 
goals. Paragraph (e)(4) supersedes state and federal law to the extent 
it is ``inconsistent with'' the bill. This is necessary and appropriate 
as Title II creates a new cause of action for the securities markets 
under the federal securities laws to address the potential problem of 
piracy that the markets have identified. At the same time, H.R. 1858 
preserves state contract law claims with respect to contractual 
disputes between the exchanges and information vendors. More extensive 
state law misappropriation theories would be inconsistent with the 
bill's goals. Moreover, we do not believe the bill will disadvantage 
the states, as we are unaware of any prior state law claims relating to 
the collection or use of market data.
    The Definition of ``Real-Time.'' We believe ``real-time'' should be 
interpreted to mean what it says: right now, immediately, or the time 
it takes to transmit the information from the securities markets to the 
public. After that point the market data becomes stale and is readily 
available in the public domain. However, it may be the case that what 
appropriately constitutes ``real-time'' information may vary depending 
on the existing state of technology, the different types of market data 
and how market participants use market data. Accordingly, paragraph 
(e)(6)(B) grants the SEC rulemaking authority to define further the 
meaning of ``real-time'' in specific contexts. This rulemaking grant is 
permissive, not mandatory and grants the SEC appropriate discretion to 
act if necessary.
    For these reasons, Schwab is pleased to support H.R. 1858 as a 
considered, measured approach to the risk of market data 
misappropriation.
Schwab's Petition for Cost-Justified and Non-Discriminatory Market Data 
        Fees
    Closely related to the goal of protecting market data is the 
equally important goal of assuring that access to market data is on 
fair, reasonable and non-discriminatory terms, as required by section 
11A of the Exchange Act. SEC Chairman Arthur Levitt has announced that 
the Commission's Division of Market Regulation will be conducting a 
comprehensive review of market data distribution and fees. We applaud 
this effort, but believe it must be followed by substantive reform.
    The stated purpose of H.R. 1858 is ``to promote electronic commerce 
through improved access for consumers to electronic databases, 
including securities market information databases.'' Schwab believes 
that this is one of the most important goals for the securities 
industry--that is, to improve investor access to market data.
    Online investing has been a driving force in opening access to the 
markets for retail investors, and a significant component of this 
growth is the ready access to market data online investors enjoy. 
Schwab has been at the forefront of providing this information to 
retail investors in an electronic environment. However, our ability to 
provide information comes at a cost. Specifically, we pay fees for the 
receipt and use of market data.
    The cost of market data, whether passed-on or absorbed by a broker-
dealer, is the single greatest hurdle in providing investors with 
access to market data. While Schwab is committed to providing access to 
timely and complete information, our central concern with the cost of 
access is that it is not fairly allocated among all market 
participants, thus not all investors receive market data on equivalent 
terms.
    We believe that the current fees discriminate against our 
customers. For example, online retail investors must either pay a 
penny-a-quote or a fixed monthly fee of up to $5.25. For firms like 
Schwab that absorb these fees for the benefit of their customers, there 
is virtually no cap to the monthly market data expense. In stark 
contrast, traditional brokerage firms that deliver market data to their 
customers the old-fashioned way--through a broker or the telephone--pay 
a fixed monthly terminal fee no matter how many quotations they 
deliver. We think this fee structure penalizes Internet technology and 
direct investor access to market data, and has resulted in online 
brokers and their retail customers paying grossly excessive market data 
fees.
    Yesterday, Schwab filed a petition with the SEC requesting that it 
institute rulemaking to govern the terms of access to market data. In 
particular, Schwab requested that, to ensure the fairness of market-
data fees, the SEC adopt rules to require that fees be related to the 
cost of collecting and disseminating market data. This is the standard 
the SEC itself has articulated. In addition, Schwab requested that the 
rules ensure that market-data fees are allocated in a fair, reasonable 
and non-discriminatory manner consistent with section 11A of the 
Exchange Act. Greater transparency of the fees, costs, contracts and 
policies relative to the collection and dissemination of market data is 
essential to meeting these goals. The processors have in the past 
avoided public and regulatory scrutiny in a number of instances by 
instituting fee changes through ``pilot'' programs that were not filed 
with the SEC for review, approval and, importantly, public notice and 
comment.
    Schwab believes that SEC intervention into this matter is critical 
for a fair and prompt resolution of these issues for several reasons, 
many of which are relevant to this committee's consideration of this 
bill. For example, although the processors are directed by the Exchange 
Act to distribute market data in a fair, reasonable and non-
discriminatory manner, the processors are operated by joint action of 
the existing securities markets, and those markets share in the 
processors' revenues. Combined with the absence of public and industry 
representation on the processors' boards, it becomes natural for the 
processors' operations to favor the interests of the individual stock 
markets, rather than the interests of all market participants. This is 
exemplified by the recent programs offered by several markets to rebate 
a portion of the fees paid by certain classes of market participants 
based on their volume of trades in that market, for the purpose of 
capturing order flow. These programs help the markets involved to 
compete, but do not foster the goals of widespread and fair 
dissemination of market data to all investors. Prevention of 
monopolistic control of market data was recognized by Congress during 
the passage of the 1975 Amendments to the Exchange Act, and is equally 
important in the context of H.R. 1858.
    The 1975 Amendments to the Exchange Act were designed to open more 
fully the national securities markets to the free play of competition 
and to prevent unreasonable restraints on access to services and market 
information. Through the 1975 Amendments, Congress gave the SEC the 
authority to intervene in those situations where competition would not 
be sufficient to protect these interests. H.R. 1858's measured approach 
will further these goals by clarifying the proper use of market data 
and the rights of the various market participants to that data. H.R. 
1858 accomplishes this by upholding the rights of retail investors and 
all market participants to access essential market data, while at the 
same time protecting the markets' necessary investments in market data 
technology from misappropriation.

    Mr. Oxley. Thank you, Ms. Dwyer.
    That concludes the testimony and the Chair would recognize 
himself for 5 minutes for questions.
    Let me begin with Mr. Ricketts because of all of the 
statements today, I thought yours was the most provocative. If 
I understood it correctly, since Ameritrade is essentially 
generating quotes, you believe you ought to be paid for that 
market information as opposed to the other way around. Did I 
get that right?
    Mr. Ricketts. You got that right, Mr. Chairman. If there is 
going to be a levy, if there is going to be a tax, there should 
be some refund that comes back to where those quotes originated 
from. They belong to the public. They don't belong to a 
purveyor; they don't belong to an exchange. Everybody is part 
of making the market system work, including the customers, the 
institutions and our customers, the individual investors that 
deliver the buy and sell orders to the marketplace.
    Mr. Oxley. Now, I think there would probably be some 
disagreement with that statement with some of your friends to 
the left. I wonder if anybody would care to comment on that, 
for example, Mr. Bernard.
    Mr. Bernard. I would be delighted. I guess it is worth 
noting that the world consists of investors and nobody else. 
That is where the money begins and ends. There is a list of 
companies, their money is investor money. Broker-dealers, they 
are intermediaries for investors. Same thing for mutual funds, 
you name it. So the question about who owns it is really not 
the issue.
    The issue is that it cost us about $550 million last year 
to run the New York Stock Exchange. We are pleased to give 
another $180 million to you gentlemen, because we are a not-
for-profit corporation; we are a tax paying corporation.
    About $110 million of that was revenue related to market 
data. Something under $10 million of that was revenue related 
to the sort of fees that are being discussed here. With that 
money, we ran a market that is now at about 800 some-odd 
million trades a day. It does all of the things that you know 
it does, surveillance and those sorts of things. It is not 
about who owns the data. The question is that you have got to 
run the markets; you have to get that money from somewhere. It 
all comes from investors one way or the other.
    Mr. Oxley. Mr. Furbush, do you have any comments on that, 
on the provocative statement by our friend down here?
    Mr. Furbush. My friend's provocative statement describes 
the current state of the world for him. He receives commissions 
from his customers, and he receives per-trade revenue from the 
market maker. The market makers are the institutes to whom he 
sends those trades.
    In many cases, that data arises because the venues to which 
the trade goes are able to make money from the data selling 
them in the information national market we are talking about 
today.
    Mr. Oxley. Let me ask Ms. Dwyer, you are the largest online 
trader according to your testimony. What do you think about Mr. 
Rickett's idea? What do you think Charles Schwab would think 
about that?
    Ms. Dwyer. I think it is intriguing. I think that if we put 
our customers' interests first, then I think that we believe 
that each customer who puts in a bid or ask or transacts a 
trade essentially has an ownership interest in that. I don't 
think that is property interest that we are all interested in 
creating or paying for. We would much rather eliminate the tax 
on seeing your own quote.
    Mr. Oxley. Let me ask each of you. Ms. Nazareth, our first 
witness from the SEC, indicated that firms do not pass the cost 
of market data on to investors. Let me begin with Mr. Hogan and 
just ask you down the line. Do you go with that, that the cost 
is not passed on?
    Mr. Hogan. No, I don't. In fact, we do charge. We allow a 
client to have 100 free real-time quotes when they open an 
account. Each time they do a transaction with us, we give them 
100 more free real-time quotes. To the extent the client uses 
up their quote bank, they can buy 500 more real-time quotes for 
$19.95.
    To the extent that clients want to receive from us 
streaming quotes, whenever they are logged on, they will get 
the stream of quotations that is out there in the marketplace. 
We charge them $27.45 per month. This is in addition to any 
other commissions or service charges that we apply. It is not 
our understanding that we are unique. However, there is 
competitive pressure in the marketplace to try to deal with 
these sorts of fees in another way.
    Mr. Oxley. Mr. Ricketts, I can anticipate your answer.
    Mr. Ricketts. It is a little bit awkward or ridiculous to 
talk about how we pass on the fees. It is a cost of doing 
business that the customer has to pay. It doesn't matter which 
way we do it.
    Mr. Oxley. Mr. Bell.
    Mr. Bell. For real-time information, our users basically 
have a choice. If they take real-time information, we pass on 
that charge to them.
    Mr. Oxley. Is that a direct dollar-for-dollar pass through?
    Mr. Bell. In most cases, yes. Sometimes we bundle them 
together. If they have five or six different real-time 
exchanges they are accessing and then add some sort of small 
administrative charge. That is pretty much dollar for dollar.
    Mr. Oxley. Thank you.
    Mr. Furbush. In Annette's defense, the direct charge that 
many investors pay is likely to be zero. But of course, my 
colleagues to my right, those are costs that are borne 
ultimately by investors. So, for example, if an online investor 
wants to see a real-time quote rather than a 15-minute delayed 
quote, that is costing a penny. And that investor either pays 
that directly or that penny is charged to the firm who is 
eating it.
    Mr. Oxley. He is getting something of value for that, 
obviously. A 15-minute difference in a stock quote is huge.
    Mr. Furbush. It makes a world of difference.
    Mr. Oxley. Mr. Bernard.
    Mr. Bernard. Just like the other point, different firms 
have different business models as to whether they unbundle 
their costs and pass them on or pass them all on as a single 
commission.
    Ms. Dwyer. Our cost structure is the same as DLJdirect. We 
primarily absorb the cost to our customers. But there is 
another issue behind that. Because it costs us money to provide 
real-time quotes, we don't provide real-time quotes in many 
situations where a customer doesn't strictly need it, although 
they would be better served by having real-time data. It is 
what they don't get as a cost that affects investors directly.
    Second, I would say that the way that the costs are now 
structured, they are uniquely discriminatory against online 
brokers in that a full commission broker is sitting at a desk 
with a terminal who pays a monthly fee. It doesn't matter 
whether he draws down 10,000 quotes or one. The fee is the same 
to the firm. When our customers access over the Internet, there 
is a cost associated with every quote. And therefore it is more 
expensive to deliver quotes to an online customer than to a 
customer who is dealing with a full-service broker. And that is 
a cost we bear as well.
    Mr. Oxley. Thank you. My time has expired. The gentleman 
from New York, Mr. Towns.
    Mr. Towns. Thank you, Mr. Chairman. Let me again begin with 
you, Mr. Bernard. What are some of the problems that you see 
with H.R. 1858? Or are there so many you can't do it in 5 
minutes?
    Mr. Bernard. There is really just a few technical issues. 
The basic thrust of the bill is fine. We concur with some of 
the ones that the NASD has mentioned. There is a troubling 
definition of government agency in the bill that we are fearful 
could be read to incorporate the self-regulatory organizations, 
the exchange, which of course is not a government agency 
although by statutory mandate it must collect consolidated 
market data. We are a little bit troubled by the idea that the 
SEC needs to start defining what is delayed and real-time. That 
has been a nonissue for the last 207 years. We are not sure it 
needs to continue. The market seems to do a fine job on that 
one.
    There is a provision that has a different statute of 
limitations for market data as opposed to other databases, and 
we just don't see the need for that. The fundamental property 
rights, whosever they are, are the same whether it is market 
data, sports scores or anything else. Then there is a technical 
issue of how well State remedies are preserved in concert with 
the Federal remedy.
    We don't see any particular reason to extinguish the 
State's remedies as you bring about a Federal remedy. None of 
these go really to the heart of the wisdom of having a Federal 
misappropriation bill that recognizes the continuing 
jurisdiction of the SEC to deal with some of these issues that 
you have been dealing with today.
    Mr. Towns. Thank you very much. You have been very helpful.
    In your testimony, Ms. Dwyer, you state that the exchanges 
and the markets charge unfair and excessive fees for the market 
data. Are you saying that the SEC has failed in its regulatory 
role? What are you really saying here?
    Ms. Dwyer. I think that what I said was that we are 
concerned that the fees that are charged are not sufficiently 
related to the cost of producing the data and delivering it. We 
believe that the SEC needs to take a fresh look at the cost, 
cost justification, and concepts like cost recovery.
    The real question is are the exchanges for profit 
businesses that have the ability, even though they are the only 
show in town, to charge whatever the market will bear for 
quotes; or is there a public utility character here that is 
invested with the interest of the American public that demands 
that there be some reasonable relationship to the cost of 
producing and delivering the data what is charged to investors.
    So I am saying that we have petitioned the SEC to ask them 
to undertake just that analysis because we are concerned that 
while the costs in the brokerage industry have collapsed 
dramatically in the last several years--a primary example would 
be last month's announcement that Merrill Lynch is reducing its 
commissions to $29.95--we have not seen a concomitant decrease 
in the price of market data.
    Mr. Towns. Thank you very much. This is a question that the 
Chairman raised, but I am going to go at it in a different way. 
If market fees are lowered, would you pass the savings on to 
your customers? Let's go on down the line.
    Mr. Hogan. Absolutely.
    Mr. Ricketts. Very definitely.
    Mr. Bell. Yes, sir.
    Mr. Towns. You, Ms. Dwyer?
    Ms. Dwyer. Definitely, and we also provide them with better 
and more functional service.
    Mr. Towns. Thank you. Let me phrase this one. Would any of 
you support Congress again fixing the prices charged for 
various data products?
    Mr. Ricketts. I wouldn't support Congress fixing the 
prices. I think I would support Congress creating an 
environment for competition and market forces to play out and 
let the market forces take care of the prices.
    Mr. Bernard. Congress looked at this issue 24 years ago and 
it said, let the self-regulatory organizations with their 
constituent boards take a first pass at trying to decide how to 
allocate the cost of running the markets and what charges get 
made. The SEC oversees that through a regulatory scheme.
    Our board consists of broker-dealers. It consists of lists 
of company chairmen. It consists of lists of people from the 
public sector. Half of the board is not from the securities 
industry. So there is a mechanism in place that tries to take 
into account all of the constituents' interest in how these 
costs should be allocated. That is a pretty good system; it 
actually works very well. I think if Congress stays where it 
is, which is to keep that club behind the door in case it needs 
it through the SEC, it will be fine.
    Mr. Towns. Is that a no?
    Mr. Bernard. I guess that is a no. I spent 4 years in 
Russia. That is a definite no.
    Mr. Towns. Thank you. I yield back.
    Mr. Oxley. The gentleman from California.
    Mr. Bilbray. Thank you, Mr. Chairman. Mr. Chairman, it has 
become obvious to me there is a distinct difference between the 
private sector and those of us in Washington--is that when you 
get a lower cost, you would lower the--how much--the price to 
the consumer and lower the fees that you charge. Here in 
Washington we would try to find a new program that we could 
provide with the extra revenue and justify maintaining the fees 
based on the expanded service.
    Enough cheap shots for this morning.
    Mr. Bernard, you were talking about--would you try to 
clarify for this member, talking about the issue of the rights 
of the performer who is being shot out of the cannon, which 
those of us in Congress relate to a lot. And then you relate to 
the fact of the sports scores.
    How do we balance that whole issue, that the fact is that 
if somebody reports on the news and shows the film of somebody 
being shot out of the cannon that there is property value to 
that? But at the same time, we have sports scores being 
reported by CNN on cable, a service that is being charged for; 
but as far as I know, CNN or the TV stations are not paying the 
leagues for the right to be able to report those sports scores.
    Mr. Bernard. This really goes to the issue of real-time. 
One of the cases that actually made this bill a good idea 
looked at NBA sports scores. I tried to tell your counsel that 
market data had a more fundamental public interest than 
basketball scores, and I was roared down in the media. And 
having watched the Knicks and Spurs, I now agree that those are 
more important.
    Mr. Bilbray. You haven't seen him play basketball, both the 
ranking member and the Chairman.
    Mr. Oxley. I thought you were finished with cheap shots.
    Mr. Bilbray. I meant it as a compliment, Mr. Chairman.
    Mr. Bernard. When I was watching the Knicks making their 
valiant effort, every time I turned on the television the thing 
started with a whole bunch of stuff about how you couldn't 
videotape the presentation. I think that is the right analogy 
here. The minute this data is more than 15 minutes old as 
measured by our old ticker, it is out there. Ted Williams 
sports scores are out there and you can have either----
    Mr. Bilbray. It is the public domain.
    Mr. Bernard. I will never use the ``public domain'' word 
but we certainly don't charge for it. This bill made very 
clear, by the way, that we certainly can't rely on the statute 
to do that, but the issue is this. The market data is 
actionable within the first 15 minutes. If we are correct that 
revenue from market data is in our case about 10 percent or a 
little higher than that of the way we recover the costs we 
need, if that is a correct thing to do--which we think it is--
then we have got to be able to charge for it. It is the actual 
periods like being in the middle of the basketball game and 
that ought to be protected.
    Mr. Bilbray. I would be very interested to see what CNN 
does with the real-time display that they show on the bottom of 
the screen.
    Mr. Bernard. They pay us for it, Congressman.
    Mr. Bilbray. What is the difference in the price between 
the real-time and 15 minutes? Would somebody give this poor 
layman some idea?
    Mr. Furbush. Zero after 15 minutes.
    Mr. Bilbray. I will let my daughter know that. This 
information is really for a 12-year-old sitting in San Diego 
who does all of the investments for the family, I want you to 
know, for the last 2 years. Frankly, we don't argue with 
success, Mr. Chairman. If she can continue to make what she has 
been making for the family, she is going to continue for a long 
time.
    Mr. Hogan, what is the--you were talking about the new 
account and getting basically 100 hits for free. Is that that 
$27 a month?
    Mr. Hogan. No. The way that we work it is a person with a 
new account, we give you 100 free quotes. If you do trades with 
us, thereafter for each trade that you do we give you another 
100 free quotes. It is if you use up your real-time free quotes 
that you would have to go back and buy more access to them. We 
sell that access in two different kind of units. One is 500 
more single units of real-time quotes for 19.95, which is the 
current price.
    Mr. Bilbray. I remember when we used to get our cars 
painted for that.
    Mr. Hogan. Or to the extent that you when you are logged on 
and you want to continuously and at all times see real-time 
data, because that goes by so fast and you would consume 100 
units of that right away, we have a monthly fee which is 
currently $27.45, which allows to you have at all times real-
time quotes going by.
    Mr. Bilbray. Go back to the issue of the new account. What 
is the cost to a consumer at setting up a new account?
    Mr. Hogan. Nothing.
    Mr. Bilbray. Okay. Thank you.
    Mr. Oxley. The gentleman's time has expired. The gentlelady 
from California.
    Mrs. Capps. Thank you. Thank you, Mr. Chairman. And I 
appreciate the testimony that each of you have given and also 
the interchange of information so far.
    I want to ask Ms. Dwyer to describe a little bit about the 
statement that you made that current fees discriminate against 
your customers and others' customers at the table as well and 
that you have asked the SEC to evaluate the way that the 
current fees are established and modernize--you didn't use that 
word, but I am kind of reading that that is what you are 
intending with the advances in technology and your ability.
    And if you have ideas for them--I am sure that you are 
asking for this with some suggestions in mind. Others of you 
might also have that. I would then like to get a response from 
Mr. Furbush and Mr. Bernard.
    Ms. Dwyer. The point that I was making was that online 
investors use quotes differently than investors have in the 
past. So as we have seen this explosion in online trading, we 
find that a customer who may have been reluctant to call his 
broker five times a day and ask how something is doing before 
he makes up his mind to do a trade. He or she will now look, 
because he can now access quotes much more frequently.
    In fact, when Schwab did business primarily over the 
telephone, our proxy was 10 quotes per actual trade usage on 
average. We are now seeing--I quoted some numbers last night 
and I checked them this morning--we are now seeing 75 quote 
looks per trade on average. People are looking because they 
can. The more they have, the more they want. Their expectation 
is very high to look at data, to be able to really be involved 
and look at what is going on.
    A full-commission broker, his firm is paying for terminals. 
They pay a flat monthly fee. It is on a sliding scale. The more 
terminals they have, the lower the fee, I believe. They can 
access quotes all day without increasing that fee. Yet our 
customers as they increase their usage are racking up those 
costs. That is the discrimination that I was talking about that 
is an issue. As we are seeing, people are moving online in 
dramatically larger and larger numbers. It is a facility that 
they enjoy, they want, and they use tremendously.
    So what we have asked the SEC to do in our petition filed 
yesterday, among other things, in a cost justification in 
looking at the real finances behind all of this, is to look at 
how the fees create a more transparent and open process or how 
fee structures are created, to set some standards to ensure 
that you don't have needless consequences, that the fee 
structures adequately address and are scalable as businesses 
change and grow. We have asked public representation on the CTA 
board which sets these fees. We have asked for essentially a 
more open, free, and understandable process.
    Mrs. Capps. So you are not asking for specifics as to what 
the fees should be. You are just setting the parameters and 
asking that certain people be on board?
    Ms. Dwyer. No. We think if there is the right input, the 
statute gives the SEC all of the authority they need to really 
fulfill this function. If the forces of competition and supply 
and demand are allowed to work here and there is good input 
from all parties, we think there is no rate making necessary.
    Mrs. Capps. Do the others of you agree with that analysis?
    Mr. Hogan. Absolutely.
    Mrs. Capps. Those goals are your goals as well? Is there a 
response?
    Mr. Bernard. First of all, Schwab is a member firm in the 
New York Stock Exchange. So is Merrill Lynch. Carrie just 
described two business models. The Stock Exchange and the NASD 
are trying not to discriminate against one type of member 
against another. We are neither permitted to do that by statute 
nor why would we want to. They both own us.
    We have tried to respond. There are different business 
models as to how to do the right thing. Terminal charge on an 
hour versus a penny per quote or now one quarter of penny per 
quote for a Schwab customer. The way we have done it is first 
of all we have drastically reduced the fees, as I mentioned 
before, so that is of course a start.
    Second, we have an all-you-can-eat manual of a dollar a 
month now in our pending proposal. So no matter how many quotes 
a particular customer of Schwab takes, Schwab will pay no more 
than a dollar per month in respect to that customer. Moreover, 
we have linked the two so that whichever one is lower for 
Schwab. If they have a low use customer and if they stay below 
a buck, they pay that amount. If it is a high use customer, 
they are capped at a buck.
    In addition, looking at firms like Schwab that has both 
kinds, although they are phasing out, we have basically put a 
basic cap on the maximum amount that any broker-dealer can pay 
in any given month, which is $500,000. So Schwab, if this is 
passed, would be capped at $6 million a year for the market 
data fees that relate to the New York Stock Exchange traded 
securities.
    Ms. Dwyer. Let me just add that those fees are not actually 
in effect yet. They are proposed. They represent a good start, 
but our issue is with the process of creating the structure.
    Mr. Bernard. If I might add, Schwab is proposing this joint 
venture. The markets have public representatives. I just want 
to make a point about that. That is what it is, a joint 
venture. The real decisionmaking is not made at the joint 
venture. It is responding to the self-regulatory organizations. 
Each of them by statute have to have constituent representation 
including public representation on the boards. So I really 
don't understand that particular argument.
    Mr. Oxley. The gentlelady's time has expired. The gentleman 
from Illinois, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. The first comment, I 
just want to throw this out to the panel. I apologize if you 
may have addressed this before, but I have two simultaneous 
hearings going on. Levar Burton is downstairs, so you Star Trek 
fans can appreciate me wanting to be there, rather than up here 
immediately.
    My interest in this also revolves around the process we are 
going to go through today and tomorrow which is financial 
modernization. I always like to look at State laws, federalism, 
and so the question is, how does the industry view the 
federalism argument with respect to this bill? Is there a 
conflict?
    Mr. Furbush. Let me presume that there would be agreement 
among us, as on most issues with this panel, that the data use 
is national and indeed international and that this would be an 
appropriate area for Federal effort.
    Mr. Bernard. I agree with that comment. I would add, 
though, that there is no reason to preempt State remedies in 
this area. What we are doing here in this particular bill is 
Federalizing what is an existing common law remedy in the 
State. There is no reason why the two couldn't coincide. Of 
course, conflicts would have to yield to the Federal law.
    Mr. Shimkus. Anyone else want to add? Okay, thank you. I 
believe that delayed data simply is by being delayed is 
historical fact. And so why is it important in this legislation 
that it doesn't address delayed data?
    Mr. Bernard. Well, I think the whole point is to not give 
these misappropriation rights a pie in regard to delayed data, 
the net effect of which is going to be that the price is zero. 
I don't know that there is any controversy on that here at all.
    Mr. Shimkus. Just moving right along. Ms. Dwyer, my last 
question is you note that in H.R. 354, the legislation recently 
considered by the Judiciary Committee would grant exchanges, 
new rights and control over market data and chill innovative 
uses of that data. Could you just elaborate on that. What sort 
of innovations are you concerned about and how is this--how 
could this be dangerous to investors?
    Ms. Dwyer. Well, we were concerned that the Coble bill 
grants what we consider to be new and very extensive property 
rights in the exchanges with civil and even criminal remedies 
for an ill-defined misappropriation. The language is very broad 
in the Coble bill with respect to what misappropriation is. It 
is literally any extract or use. The bill is not limited to 
real-time data.
    So, for instance, we are concerned that if someone wanted 
to construct an index of market prices going back 10 years, one 
would have to approach the owner of that data to ask for 
permission to do that and pay a licensing fee. That is clearly 
something that we think would chill the development of 
products, services, and certainly restrict the free flow of 
factual information that investors need. Those are our 
continuing concerns with that.
    Mr. Shimkus. So although the data was published and could 
be compiled, the individual would still have to go back to the 
providers of the original data?
    Ms. Dwyer. We are concerned that the misappropriation 
remedies were so broad that there could be action against that 
kind of use.
    Mr. Shimkus. Thank you. Mr. Chairman, I yield back.
    Mr. Oxley. The gentleman yields back. The gentleman from 
Wisconsin.
    Mr. Barrett. Thank you, Mr. Chairman. My knowledge in this 
area is virtually nil, so I am going to try to get a little 
tutorial here so I have a better understanding when the hearing 
is done as to exactly what we are doing.
    Are we talking about 15 minutes? Is that what we are 
talking about here? So the value of this property is for a 15-
minute period? Anything thereafter is no value--I don't want to 
say no value, but that is not what is at issue here. Is that 
right?
    Mr. Bernard. The point is only actionable, market data 
prices change very quickly, so it becomes historical very 
quickly.
    Ms. Dwyer. It might be within the 15- to 30-second range.
    Mr. Barrett. So if I go home and I turn on my computer and 
get the prices and there are 15 minute or 20 minute delays, we 
are not talking about that here, right? Again, just bear with 
me here so that I understand what we are doing. So if it is a 
15-minute period, it is the New York Stock Exchange, you are 
supplying it to Charles Schwab, they are paying you for this 
service. Is that right?
    Mr. Bernard. In short, yes.
    Mr. Barrett. Again, bear with me. The fees that are 
generated, those are used to cover the costs of the expenses of 
the stock exchange; is that correct?
    Mr. Bernard. Precisely. They contribute about 10 or 12 
percent in the case of the New York Stock Exchange.
    Mr. Barrett. So all, not just Charles Schwab, but all fees 
generated in the sale--is it called real-time data? That is 
used to pay the cost of the New York Stock Exchange?
    Mr. Bernard. Yes.
    Mr. Barrett. You would concur with that?
    Ms. Dwyer. I believe that is what happens.
    Mr. Barrett. Does the SEC have any say over what you charge 
for that data?
    Mr. Bernard. They have an oversight obligation. Their 
standard is that the charges have to be fair and reasonable, 
and they also cannot be unreasonably discriminatory.
    Mr. Barrett. The problem that we are dealing with here or 
the potential problem is someone else who can come in and just 
lift that data from the stock exchange; is that correct? Is 
that happening now?
    Mr. Bernard. As Mr. Furbush testified earlier, the problem 
is that we have traditionally tied market data dissemination up 
by contracts. That gets in the way of the broadest, widest 
dissemination of market data. So that if you can instead rely 
on a certain national misappropriation theory, it gives you 
more freedom to disseminate out to investors without trying to 
wrap them into a contractual framework.
    Mr. Barrett. Okay. All right. I guess this is where I am 
starting to get hazy then. What is the problem then? Who can 
come in and get this data? Who would be the person in the 
company----
    Mr. Furbush. The problem would be if a market has a 
contract and is selling the data in real-time which is valuable 
to another entity--we have many contracts, many entities who 
buy these data--it could be that another entity, a data pirate 
that we don't know, is accessing those data and 
misappropriating it, using it for fun or profit. That is data 
that we didn't sell to them. This would give us right of tort 
explicitly against those who misappropriate outside of the 
contractual arrangement and establishes the right under 
contract. It sort of reaffirms the right under contract to 
those with whom we do have contractual arrangements. Does that 
clarify it?
    Mr. Barrett. That is helpful. Mr. Ricketts, you made a 
statement that the Chairman said was provocative. I guess I am 
a little younger. I think that maybe Tom Cruise and Nicole 
Kidman we would find more provocative. Everybody makes their 
own decision.
    Are you being realistic or honest----
    Mr. Ricketts. I am being very realistic, very candid. The 
evolution of the markets with respect to the technology is 
changing rapidly. We don't need physical locations for 
exchanges. We need service with communications and we need to 
have systems that are going to protect the data. We need to 
lower our cost to increase the depth and breadth and the 
liquidity of the marketplace. That is being impeded by the fact 
that we don't have free competition.
    The thing that I am afraid of with respect to this 
particular bill is that inadvertently Congress creates a 
monopoly, a situation where one purveyor can charge any amount 
that they want and can use those dollars to cover other costs 
that are not related to disseminating the information which my 
customer owns a part of to begin with.
    Mr. Barrett. So how would you change this bill?
    Mr. Ricketts. I would change this bill to provoke 
competition among purveyors of quotes?
    Mr. Oxley. The gentleman's time has expired. The gentleman 
from New York, Mr. Engel.
    Mr. Engel. Thank you, Mr. Chairman. I apologize for being 
late. I have been juggling hearings all morning. The telecom 
subcommittee was just a hearing to which I was at.
    Mr. Bell, I have visited your office in New York and met 
Mike Bloomberg. It is clear that Bloomberg is a leader in the 
information age and one of the best financial databases to be 
found anywhere. This committee, however, in earlier hearings 
has heard impassioned pleas from other producers of databases 
that brought antipiracy legislation such as the ones passed by 
the Judiciary Committee is essential to the survival of the 
database industry. That is what they testified. What do you 
know that they do not, because obviously you have a different 
point of view?
    Mr. Bell. That is a good question. I guess the first point 
that I would make is I don't know that the industry is not 
surviving. I would say that it is actually thriving. 
Organizations like Bloomberg and financial services businesses, 
I guess different services on the Internet like Yahoo or 
whatever, they seem to be thriving. So I would say in the 
present situation there is the possibility for forthright 
thriving.
    Bloomberg, I guess, is looking for legislation which would 
allow for some protection to fill a loophole which would really 
apply to just pure piracy of databases. We feel that the 
Commerce Committee bill does that. I guess if I were to 
characterize the Judiciary Committee bill, I would say that it 
tends to be more thinking about existing databases and looking 
a bit more in the past, whereas I think the Commerce Committee 
legislation is certainly more looking toward the future and 
would share the fact that we could innovate and add value to 
databases in the future.
    Mr. Engel. That would be your estimation as why you find 
the Judiciary Committee objectionable?
    Mr. Bell. That is correct.
    Mr. Engel. Thank you. H.R. 1858 protects the rights to 
databases at the same time ensuring that accurate information 
on real-time market data is available to consumers and 
investors. I am told in the testimony some of you have 
expressed concerns over potential manipulation of this type of 
data.
    I am wondering if anyone on the panel would care to comment 
on recommendations that you would make to ensure that your 
concerns are addressed. Does anyone care to comment on that?
    Mr. Ricketts. Mr. Congressman, I think that we need to 
maintain the authority of the regulators, the Securities and 
Exchange Commission, in their oversight to make sure that we 
have free flow of information, that we have good sound markets, 
and that there isn't any piracy or theft.
    Mr. Engel. Anybody else?
    Mr. Furbush. In my testimony, I referred to the value of 
the data deriving from its integrity, which doesn't happen by 
magic. It happens because of actual people who go out and go to 
firms and meet with folks and make sure that the data is not 
being manipulated and essentially the entirety of our 
regulation program goes into ensuring the reliability of the 
information. And so I am not sure I am answering your question, 
but my sense is that the value of the information is related to 
the extent to which we are comfortable that the information has 
not been manipulated.
    Mr. Engel. Okay. Thank you. I am told that my follow New 
Yorker, Mr. Towns, asked a question similar to this, but I was 
wondering if some of you could enlighten me as to how as an 
industry, how do you determine what a fair price is for market 
data?
    Mr. Bernard. If I might start from the New York Stock 
Exchange, our process is a necessity of running the stock 
Exchange and covering its expenses. Market data fees are one of 
several ways in which we collect revenue in order to recover 
our expenses. Historically for us it is run about 10 percent of 
our revenue. That is done by a constituent board consisting of 
not only the securities industry, but people representing 
investors and listed companies in the public in general.
    Mr. Oxley. The gentleman's time has expired. The gentleman 
from Massachusetts, Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman. I know I am late. I 
was with the ranking member of the hearing of the Corporation 
for Public Broadcasting, the public broadcasting system at 
National Public Radio.
    You know, the discussion that we are having really emanates 
from these different perspectives which are created by the 
historical bifurcation of jurisdictions. The Judiciary 
Committee looks at issues through the copyright perspective, 
and they are very strongly protective of that perspective.
    We look at all of these issues, understandably, from the 
perspective of the telecommunications revolution, this ever-
expanding number of technologies that are created and the 
entrepreneurial activity that we try to generate as a result of 
that revolution.
    Now, at a certain point in time there is a convergence. And 
the balance that we are going to have to strike here is one 
that pays due respect to each one of those perspectives while 
trying to ensure that we continue to move in a direction that 
ensures this rapid expansion of innovation in the technology 
sector. So I think this has been a very important hearing and I 
am told that almost all of the relevant issues have already 
been dealt with.
    I thank you, Mr. Chairman, for working on this issue 
because I think the committee is going to have to work 
something out here ultimately with the Judiciary Committee. I 
can promise you that it is toward the goal ultimately of being 
respectful of all of the participants here at the table. They 
all have to be given their due and I thank you, Mr. Chairman.
    Mr. Oxley. I thank the gentleman from Massachusetts for his 
contribution and his considered good work on this effort. We 
thank all of the members of our panel for their most 
enlightening testimony and very incisive answers to some good 
questions. With that the subcommittee stands adjourned.
    [Whereupon, at 11:56 a.m., the subcommittee was adjourned.]
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