[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]





                     PUBLIC ACCESS TO MARKET DATA:

                 IMPROVING TRANSPARENCY AND COMPETITION

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND 
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 14, 2001

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 107-5


                   U.S. GOVERNMENT PRINTING OFFICE
71-311                     WASHINGTON : 2001

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD, Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSELLA, New York               JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missiouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director
            Subcommittee on Capital Markets, Insurance, and 
                    Government Sponsored Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

ROBERT W. NEY, Ohio, Vice Chairman   PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
CHRISTOPHER COX, California          NYDIA M. VELAZQUEZ, New York
PAUL E. GILLMOR, Ohio                KEN BENTSEN, Texas
RON PAUL, Texas                      MAX SANDLIN, Texas
SPENCER BACHUS, Alabama              JAMES H. MALONEY, Connecticut
MICHAEL N. CASTLE, Delaware          DARLENE HOOLEY, Oregon
EDWARD R. ROYCE, California          FRANK MASCARA, Pennsylvania
FRANK D. LUCAS, Oklahoma             STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia                    MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, North Carolina      BRAD SHERMAN, California
STEVEN C. LaTOURETTE, Ohio           GREGORY W. MEEKS, New York
JOHN B. SHADEGG, Arizona             JAY INSLEE, Washington
DAVE WELDON, Florida                 DENNIS MOORE, Kansas
JIM RYUN, Kansas                     CHARLES A. GONZALEZ, Texas
BOB RILEY, Alabama                   HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York              RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
GARY G. MILLER, California           RONNIE SHOWS, Mississippi
DOUG OSE, California                 JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      STEVE ISRAEL, New York
MIKE FERGUSON, New Jersey            MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
MIKE ROGERS, Michigan
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 14, 2001...............................................     1
Appendix:
    March 14, 2001...............................................    55

                               WITNESSES
                       Wednesday, March 14, 2001

Bell, Stuart, Bloomberg Financial Markets........................    16
Britz, Robert G., Group Executive Vice President, Operations 
  Group, New York Stock Exchange, Inc............................     7
Dwyer, Carrie E., General Counsel and Executive Vice President, 
  Charles Schwab Corporation.....................................     9
Knight, Edward S., Executive Vice President and General Counsel, 
  NASDAQ Stock Market............................................    14
MacDonald, Randy, Chief Financial Officer, Ameritrade Holding 
  Corporation....................................................     5
Putnam, Gerald D., Jr., Chairman and Chief Executive Officer, 
  Archipelago Holdings, L.L.C....................................    11

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    63
    Crowley, Hon. Joseph.........................................    56
    Kanjorski, Hon. Paul E.......................................    59
    Ney, Hon. Bob................................................    61
    Bell, Stuart (with attachment)...............................   178
    Britz, Robert G. (with attachments)..........................    74
    Dwyer, Carrie E..............................................   126
    Knight, Edward S. (with attachments).........................   133
    MacDonald, Randy.............................................    65
    Putnam, Gerald D., Jr. (with attachment).....................   208

              Additional Material Submitted for the Record

Fossella, Hon. Vito J.:
    Question for the record......................................    58
Bell, Stuart:
    Written response to questions from Hon. Doug Ose.............   190
    Written response to questions from Hon. Michael G. Oxley.....   192
Britz, Robert G.:
    Written response to questions from Hon. Michael G. Oxley and 
      Hon. Doug Ose..............................................   122
Knight, Edward S.:
    Letter to Hon Richard Baker, April 20, 2001..................   172
    Written response to questions from Hon. Michael G. Oxley and 
      Hon. Doug Ose..............................................   174
Securities and Exchange Commission, written response to questions 
  from Hon. Richard H. Baker and Hon. Paul E. Kanjorski..........   195

 
  PUBLIC ACCESS TO MARKET DATA: IMPROVING TRANSPARENCY AND COMPETITION

                              ----------                              


                       WEDNESDAY, MARCH 14, 2001

              U.S. House of Representatives
       Subcommittee on Capital Markets, Insurance, 
              and Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:02 a.m., in 
room 2129, Rayburn House Office Building, Hon. Richard H. 
Baker, [chairman of the subcommittee], presiding.
    Present: Chairman Baker; Representatives Oxley (ex 
officio), Ney, Shays, Royce, Barr, Shadegg, Weldon, Fossella, 
Miller, Ose, Hart, Rogers, Kanjorski, Bentsen, Mascara, S. 
Jones of Ohio, Sherman, Meeks, Inslee, Moore, Ford, Lucas, 
Shows, Crowley, and Israel.
    Chairman Baker. I would like to call this hearing of the 
Capital Markets Subcommittee to order, and welcome everyone 
here this morning. This hearing is the result of interest by 
many in the explosive growth of our markets and the concurrent 
growth in the supply of information to literally millions of 
investors across the country on a daily basis who are now, even 
despite the morning news about the activities in the market, 
are still investing heavily, with working families providing 
significant contributions to our economic growth.
    At the core of the hearing this morning is the discussion 
relating to the delivery of market data, that material on which 
every investor bases an investment decision and on the 
mechanisms by which that data is collected and delivered, and 
associated charges related to the delivery of that product for 
the educated investor.
    I think it important to recognize the enormous growth in 
revenue that this product has provided to the exchanges, not 
that that in itself is any indicator of whether this is a good 
thing or a bad thing, just the significance of it to the 
performance of the markets. Anywhere from 20 percent to 40 
percent of an individual exchange's net revenues now is 
generated by the sale of this information.
    Up rather dramatically, despite the fact that over the 
course of recent years, reductions in fees have been very 
significant.
    The subcommittee is here this morning to better understand 
the function of the markets, how market data is provided, the 
benefit to consumers it presents, and to ensure the 75 
amendments to the Securities Act provided that the charges 
associated with the distribution of this information are fair, 
reasonable, and non-discriminatory.
    To that end, we will have a panel of witnesses this morning 
who can speak directly to how this system functions and better 
help the subcommittee move forward with a careful examination 
of this subject matter over the coming months.
    I am particularly appreciative that the Chairman has taken 
such an interest in this topic and has done good work in his 
former capacity in the committee on Commerce on this very 
subject.
    At this time, I would like to recognize the Ranking Member, 
Mr. Kanjorski, for any opening statement he would choose to 
make. Mr. Kanjorski, it would be my intent, with your 
agreement, to recognize you and then the Chairman for opening 
statements, and then move to our witnesses, if there's no 
objection.
    Mr. Kanjorski. No objection.
    Chairman Baker. Thank you, Mr. Kanjorski.
    Mr. Kanjorski. Mr. Chairman, thank you for the opportunity 
to comment on market information issues before we hear from our 
witnesses today. The securities industry presently faces few 
issues as important or as complex as those surrounding the 
ownership and distribution of market data.
    In short, the wide distribution of market information 
remains a fundamental component of our Nation's securities 
markets. A regulatory framework that promotes the transparency 
of market data--especially the real-time, public dissemination 
of trade and quote information--helps to make certain that all 
market participants have access to prices across our national 
market system. This access, in turn, helps to provide for 
efficient price discovery and the best execution of investors' 
orders.
    Congress first addressed the issue of market information 
when it enacted the Securities Acts Amendments of 1975. This 
statute, among other things, charged the Securities and 
Exchange Commission with establishing a consolidated, real-time 
stream of market information for securities in order to make 
transaction and quotation information widely available. As a 
result of this law, millions of investors worldwide now have 
easy access to market data.
    But the world has changed substantially since Congress 
enacted the legislation governing market information, and we 
may now need to refine our approach on such matters. For 
example, we passed the law and the Securities and Exchange 
Commission developed the regulations governing market data 
before the advent of technological and communication advances 
like the internet, electronic communications networks, and 
alternative trading systems. This new technology has greatly 
expanded the opportunities for retail investors and interested 
individuals to obtain access to real-time market information.
    Additionally, critics of the current system for 
distributing consolidated market data have raised a number of 
questions about the present system in recent years. For 
example, some contend that although market data fees for retail 
investors have fallen by 50 to 80 percent since 1998, they 
remain unusually high because no competition exists in the 
field of market data collection and distribution. To address 
this problem, some argue that we should allow competing 
entities to provide consolidated information and/or permit the 
exchanges to provide their own data outside the consolidator. 
By providing investors with more complete market information, 
we would promote the goal of greater transparency and thereby 
improve competition.
    Although the Securities and Exchange Commission has 
recently begun to examine these difficult issues and other 
related and complicated questions through its concept release 
and advisory committee on market information, it is appropriate 
for us to begin to educate the Members of our subcommittee 
about these complex subjects. Accordingly, we will hear today 
from a variety of witnesses about their views on market data. I 
want each witness to know that I approach the issue of market 
information with an open mind.
    For me, one can distill the complex debates surrounding 
market data into three key questions: First, who owns market 
information?; Second, how much should we charge for market 
information?; and third, how should we distribute market 
information? The answers of our panelists to these questions 
will help me to discern how we can maintain the efficiency, 
effectiveness and competitiveness of our Nation's capital 
markets into the future, and what further legislative action, 
if any, we should take to address the issue of market data.
    In closing, Mr. Chairman, today's hearing is just the 
beginning of a discussion in the 107th Congress about market 
information. I anticipate that we will hold additional hearings 
on this issue in upcoming months, especially after the 
Securities and Exchange Commission's Advisory Committee on 
Market Data publishes its report in September. I therefore look 
forward to working closely with you and with others to address 
this multifaceted, complicated and important matter. Finally, I 
think we are indeed fortunate, on the Financial Services 
Committee, to have the new Chairman with his wealth of 
information that carries over from his former service on the 
Commerce and Energy Committee, so I look forward to his opening 
statement today also, Mr. Chairman.
    Thank you.
    [The prepared statement of Hon. Paul E. Kanjorski can be 
found on page 59 in the appendix.]
    Chairmaan Baker. Thank you, Mr. Kanjorski.
    Chairman Oxley.
    Mr. Oxley. Thank you, Mr. Chairman.
    I want to commend you for holding this hearing on an issue 
that is fundamental to the health of our capital markets and, 
indeed, this issue is quite new to I suspect the vast majority 
of Members on the subcommittee.
    This morning, we will examine how stock market data is 
provided to the public, how it is paid for, what information is 
available to the public about market data fees, and how 
competition might improve the way investors get market data.
    While the regulatory structure we will examine is 
complicated, our goal is simple: to ensure that investors are 
getting the best possible information about stock prices in the 
most efficient way.
    As one observer put it last year, following a hearing I 
held on this subject, stock market data, that is the quotes at 
which people are willing to buy and sell stock, and the 
information showing the price of the last sale of a stock is 
oxygen to investors.
    Indeed, the transparency of our marketplace is the backbone 
of its success. Unfortunately, the regulatory structure that 
exists today was put in place back in the 1970s when the only 
person using a cell phone was George Jetson, and Al Gore hadn't 
even thought about the internet yet.
    That outdated regulatory structure, which may have made 
sense before the advent of modern communications technology, 
put into place a system that prevents competition and the 
provision of consolidated market data, and impedes innovation 
in the way market data is presented to investors.
    The cost of market data is significant and those costs are 
passed on to investors, just like the transaction fees this 
subcommittee heard about last week.
    Competition is always a better way to set prices than 
regulation. With no competition in the provision of 
consolidated market data, the only check on the fees is 
regulation.
    One important question we will consider is whether market 
data fees are fair, reasonable, and not unreasonably 
discriminatory, which is the statutory requirement established 
by the Congress in the 1970s.
    Of course, the alternative is to actually introduce 
competition into the market for consolidated market data.
    We'll also hear from our witnesses today about what new 
competition in this field would mean for investors and the 
markets.
    We'll also be seeking to learn how investors might benefit 
if more information about market data, costs and fees were made 
public.
    While the SROs publish a great deal of information about 
market data fees on their websites, some information, for 
example, certain information about pilot programs is not so 
readily available.
    Today, we will examine the implications of increasing the 
transparency of market data terms and conditions. No discussion 
of market data can ignore the fact that market data fees play 
an important role in funding the activities of stock exchanges 
in the NASDAQ market, but some critics of the current system 
question how market data revenue should be used.
    Should they subsidize the cost of regulation? Should they 
be limited to the costs of providing market data?
    If they are reduced by competitive forces or otherwise, 
will investors be subject to new fees to replace that lost 
revenue?
    Some suggest that the governance of market data plans, 
which set market data fees in the first place, should be 
expanded to include all market participants like ECNs and the 
public, as opposed to only the SROs that receive market data 
revenue.
    These are some of the issues we will examine today.
    In addition to the cost of paying for market data, the 
current regulatory structure imposes administrative costs on 
the marketplace. Market participants who purchase consolidated 
market data face a maze of different types of fee structures 
and contract requirements.
    Reducing the administrative burdens associated with the 
purchase of market data would bring greater efficiency to the 
marketplace and ultimately save investors money.
    I thank each of our witnesses for coming today to inform 
the subcommittee on the very important issue that we have 
before us, and look forward to your testimony.
    I yield back the balance of my time.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 63 in the appendix.]
    Chairman Baker. Thank you, Mr. Chairman. I do very much 
appreciate your past work on this subject, your interest in 
participating in our hearing this morning, and understand 
clearly the interest that you have in this important issue.
    Today, there are literally millions of individuals 
investing today who were not even participants in the economic 
process a few years ago, primarily as a result of technology.
    And it is important that this subcommittee examine the 
delivery of this information to those individuals to ensure 
that whether a person is investing $200,000 or $200 million, 
that they get access to the same information in the same 
timeframe as all other participants.
    This morning, we are fortunate to have with us a 
distinguished panel of witnesses representing the various 
interests from the markets, and I've been presented with the 
order for recognition this morning with Mr. Randy MacDonald, 
Vice President and Chief Financial Officer, Ameritrade Holding 
Corporation being our first witness this morning.
    Welcome, Mr. MacDonald.
    We, in all cases--I should give this brief explanation--we 
limit opening statements of the subcommittee because of the 
number of individuals on the subcommittee today, we strongly 
recommend that each witness present his or her thoughts within 
the 5-minute window.
    All witnesses' statements will be incorporated and made 
part of the official record in their entirety.
    And with that request, Mr. MacDonald, I will recognize you 
and welcome you to our subcommittee.

    STATEMENT OF RANDY MacDONALD, CHIEF FINANCIAL OFFICER, 
                 AMERITRADE HOLDING CORPORATION

    Mr. MacDonald. Thank you very much, Mr. Chairman Baker, and 
Chairman Oxley. I appreciate you inviting Ameritrade today.
    Ameritrade has always represented the small investor, and 
I'd like to talk to you about our concerns. We have four 
concerns.
    Let me first start off by saying, with our pending 
acquisition of Tradecast, we're one of the largest brokers in 
the world, Charles Schwab, in our estimation, the largest.
    We are completely agnostic about our order flow. That is, 
we are not an ECN, we are not a marketmaker, we do not benefit 
from internalizing our order flow; we strictly act as an agent 
for the small investor.
    The first point I want to make is, the present practice of 
distributing quotes is discriminatory to the individual 
investor, and I'll elaborate.
    The second point is that the costs, the administrative 
costs to us, are spiraling out of control. We are at a 
competitive disadvantage because of the present monopoly.
    The third point I wanted to make is that the tape revenue 
in fact should belong to those people who actually contribute 
the orders, and that is the customers out there.
    And the fourth point I wanted to make is that the SROs have 
been unchecked. It's a case of the fox being in charge of the 
hen house. They are taking these excess profits and creating 
competitive systems, systems that will compete with other 
market participants.
    The first question is what are the regulatory impediments? 
I would say that one thing that is going well, one of the 
benefits is that, in fact, people are getting information real-
time.
    But let me start off with the discrimination. Today, I 
cannot deliver real-time quotes in a cost effective way to all 
1.4 million customers of Ameritrade.
    There is an onerous subscription agreement. There is the 
cost of either per quote or a subscription fee. My average 
customer, about half of them trade less than once every two 
months. The fee that I have to pay to the four SORs are $1 a 
month, and if I have one customer who is paying me a commission 
of $8 every 2 months, I've done nothing but recover my cost for 
market data distribution.
    So 1.4 million customers are not getting real-time quotes. 
I think they're disadvantaged.
    The second point is on what I perceive to be the abuses by 
the SROs in distributing this information and causing 
administrative nightmares.
    In the past week, we've had three instances that kind of 
illustrate this point. One is we were trying to change our 
methodology for distributing real-time quotes, and we were 
obtaining subscription agreements from customers who were 
getting real-time quotes, and we were told by one of the SROs 
they would not approve that, because they didn't like the 
method of distributing the subscription agreement, so we have 
to go back to the planning board.
    The second thing is they told us that the sign-on had to be 
because we do not allow for a single sign-on to the website 
that we could not obtain subscription agreements, that we would 
have to pay on a per-quote basis.
    So to the extent that someone is calling in to a broker, 
that quote would be free to that customer. But to the extent 
that they are using the web, they have to pay for that quote 
and that's the discrimination.
    The fact that there is dual sign-on, my wife and I can both 
sign on to my account, that is an impediment to allowing us to 
distribute real-time quotes, and I think that's arbitrary, I 
think that's capricious.
    And the third point I want to make is, in dealing with 
these entities, they reflect their monopolistic attitude, and 
we've had an incident where the chief technology officer, last 
week, was put on the speaker phone by one of these SROs and she 
said, ``I will be doing other work while you're speaking. If I 
like what you're saying, I'll listen; otherwise, I will just 
ignore you.''
    And so we're opening the window, we're shouting out, 
``We've had it and we're not going take it anymore.''
    We paid a million dollars in market data fees last month. 
This is an enormous competitive disadvantage for us.
    Thank you very much.
    [The prepared statement of Randy MacDonald can be found on 
page 65 in the appendix.]
    Chairman Baker. We will have significant questions from all 
the Members for you to have a further opportunity to comment on 
this. We do appreciate your direct testimony.
    Our next witness is Mr. Robert Britz, Group Executive Vice 
President representing today the New York Stock Exchange.
    Welcome, Mr. Britz.

 STATEMENT OF ROBERT G. BRITZ, GROUP EXECUTIVE VICE PRESIDENT, 
        OPERATIONS GROUP, NEW YORK STOCK EXCHANGE, INC.

    Mr. Britz. Thank you, Chairman Baker, Vice Chairman Ney, 
Ranking Member Kanjorski and certainly Chairman Oxley.
    I am Robert Britz. I am here representing the New York 
Stock Exchange and we appreciate the opportunity to be before 
you this morning.
    There is much to say on this subject and not a great deal 
of time, so I will get straight to it.
    Markets, such as the New York Stock Exchange, exist to 
manufacture securities prices, and basically only to 
manufacture securities prices. We tell the world what a fine 
slice of ownership--a single share of the global enterprise 
that is Exxon Mobil, for example--is worth on a moment-to-
moment basis.
    We take raw material, investors orders that they have 
entrusted to their brokers, and from that raw material, we 
create valuable market data without which markets could not 
operate.
    Markets like the NYSE create their value through a 
combination of this information on the one hand, and fast, 
secure, reliable delivery systems on the other.
    So think of the New York Stock Exchange as being in the 
business of producing market data, manufacturing securities 
prices. At the end of the day, the price is our only product.
    The CTA, the Consolidated Tape Association, on the other 
hand is an SEC-sponsored joint venture among national and 
regional stock exchanges. It doesn't produce data--the markets 
produce data--so much as it consolidates and collects and 
redistributes the data to the next level, the information 
vendors.
    So with that as broad background, admittedly there's been a 
fair amount of discussion about this subject over the past 
couple of years, and I must say much of it is a surprise to us.
    In truth, it's never been obvious to us what the noise has 
been about. It's clearly not about investors' access to the 
data. Individual investors and the general public, for that 
matter, have access to unlimited real-time data through a 
variety of delivery systems; telephones, television; PCs, 
personal digital assistants, pagers, automated teller machines, 
and so on.
    Market data is available in the home and in many public 
places; schools, libraries, airports, even on the plane itself, 
restaurants, train stations, shopping malls, and literally on 
the street.
    In contrast to some commentators who have, in the past, 
suggested that investors are struggling for access to real-time 
market data, in fact they can barely avoid it.
    Simply stated, the data is pervasive and I believe the best 
is yet to come.
    So it is not about availability. It can't be about the cost 
of the access to the data for investors, because it's free from 
an endless number of sources.
    Indeed, the data is so inexpensive to information vendors 
that many purchase it, give it away, and still profit 
handsomely.
    It shouldn't be about brokers' cost of market data for a 
couple of reasons. Brokers themselves establish the prices they 
will pay for the market data.
    Given that fact, it's not at all surprising that the cost 
of market data has come down dramatically over the past 25 
years to the point where U.S. market data, CTA, NYSE market 
data is among the least expensive of any market in the world.
    It's hard to see how this discussion can be about control 
or governance of market data since all the power rests in the 
customer-laden boards of the self-regulatory organizations. 
Simply put, those who establish market data fees are the ones 
who pay those fees. They can raise or lower any fee any time 
they care to.
    Most recently, this discussion has morphed into being about 
transparency of market data processes. But even that's hard to 
follow.
    The SEC literally gave birth to the Consolidated Tape 
Association. It attends all meetings. It reviews, publishes and 
approves all significant initiatives. It has the power to 
override any action. It has the power to unilaterally amend the 
Consolidated Tape plan.
    So CTA hardly operates in a closet.
    Additionally, it's very important to realize CTA is a 
conduit. The discussions and the decisionmaking that end up at 
the Consolidated Tape Association begin and actually take place 
again at the constituent-laden boards of the self-regulatory 
organizations.
    CTA's initiatives begin at the grass roots level with 
customers. To the extent an idea gains some traction, it then 
moves through various industry organizations. If it continues 
to have some consensus, it goes to our board, it then goes, 
coming out of the board, to the Securities and Exchange 
Commission. The SEC publishes it for public comment, they 
review it, ultimately they approve or disapprove nonetheless a 
very rigorous and transparent process.
    All CTA fees contracts are both standard in terms of the 
terms and are publicly available on NYSE.com among various 
other distribution channels.
    The CTA annually publishes audited financial statements and 
issues those to the Securities and Exchange Commission for 
public review. The NYSE and the markets do likewise.
    It's not clear what more we could do, viz a viz, 
transparency, but we are open to suggestions.
    Mr. Chairman, you asked a very important question in your 
letter, which is, how does market data recover its costs and 
subsidize other areas of the SROs.
    At the NYSE, market data does not recover its cost and it 
is therefore in no position to subsidize anything else. You 
should understand that the New York Stock Exchange gets a much 
smaller percentage of its revenues from market data than do 
other markets.
    I would never suggest it's not an important part of our 
funding, however, and in that regard there's a very important 
point to be made. We must be careful not to do anything that 
hinders markets' abilities to make technical infrastructure 
investments to maintain and enhance their operational 
stability.
    To the extent that markets like the NYSE don't make 
infrastructure or order processing network upgrades on the 
front end, which run to the hundreds of millions of dollars, 
there is no market data on the back end.
    One online discount firm recently was quoted as saying, it 
would be unprofitable and therefore unthinkable to invest for 
peak utilization.
    The NYSE not only invests for peak utilization, it invests 
for multiples of peak utilization. It's by no means a 
prescription for great profitability, it's simply the best way 
we know how to operate a market which has zero tolerance for 
down time, and whose operating performance is the standard 
around the world.
    Because underinvesting and capacity reliability is simply 
not an option for the New York Stock Exchange.
    Thank you, Mr. Chairman.
    [The prepared statement of Robert G. Britz can be found on 
page 74 in the appendix.]
    Chairman Baker. Thank you, Mr. Britz. I appreciate your 
appearance here this morning.
    Our next witness, representing Charles Schwab, is Executive 
Vice President, Ms. Carrie Dwyer.
    Welcome, Ms. Dwyer.

  STATEMENT OF CARRIE E. DWYER, GENERAL COUNSEL AND EXECUTIVE 
           VICE PRESIDENT, CHARLES SCHWAB CORPORATION

    Ms. Dwyer. Thank you, Chairman Baker, Vice Chairman Ney, 
Congressman Kanjorski, and Chairman Oxley, distinguished 
Members of the subcommittee.
    I am Carrie Dwyer. I am General Counsel and Executive Vice 
President of Charles Schwab, one of the world's largest 
financial services firms. I'm pleased to be here today to 
present Schwab's views on market data.
    As you may be aware, in many ways, the dialogue we are 
having today was launched in June of 1999 when my firm 
submitted a formal petition to the SEC to review and correct 
what we believed to be an unreasonable and discriminatory 
market data fee structure.
    The process since then, which has included an SEC concept 
release, and formation of the SEC Advisory Committee on Market 
Information, on which I sit, has seen an emerging consensus 
that the current system is flawed, but deep divisions over what 
the appropriate solution should be.
    For that reason, I am pleased that Congress, this 
subcommittee in particular, is taking an active interest in 
monitoring this issue. We believe that the need for reform of 
the market data system is driven by two things, and they've 
been referred to already in this hearing:
    The advent of technology that lets us give more information 
to more people in more ways, and the simple change in the end 
user of market data since the system was created 25 years ago.
    The exchanges do not manufacture data. The source of that 
news is not the stock markets, themselves, but the investment 
decisions of millions of people trading around the world in a 
diverse group of markets.
    Yet, despite the increased breadth of participation, all 
the information about prices is still funneled through the same 
small group of markets that were in place 25 years ago.
    This group still controls the format, the speed, who can 
receive it and how much it costs. From them, investors must buy 
back their own information at a market not subject to 
competition.
    As more Americans have invested in the stock market, more 
people check their portfolios more often. The internet has 
facilitated this. No longer required to have a conversation 
with a broker, an individual can hit the ``refresh'' button on 
his computer 10, 20, 50 times a day to see the latest 
information.
    With automated access to brokerage firms by wireless 
internet, a customer can check her IRA while walking down the 
sidewalk, if she chooses.
    Our own internal research found that in the days when our 
customers relied primarily on telephone orders, they asked for 
and the firm bought about ten quotes for every trade.
    With online trading, Schwab buys in the range of 75 quotes 
per trade. While we encourage this trend, because it gives 
investors more knowledge, it also makes clear the dramatic 
impact online investing has had on market data revenue.
    Market data fees represent such a significant amount of 
revenue for the exchanges, that discussions about opening the 
system to competition become, understandably, very difficult.
    Certainly cost is important, but there are other problems 
with the monopoly structure. The rules are made by exchanges 
alone; other participants don't really have a say. There is 
nowhere else to buy market data so market incentives don't 
apply.
    Under the current structure, market data is available in 
only a few limited formats. The creation of value-added data 
products has been slow and marked by competitive battles.
    In addition, the exchanges impose onerous administrative 
burdens on vendors and brokers. We must count every customer 
quote request and count for each type of end user to the 
exchanges.
    Every one of our millions of customers with web access must 
click through a different subscriber agreement for each 
exchange.
    We must seek and obtain prior approval of any new or 
innovative way to deliver market data.
    Pricing changes are often made through pilot programs that 
can circumvent SEC's and public scrutiny.
    I'm not here today to propose a specific remedy, either 
legislative or regulatory. I do believe, however, that a plan 
for market data reform must have at its core four guiding 
principles:
    First, any reform must promote competition. Competition at 
all levels of the market data system will foster innovation 
leading to the creation of market data products that better 
serve the needs of today's investors. That competition should 
be fair. Anyone wishing to compete to provide market data 
should ensure that access is on fair, reasonable, and 
nondiscriminatory terms.
    Second, reform must ensure that no one has ownership over 
market data. The last several years, the exchanges have been 
advocating database protection legislation on Capitol Hill that 
would give them an historical property right over data. But 
market information is a set of facts, plain and simple: bids, 
offers, limit orders, last sale prices. No one can own 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.
    Third, the market data system must become more transparent. 
Market data fees should be set in the sunshine. Greater 
transparencies of the fees, costs, contracts, policies relative 
to the collection and dissemination of market data is essential 
to creating a fair and open system.
    Yes, the basic contracts of fee schedules are freely 
available on the websites, but each of us negotiates our own 
contracts with the exchange, one by one. We worry about side 
agreements, especially negotiated rates, offsets of other 
exchange fees, and pilot programs.
    We've been the beneficiary of some of these, but that 
doesn't make it fair. Transparency is the hallmark of our 
markets; so should it be the hallmark of our market information 
system.
    Finally, reform must result in a level playing field, 
ensuring the broadest possible access to market data is 
essential to the protection of investors and the fairness of 
our markets.
    Individual investors must be able to access critical market 
information at the same time and on the same terms as large 
institutional investors and other market participants.
    One way to ensure fairness would be most-favored-nation 
pricing. If you sell it, everyone must get the best price.
    Mr. Chairman, the debate over market data is a complex one, 
but the reality is this; our markets have changed. It's time to 
reevaluate the entire framework by which market information is 
made available to investors, end the monopolies and create a 
new system based on fairness and competition.
    Thank you very much for the opportunity to testify, and I'd 
be happy to answer any questions later.
    [The prepared statement of Carrie E. Dwyer can be found on 
page 126 in the appendix.]
    Chairman Baker. Thank you, Ms. Dwyer.
    Our next witness is the CEO of Archipelago Holdings, Mr. 
Gerald Putnam.
    Welcome, Mr. Putnam.

    STATEMENT OF GERALD D. PUTNAM, JR., CHAIRMAN AND CHIEF 
        EXECUTIVE OFFICER, ARCHIPELAGO HOLDINGS, L.L.C.

    Mr. Putnam. Good morning, Chairman Baker, Chairman Oxley, 
Vice Chairman Ney, and Ranking Member Kanjorski.
    Chairman Baker. And you'll need to pull that mike pretty 
close. They're not that sensitive.
    Mr. Putnam. OK.
    In late 1996, I founded Archipelago, along with software 
developers MarrGwen and Stuart Townsend.
    Today, it's a leading electronic communications network or 
ECN, whose owners include Goldman Sachs, E*Trade, J.P. Morgan-
Chase, Instinet, Merrill Lynch, and CNBC.
    Archipelago serves a diverse client base and executes 
upward of 140 million shares per day or roughly 6 percent of 
NASDAQ's volume.
    Late last year, Archipelago entered into a business 
alliance with the Pacific Stock Exchange to create the 
Archipelago Exchange, the first fully open, electronic national 
securities exchange for both listed and over-the-counter 
securities.
    The Archipelago Exchange will be fully integrated into the 
National Market System and will compete toe-to-toe with the New 
York Stock Exchange, the American Stock Exchange, and NASDAQ.
    Our trading rules, which reflect market structure of the 
exchange were published in the Federal Register by the 
Securities and Exchange Commission in December of 2000, and we 
recently submitted our responses to the SEC to comment letters 
on our rules.
    In the end, with plenty of elbow grease and some good 
fortune, we trust the Archipelago Exchange will be the first 
for-profit, technology-driven exchange that levels the playing 
field for all investors by combining greater transparency, 
faster speed, and lower cost.
    Former SEC Chairman Arthur Levitt has called market data 
the ``lifeblood of markets.'' Today, market data in our equity 
markets is governed and controlled by a Government-mandated, 
anachronistic, and static structure: the National Market System 
Plans. Although organized with good intentions and noble 
purpose, we respectfully submit that the NMS Plans, the CTA/CQ 
Plan for listed securities and the OTC/UTP Plan for NASDAQ 
securities, must be fundamentally improved.
    Why? Because the plans are exclusive providers. Any vendor 
or broker-dealer that supplies data to the investing public 
must contract with the plans. Further, the plans engage in 
ratemaking, albeit subject to SEC oversight. Surely, the words 
``exclusive'' and ``ratemaking'' sound funny and out of place 
in a world that has so benefited from prudent deregulation.
    Market forces neither impact the plans nor provide 
incentives to offer competitive rates. Instead, vendors and 
broker/dealers are presented with the classic Hobson's choice: 
doing business based on monopolistic terms or not doing 
business at all.
    In this sub-competitive environment, valuable market data 
is sold to vendors and broker/dealers and then distributed to 
millions of retail and institutional investors, forcing 
investors to pick up the tab for non-competitive pricing.
    Without competitive forces to discipline markets, economic 
distortions result. No one really knows if market data fees are 
too high or too low.
    What we do know is that they're not tied to value. More 
troubling is that innovation within the market for data 
provision is not rewarded. Exchanges have little incentive to 
bring innovative data products to the market, because data 
dissemination is regulated by the ``Vendor Display Rule,'' a 
one-size-fits-all mandate.
    The Archipelago Exchange is currently negotiating with the 
National Market System Plans, in essence, to join the 
fraternity. Absent initiation, Archipelago cannot do business 
as an exchange.
    Ironically, the most difficult task about creating a new 
exchange isn't the enormous time and expense of drafting 700 
pages of rules, or responding to public comments or regulators 
and clients about your market structure.
    No, the most difficult hurdle or barrier to entry is the 
hazing process that a new entrant must endure to join the NMS 
fraternity, which is composed exclusively of competitors.
    As with all frats, a single blackball veto right is part of 
the governing rules. And we have experienced dealing with the 
NMS recently.
    A recent example: our staff was recently told by the staff 
of the New York Stock Exchange that the exchange interprets the 
ITS Plan to severely limit the ability of participants to use 
computers to place its orders into ITS.
    The New York Stock Exchange strongly suggested we change 
our market structure to include a time probe, where the 
Archipelago Exchange would delay accessing other markets to 
hold that order up for a predetermined time, such as 15 or 30 
seconds. The purpose of this holdup would be to allow the 
marketmaker to manually interact with the order.
    We believe that we do probe our market, but we do it 
electronically. Think of it in these terms. Suppose American 
Airlines, through the authority of the FAA, informed United 
Airlines that it would no longer be in regulatory compliance if 
United's pilots use computer autopilot, because American's 
pilots chose not to use it. ``You're out of business, United, 
unless you do it American's way.''
    Can anyone name another industry with this type of never 
ending hell week initiation is imposed as a precondition of 
joining?
    We respectfully suggest an overhaul to the current system 
where sunshine is cast on ``ancient fraternal rights'' and 
competition is injected to allow market forces to play a 
central role in the collection and dissemination of market 
data.
    Some observations and suggestions:
    First, competition among marketplaces must replace 
ratemaking by a committee of competitors to provide value, and 
vendors must be allowed to pay for data based on value. Instead 
for forcing vendors to contract with NMS utilities, allow 
vendors to contract with any number marketplaces directly and 
let marketplaces sell data to vendors at prices that the market 
will bear.
    Second, the type of data that a marketplace can sell to a 
vendor should not be regulated. Rules that prevent or disincent 
a marketplace from providing additional value such as full 
depth of book, have no place in securities regulation.
    Third, while we are true believers of competition in the 
data market area, prudence suggests a transition period under 
which the NMS utilities would continue to function. These 
utilities can help ensure a soft landing as we move to a 
competitive model so that consolidated information is not lost 
before new competitors have had an opportunity to build their 
business.
    We expect the NMS utilities to wither on the vine as more 
in-depth competitors enter the marketplace.
    Finally, NMS Plan participants should be barred from using 
fraternity rules as a license to affect the business model or 
value proposition of new entrants. Such participants must be 
continually mindful of their mandate in no way includes 
determining the market structure of new exchanges.
    If necessary, the plan should take action to change their 
governance to reduce the potential for conflicts of interest. 
The SEC must be vigilant in protecting against the misuse of 
NMS Plans to deny investors innovative marketplaces. Thank you.
    [The prepared statement of Gerald D. Putnam, Jr. can be 
found on page 208 in the appendix.]
    Chairman Baker: Thank you, Mr. Putnam.
    Our next witness is the Executive Vice President and 
General Counsel of the NASDAQ Stock Market, Mr. Edward Knight.
    Welcome, Mr. Knight.

  STATEMENT OF EDWARD S. KNIGHT, EXECUTIVE VICE PRESIDENT AND 
              GENERAL COUNSEL, NASDAQ STOCK MARKET

    Mr. Knight. Thank you, Mr. Chairman. It is a pleasure to be 
here. And thank you Members of the subcommittee.
    Obviously, this is a very complex subject. We could spend 
hours describing the rules that apply here, how the market 
works.
    What I'd like to do is just try to make a few basic points 
about how NASDAQ approaches this issue.
    In particular, I call your attention to a white paper that 
we attached to my testimony today which outlines, in some 
detail, the recommendations NASDAQ has made to the Seligman 
Committee, which is looking at this issue on behalf of the SEC. 
It's chaired by a distinguished professor of law who is 
considered one of the leading experts in securities law, and we 
and many on this panel have been working with that committee to 
try to come up with new solutions to this issue.
    In particular, though, the topic of this hearing today, 
Competition and Transparency, are two issues that we take very 
seriously at NASDAQ and which frankly we believe are at the 
heart of the success that we've had over the past few years.
    I would like to focus on what we consider seven key issues 
and facts, if you will, that frame our thinking in this area.
    First, in terms of the history of our market, the NASDAQ 
Stock Market is what it is today because of the very intense 
competition between various stock markets and, because of our 
focus at NASDAQ on transparency or the wide dissemination of 
information to the public as the best method for us to compete.
    Because of this single-minded emphasis on transparency, we 
believe that NASDAQ delivers the highest quality market to the 
investing public today.
    Others at this table have other views.
    We're out there competing every day about our market. If we 
can continue to deliver such transparency and quality, the 
investor will return tomorrow. That's the test, quality every 
day, and we focus on it day in and day out.
    Second, I need not remind you that just 30 years ago, we 
were a tiny part of the U.S. economy, an insignificant part of 
the process of price discovery.
    Today, we are the largest electronic, screen-based market 
in the world, listing over five thousand companies. In the last 
15 years, we have facilitated the raising of over $480 billion 
for companies with employees in each of your districts.
    This has not been an accident that we grew. More than 
anything else, our growth happened because we try to think 
first about the individual investor and their needs.
    That is why we get 40 million hits a day on NASDAQ.com, our 
website. That is why the individual investor pays only one 
dollar a month to get an unlimited number of real-time quotes 
and trade information.
    You only need to compare that with, for instance, your 
internet providers monthly bill of $21.95 to understand our 
commitment to getting information to the American investing 
public.
    Or compare our one dollar for an unlimited number of 
transactions to the $1.50 for a customer to get access to his 
or her money through an ATM machine.
    In fact, an investor need only click on NASDAQ.com or any 
of hundreds of other websites and get 15-minute delayed 
information for free. That is one reason why most investors pay 
nothing for their market data.
    Our belief in transparency can also be found in how we sell 
our information products to the investing public. Just click on 
NASDAQ.com, which I did last night and printed out what is on 
that page.
    It lists all our data policies, our pricing policies on 
data, the market vendors, the agreements. It is all there on 
our website on trader.com, and the list of prices have 
undergone a rapid reduction over the last few years, a 50 to 80 
percent reduction in our most critical fees.
    And, as I said, it's right there on our website.
    We understand that one of the critical reasons why so many 
individual investors have invested in NASDAQ stocks is the ease 
with which they can access information about our market.
    We're not standing still with this. We are looking for ways 
to improve our market and in January, with the support of many 
Members of Congress, the SEC unanimously approved SuperMontage, 
the next generation of the open access, fully transparent 
NASDAQ stock market.
    We're making substantial new investments in this 
technology. It won't be easy to build. It will cost hundreds of 
millions of dollars. But in the end, we believe the U.S. 
investor and the U.S. economy will benefit.
    Fourth, you need to focus, I would respectfully suggest, on 
the fact that certain market participants have decided that to 
attract more customers, they need to offer information from our 
market for free. That is their choice, and they make up that 
cost in other services and fees.
    But a choice of a particular business model by one or a 
group of competitors should not drive important aspects of 
economic policy or market structure in one direction or 
another.
    Fifth, the value of our market data cannot be divorced from 
the quality of our market and what the market delivers. Market 
data value is inextricably tied to market structure, to our 
technological efficiency of our market platform, to the quality 
of our surveillance and regulation, the quality of the 
companies on our market.
    Attached to my testimony is an exhibit which describes in 
detail where we believe we add value to market data.
    The SEC put it this way in its Market Data Concept Release, 
and I quote:
    ``Information is worthless if it is cut off during a 
systems outage, tainted by fraud or manipulation, or simply 
fails to reflect accurately the buying and selling interests in 
a security. Consequently, there is a direct connection between 
the value of a market's information and the resources allowed 
to operating and regulating that market.''
    Sixth, the process of establishing fees for market data is 
fair and it protects the public interest. Let me just briefly 
describe it. There is another chart which lays it out in detail 
in a graphic attached to my testimony.
    At a minimum, before we can charge a fee, we must submit 
our fee proposals to an outside advisory committee and then to 
our board, where I may point out that Schwab has an executive 
who sits on NASDAQ's board.
    We must have at least one-half of its members drawn from 
representatives of the public or non-industry groups as a 
matter of law. Once we have received these approvals, we then 
must submit that to the SEC for approval, and they notice the 
public fully about this, and the public has an opportunity to 
comment.
    This is a time-consuming and difficult process.
    Chairman Baker. Can you begin your summation, sir?
    Mr. Knight. Yes.
    Chairman Baker. Thank you.
    Mr. Knight. Finally, I would point out what I started with, 
which is that we are proposing significant changes in the 
current system. We have described those in the Seligman 
Committee white paper. We believe they will bring more 
competition to this process, but we ask the subcommittee, look 
at what these markets have delivered to the American economy 
and the American public in terms of growth over the last few 
decades.
    Thank you very much.
    [The prepared statement of Edward S. Knight can be found on 
page 133 in the appendix.]
    Chairman Baker. Thank you very much, Mr. Knight.
    Our final witness, representing Bloomberg Financial 
Markets, is Mr. Stuart Bell.
    Welcome, Mr. Bell.

     STATEMENT OF STUART BELL, BLOOMBERG FINANCIAL MARKETS

    Mr. Bell. Thank you, Mr. Chairman.
    Mr. Chairman and Members of the subcommittee, my name is 
Stuart Bell and I'm pleased to have the opportunity to testify 
on behalf of Bloomberg Financial Markets regarding the critical 
issue of access to market data.
    Bloomberg Financial Markets provides multimedia, analytical 
and news services to more than 150,000 terminals used by 
350,000 financial professionals in 100 countries worldwide.
    Bloomberg tracks more than 135,000 equity securities in 85 
countries, more than 50,000 companies trading on 82 exchanges, 
and more than three million corporate and municipal bonds.
    Our clients include most of the world's central banks, as 
well as institutional investors and broker/dealers, commercial 
banks, and U.S. Government agencies.
    Bloomberg Financial Markets also provides the services of 
Bloomberg Tradebook, an electronic agency broker serving 
institutional investor and other broker/dealers. Bloomberg 
Tradebook is one of the largest electronic communications 
networks, regularly matching orders in excess of 100 million 
shares daily.
    In short, as both a vendor and an ECN, Bloomberg is acutely 
aware of the critical importance to investors and the markets 
of access to market data.
    And as Chairman Oxley reinforced today, this data is the 
oxygen of the market. Like oxygen, it is essential; unlike 
oxygen, it is not free.
    It defies basic economics to argue in any business context 
that in excess of $400 million in fees annually can be levied 
without the lion's share of those costs ultimately being passed 
on to the consumers and investors.
    As you know, before the 1970s, no statute or SEC rule 
required self-regulatory organizations, SROs, to disseminate 
market information to the public. Indeed, the New York Stock 
Exchange, which operated the largest stock market, severely 
restricted public access to market information, particularly 
its' quotations.
    Markets and investors suffered from this lack of 
transparency.
    The Congress responded by enacting the Securities Acts 
Amendments of 1975, facilitating the creation of a national 
market system for securities with market participants required 
to provide for each security which in turn was to be 
consolidated into a single stream of information disseminated 
to the public.
    The Congress clearly recognized the dangers of data 
processing monopolies. To protect the public, the Congress 
envisioned that securities information processors would be 
regulated in the same strict way as public utilities are 
regulated, so as to avoid abuse and undue expense, and to 
increase price transparency.
    The potential for abuse of that monopoly status looms 
larger today than it did in 1975. At present, most SROs are 
non-profit organizations. The NASDAQ, however, has largely 
completed its privatization of NASDAQ and it may well be that 
other privatizations will follow.
    Non-profit SROs have exploited the opportunity to subsidize 
their other costs through market information fees. As for-
profit entities, the incentive will be even stronger to exploit 
this Government sponsored monopoly over market data by charging 
excessive rates and using those monopoly rents to subsidize 
their competitive businesses.
    This threatens to hurt investors and compromise the 
efficiency of the markets in many ways. Investors will be 
forced to pay excessive monopoly rents for market data. 
Investors will be denied a level playing field that would 
otherwise exist in the absence of those monopoly subsidies.
    Investors will also lose as major market players, 
comfortable as Government sponsored monopolies fail to 
innovate, leaving American markets vulnerable to future off-
shore competition.
    Recent regulatory developments in the corporate and 
municipal bond markets underscore the absence of an 
economically efficient policy on market data that would benefit 
markets and investors and raise concerns regarding the possible 
resolution of these issues in the equities market.
    A little over a year ago, the NASD, operating through its' 
wholly-owned subsidiary, NASDAQ, filed a proposed rule change 
with the SEC to create a corporate bond trading, reporting and 
comparison entry service, the TRACE proposal.
    As approved a few weeks ago, the proposal creates a 
Government sponsored monopoly in bond data, just when NASDAQ 
has been transformed into a privately owned, for-profit entity.
    Under the TRACE proposal, the SEC has granted the NASD an 
exclusive franchise by mandating, with only limited exceptions, 
that all NASD members report their corporate bond transactions 
to the NASD.
    Is a de facto monopoly in this field necessary? The answer 
is a resounding NO. Credible, highly capitalized market 
participants are ready to consolidate bond market data if 
competition is permitted to replace a Government sponsored 
monopoly in this area.
    Numerous market participants filed comment letters 
asserting that open network technology has made it possible to 
collect and disseminate price information without a central 
monopoly provider.
    Indeed, Bloomberg and the Philadelphia Stock Exchange have 
actually made such a proposal.
    The current debate over the nationally recognized municipal 
securities information repository, or NRMSIR, raises similar 
troubling issues.
    The Municipal Securities Rulemaking Board, the MSRB, 
recently proposed, for example, that all the NRMSIRs give to 
the MSRB all the data they had independently gathered, sorted, 
and analyzed.
    While billed as a voluntary initiative, it is disconcerting 
that the MSRB would argue that compilations of data gathered 
after enormous expenditures of private time and money should be 
considered free for the taking.
    In conclusion, the current market data policy in the United 
States, on both the equity and bond sides, does not promote 
competitive market forces which would benefit investors and 
markets. Bedrock changes in our markets over the past quarter 
century demand a thorough congressional re-examination of the 
1975 amendments, including the provisions on market data.
    We believe the competitive provision of market data should 
be encouraged to the maximum extent possible. The greater the 
transparency, the greater the opportunity to unleash market 
forces for the benefit of investors.
    Thank you.
    [The prepared statement of Stuart Bell can be found on page 
178 in the appendix.]
    Chairman Baker. Thank you, Mr. Bell. We appreciate your 
participation.
    Mr. Britz, I will start my questions with you with a couple 
of statements, one with regard to the reading of the 1975 
Amendments and the requirement to provide information on a 
fair, reasonable, and non-discriminatory basis.
    I understand there is considerable discussion as to whether 
the intent of Congress at that time was to ensure that the 
information was provided on a cost reimbursement basis to the 
providers or whether, in fact, it was intended to be the 
significant revenue stream which, in fact, it has become today 
to the various exchanges.
    I tend to lean toward the side, given the importance of 
this technology, that it is something that should be provided 
at the lowest possible cost without net loss to the exchange.
    Second, in discussion with Chairman Greenspan a few days 
ago in another committee hearing, I asked the question of the 
Chairman relative to the transparency of markets and disclosure 
of information. How should we view this commodity in the 
current construct of the market?
    To which he responded, ``I think with technology 
accelerating as it has over the past 5 to 7 years, we've seen a 
more rapid response.''
    Indeed, that's the issue which I was speaking to earlier, 
meaning transparency.
    The issue of disclosure gets down to the conflict between 
the obvious necessity of transparency, as you have put it, and 
the question of property rights.
    Because one of the reasons why you get a lot of 
disinclination on the part of various players not to want to 
disclose is they presume that what they have is a vested 
property right, skipping over.
    And I think it necessary to make the judgment, do they have 
the right to that float, as he calls it, whether it's 
information market data, or otherwise.
    And in most instances, I think you're going to find that 
the answer is no.
    In the course of your description of your activity, you 
indicated that today it is your belief, I think--and I'm asking 
for clarification--that the net cost to the exchange in 
providing market data today is a very expensive proposition.
    Can you tell me that you have identified a cost allocation 
to your operation for the provision of market data to 
customers, and if so, what relationship does that cost basis 
have to the fee currently assessed?
    Mr. Britz. Mr. Chairman, it's very difficult to make some 
of these arcane allocations and decisions when you have joint 
products.
    Economists would describe the production of market data, on 
the one hand, and the execution of two or more investors' 
transactions, as joint products.
    What are we really doing? Are we executing investors orders 
and the price is a byproduct?
    Or is, in fact, the execution the byproduct and the price 
is the real product?
    What I can tell you, even being rusty viz a viz my old cost 
accounting days, is that when you look at the cost that the 
stock exchange has in terms of both executing that transaction 
and the production of market data, which are very difficult to 
separate, the cost of that activity exceed the revenues to the 
stock exchange of both market data revenues and transaction 
charges.
    So, as rusty as I am on cost accounting, even I can very 
quickly come to the conclusion that market data at the New York 
Stock Exchange--and I'm emphasizing NYSE--operates at a 
significant loss.
    In your comment, you talked about not operating at a net 
loss to marketplaces. Today, we already operate at a net loss.
    We actually have somewhat mixed feelings.
    Chairman Baker. Let me jump to that point. If we can't 
allocate a specific cost to the activity because it's inherent 
with the transactional side, how can we state that we know 
we're operating at a loss if we haven't got a cost center 
identified?
    Mr. Britz. Because, first of all, you can make those 
allocations, Mr. Chairman, but I would suggest to you that they 
would make the current debate and discussion of market data 
pale in comparison.
    Chairman Baker. Let me do this, and I don't want to cut you 
off, but I have to, because I'm going to hold a 5-minute rule 
here and I'm just about out of breath.
    My point is, is you can't specifically allocate the cost, 
what relevance is there then to the board's consideration of 
fee reduction. It would have to be to your overall revenue 
stream and not to the fixed-base cost of the activity which 
creates this problem for me.
    This subcommittee's very intent on seeing a fee reduction 
on the Section 31 side, because we've identified on the SEC 
side that the charges related to service are far outstripped by 
the fees being generated.
    So we're going to take, I think, action on this 
subcommittee to reduce fees, because it's inappropriate to the 
level of charge, Section 6, 14, 15, 31, whatever we do, based 
on that presumption, which I assume that New York and NASDAQ 
exchanges would strongly support.
    But at the same time, we're looking at this issue and 
saying that there's no relevance between the fee being charged 
and the actual cost of the operation, and therein is my 
difficulty with the subject.
    Mr. Britz. What I meant to say, Mr. Chairman, is that if 
you are to separate the joint products, order execution and 
production of market data, it inevitably involves somewhat 
arbitrary allocations.
    But there's no question that putting the two together, the 
cost of producing the execution and producing the market data 
in total exceeds the cost recovery, so there's no question but 
that each of them independently operates at a loss and 
combined. The only difficulty is getting into making some of 
those arcane allocations.
    Chairman Baker. Well, I understand that there is 
arbitrariness in the decision process. There may be information 
that could be made available to us to help better understand, 
but at the moment, it's a difficult matter to sort out and I 
think I'll have more to say at a later time.
    I recognize Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Let me first understand this question of transparency. I 
guess it is a 4-to-2 difference here as to those four witnesses 
that want to be in a competitive situation of providing this 
information and the two representatives from the exchanges.
    The four of you, do you think you get all the transparency 
you need? Is that what you are worried about? Or is it the 
contract costs for acquiring it from the exchanges?
    Ms. Dwyer, maybe you should take the first shot.
    Ms. Dwyer. OK. Let me just ask you to restate your question 
so I make sure I understand it.
    Mr. Kanjorski. Is it a question of not getting adequate 
information in time, or is it a question of having to pay for 
the information you are getting from the exchanges?
    In other words, if we find another way to pay for it, are 
you satisfied that you will not want any other changes?
    Ms. Dwyer. I think that pricing is going to be a function 
of how prices are set.
    And our major concern over the past several years, due to a 
variety of experiences we, as a firm, have had with the cost of 
market data, have led us to the belief that the setting of the 
prices, transparency of that process, the cost inherent in that 
process, is more important to fix than the actual level of 
price of the data itself.
    Mr. Kanjorski. So, you basically want the data so that you 
can analyze whether it is an adequate reflection of real price?
    Ms. Dwyer. We think sunshine, we think the whole industry 
needs to see what each is paying for market data and why.
    Mr. Kanjorski. Make the assumption that none of you had to 
pay for the data and that it was absolutely free. Would this be 
acceptable to you? Or is there a lack of transparency in the 
system that now inhibits your activities individually?
    Ms. Dwyer. Well, if the data could be free, and I don't 
believe there is a free lunch anywhere, then I don't suppose it 
would be very relevant how the CTA collected and consolidated, 
as long as they were doing a good job in ensuring accurate 
data.
    Mr. Kanjorski. In other words, with the standard out there 
by the exchanges, you are getting adequate information. Your 
complaint is that you have to pay for it, and you have to pay 
by some arbitrary contract that may not be equal to what your 
competitor has to pay. Is that correct?
    Ms. Dwyer. I think we are not concerned that we have to pay 
for it. We think there's a cost to gathering the data and 
collecting it. That's never really been the issue.
    The question is, what is the cost and how is the system 
administered.
    Mr. Kanjorski. Right. But you would not care about what 
those costs would be if it were free to you?
    Ms. Dwyer. Free, there wouldn't be a cost, so yes.
    Mr. Kanjorski. Well, it would still cost the exchanges.
    Ms. Dwyer. Well, we recognize that, or to anyone who 
consolidates data.
    Mr. Kanjorski. So you are really worried about getting this 
information free. Would that solve everybody's problem, Mr. 
Bell? Would that solve Bloomberg's problem if we gave it to you 
free?
    Mr. MacDonald. I'd like to address that, if I could.
    Mr. Kanjorski. Go ahead.
    Mr. MacDonald. Let me give you an example. We do not have 
transparency today and we need it. The individual investor is 
discriminated against.
    Mr. Kanjorski. So, getting the information for free would 
not satisfy you?
    Mr. MacDonald. No.
    Mr. Kanjorski. What do you want?
    Mr. MacDonald. I would like to be able to give real-time 
streaming quotes to my customers, but there are administrative 
burdens to that. I mentioned in my testimony that the 
subscription agreement----
    Mr. Kanjorski. Do you want to tap into the exchange's 
computers to see exactly what transaction is being processed in 
real-time as they are apprising you of the information?
    Mr. MacDonald. Yes, I would like my customers to----
    Ms. Dwyer. We already do that.
    Voice. We do that today, Congressman.
    Mr. Kanjorski. OK, then what I am trying to ask is what 
more can they give you?
    Mr. MacDonald. I actually disagree with that, both on a 
delayed quote basis. The New York does not, on a delayed basis, 
give us quote, the bid and the asked. They will only give us 
the last sale, so I respectfully disagree with that.
    Mr. Kanjorski. So, if you got the bid and the ask price, 
would you be happy?
    Mr. MacDonald. That would be one thing that would make the 
playing field level.
    Mr. Kanjorski. OK.
    Mr. MacDonald. The second thing would be, with the 
innovation with the internet, there are clearly rules that are 
impeding the innovation, and I have a big problem with that.
    Mr. Kanjorski. So, if we were to lay down some system that 
says it is free to anybody that wants it, and there are no 
contracts that you have to enter into, because it is absolutely 
free and there is no reason to have a contract, are you 
satisfied?
    Mr. MacDonald. No. There are other rules. I mentioned the 
way that we have to then obtain subscriptions from customers 
because there are still some rules in place.
    Assuming they went away, all these rules.
    Mr. Kanjorski. Those rules would go away if you did not 
have individual contracts.
    Mr. MacDonald. My goal is to get the best information to my 
customers in the best way.
    Mr. Kanjorski. Now to the two exchanges: I know you cannot 
give us an absolute cost estimate, but it does seem to me that 
the end product here is a result of the business you are doing. 
If you did not have the sale, you would not have the 
information, so there is a way to recapture most of the cost 
here, and this is sort of an add-on information that you are 
selling.
    But assume that there is--and there is--some cost for it. 
Can you provide me a ballpark figure on the real cost for the 
two exchanges on distributing this data information? One-
hundred-million dollars? Two-hundred-million dollars?
    Mr. Britz. No. The cost of production and transaction 
processing at the New York Stock Exchange is in excess of $400 
million.
    Mr. Kanjorski. Four-hundred-million dollars.
    So if you had $400 million, you would be happy to give 
these other four people everything they wanted?
    Chairman Baker. And if I can jump in here, Paul, to help on 
that point, if it's $400 million, I would hope you would ask 
him to give us something that says how they allocate those 
expenditures, and I'll give you a couple more minutes.
    Mr. Britz. Mr. Chairman, that's in our annual report in the 
income statement that we produce every year.
    Chairman Baker. So Members of Congress could understand it.
    Mr. Kanjorski. OK. If we could get some sort of cost 
analysis breakdown, that would be helpful.
    Now, let us go to NASDAQ. Do you have an estimate of what 
it is going to cost?
    Mr. Knight. I would answer the question this way, 
Congressman. We really believe the total operation of the 
market is, and its integrity is tied directly to the value of 
the information.
    We would allocate all of our costs. It is our market and 
the fact that the people have interest in that market, that 
that information has value. We drive orders together. We allow 
the execution--we create liquidity. That is why the information 
is valuable.
    And Congress requires us and the SEC to meet certain 
regulatory standards that bring integrity to that information.
    Mr. Kanjorski. But make the assumption that we have the 
power or could find some way to say this is not your 
intellectual property--that it is public information and that 
we can force you to put it out.
    What does it cost to distribute that information? What is 
the loss to the NASDAQ if we do that?
    Chairman Baker. And that has to be his last question and 
sum up, please.
    Mr. Knight. I really don't know, Congressman. I would be 
guessing and speculating. I would say that all of our costs are 
focused on delivering a quality market. A quality market is 
what creates that information.
    Chairman Baker. And let me add on to Mr. Kanjorski's point 
with my question.
    The subcommittee really wants to understand what the costs 
are that are identifiable associated with this activity if 
we're to be making an informed judgment.
    Mr. Chairman.
    Mr. Oxley. Thank you, Mr. Chairman.
    Let me commend the panel for what I think is an excellent 
presentation and some very good give-and-take, both in their 
statements, as well as their response to questions.
    Let me refer to Mr. MacDonald's testimony, which I think 
makes an interesting point, and one that I believe really gets 
at the heart of the matter.
    He stated--and I invite all of our witnesses to comment on 
this--that, ``SROs exercise governmental rights to collect 
market data fees from market participants, and then fund for-
profit operations which compete directly with the market 
participants from whom they have authority to collect the 
fees.''
    Very provocative, very interesting. I suspect that, Mr. 
Britz, you may have a different cut on that.
    But why don't we go down the panel? I'm assuming that Mr. 
MacDonald still believes what he said a few minutes ago, so 
we'll skip him and go right down the panel.
    Mr. MacDonald. Even more fervently. I would like to add one 
other point to that, and there may be another revenue that we 
have not considered that the exchange is getting when issuers 
list with the exchange, one of their expectations is that the 
prices will be shared. So, in fact, that is another contractual 
issue we should look at and another revenue source.
    Mr. Oxley. Mr. Britz.
    Mr. Britz. Mr. Chairman, I would go back to what I said 
earlier. Market data at the New York Stock Exchange operates at 
a loss and therefore it's in no position to subsidize anything, 
much less anything that might be competitive with our member 
firms.
    I would add one other point, and I think it's a large point 
that perhaps is being missed. Market data fees are where they 
are because it is a consensus of the broker/dealer industry 
that they be where they are.
    We don't see on this panel, Merrill Lynch, Smith Barney, 
Paine Webber, Prudential Securities, and many, many other 
firms. I can tell you that by definition, because those fees 
are where they are, it is the consensus of the brokerage 
industry, through their representatives on the various SRO 
boards, that they are about right and that this is an 
appropriate way to fund the operations of the NYSE, in my 
particular case.
    And they are free, back to the question that was asked 
earlier, to change or indeed eliminate market data fees any 
time they care to.
    But the effect of eliminating market data fees, which at 
the New York are at about the $130 million level, gives you 
$130 million toothache that you then have to find a substitute 
for. So then the consensus is about, ``OK, how do we tax to 
recover that $130 million? Who are the winners and who are the 
losers?'' And that's a consensus process.
    Mr. Oxley. Ms. Dwyer.
    Ms. Dwyer. Well, it's absolutely correct that we are 
required by statute and SEC rules to send all of our customers 
quote information to the exchanges, even quotes and trades that 
we do away from the exchange go to the exchange.
    Funding the exchange I don't believe was one of the 
objectives of the 1975 Act amendments. The discussion, as I 
recall from reading the legislative history around those Acts, 
were about breaking open the exchanges' single-source monopoly 
and providing consolidated data. Combining the data streams 
from all the exchanges, which had been excluded from the kind 
of public view the New York Stock Exchange had.
    So there is language. The statute is ambiguous. There is 
language about whether the exchange needs to use a cost-based 
analysis to recover its fees.
    But I do not believe you will find anything that indicates 
it was intended to be a profit center, or that funding the 
exchange itself was one of the objectives. It has always been a 
pretty robustly solid financial institution on its own.
    I think the point about requiring us to send the data, then 
marking it back up to us to display it to our customers, one 
point that has puzzled us is that the exchange and the NASD 
have announced that they are going to provide market data for 
free on their websites, which is puzzling in that we need to 
pay for it. We compete with them on many fronts.
    And, you know, we don't understand under the SEC rules or 
the statute, the ability to provide that data outside the 
confines of the plan, which the SEC approves, and to give it 
away for free while, you know, in order for us to provide it 
for our customers, we have quite a high cost.
    Mr. Oxley. Thank you.
    Mr. Putnam. Let's try to make this brief, because we're 
running out of time.
    Mr. Putnam. OK. You know, it's funny. We think a big part 
of the problem is the plans themselves, the plans that were 
designed to protect investors.
    And we strongly support the New York Stock Exchange's 
effort to break away from the plans and to get into a 
competitive environment where you can start to get the expenses 
and revenues in line like a business would, and to allow some 
other competitors into the marketplace.
    What I mean by a problem with the plans, the ECNs, which 
are very much like exchanges, are providing data for free to 
Yahoo and Three-D Stock Charts, for example, on the internet, 
and those bids and offers are made again available for free.
    But the plans prevent us, or prohibit us, from actually 
providing additional information, like last sale information 
for free. So we think that we need to, as Carrie said, shed 
some sunlight on the plans, not just in how the pricing is 
determined, but how the plans operate. Inject some competition 
into the process and start running these things more like 
businesses.
    Mr. Oxley. Mr. Knight.
    Mr. Knight. Mr. Chairman, we proposed that the plans be 
changed. We have proposed an alternative we call the Market 
Choice Alternative which would create alternative mechanisms to 
create this information and inject more competition into this 
marketplace.
    We're perfectly comfortable with that. We think that's the 
direction to go. Less regulation is what's needed here; more 
competition. And we think there is a way to do that using the 
existing statutes, and that is an idea that we think will also 
create the possibility for lower cost to the investor, and more 
innovation in the types of information that are available to 
the individual investor.
    Mr. Oxley. Mr. Bell.
    Mr. Bell. I guess I would just follow up with what Ms. 
Dwyer was saying. I think that it is a concern of ours that in 
this environment where SROs are becoming for-profit 
organizations, and you have situations like free real-time data 
on websites that is different from what we could provide, 
because we'd have to pay for it, or what I mentioned, the trace 
situation with corporate bonds.
    Again, the NASD and NASDAQ now have a monopoly where there 
isn't one presently, so I think that's of great concern.
    Mr. Oxley. Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Chairman, for your 
participation.
    As is the custom, we will recognize Members by seniority on 
time of arrival on the Democrat side, just so people have a 
heads up here, the next four folks are Bentsen, Mascara, 
Sherman, Shows.
    On our side, it is Ney, Shays, Royce and Weldon.
    Mr. Bentsen.
    [No response.]
    Chairman Baker. Mr. Bentsen has gone.
    Mr. Mascara.
    Mr. Mascara. Yes. Thank you, Mr. Chairman.
    Just a couple of observations. One, it's good to see that 
the monopolies are alive and well. During the past 6 years with 
the mega-mergers, I was going to ask Webster to remove the word 
``monopoly'' from the dictionary, so I'm glad to see that 
everybody's referring to the New York Stock Exchange as a 
monopoly.
    I'm curious as, in my former life, I did accounting. And I 
noted, Mr. Britz, you said that it was impossible to ascertain 
what the costs were.
    I mean, having done a little bit of cost accounting at cost 
centers, somehow you should be able to break down the execution 
costs and costs of providing the market data.
    Are you saying that the New York Stock Exchange does not 
have the ability of ascertaining that information?
    And if so, I suggest you change accounting firms.
    But go ahead.
    Mr. Britz. Congressman, I didn't mean to say impossible. I 
meant inevitably--cost accounting, as you undoubtedly know, is 
an art, not a science--it inevitably involves making 
determinations as to what categories of cost ought to be 
included and what allocation of those costs you ascribe to 
market data on the one hand to the execution of the transaction 
on the other hand, and possible other functions.
    You can clearly do it, but it's going to be assumption-
driven, and my comment was I think it would raise the decibel 
level of this debate, the debate over those allocations and 
those categories of costs. Not at all impossible.
    Mr. Mascara. OK. Because I was going to say, if I'm on the 
other side, and I see that you have many more people there that 
oppose those fees, if they're going to be charged a fee, they 
like to know that it's a fair fee and it is representative of 
the cost the New York Stock Exchange is absorbing.
    So I think they would take more comfort if your answer had 
been, yes, we can ascertain that and determine it, and these 
charges are based upon that information.
    Mr. Britz. I would imagine that's true, Congressman, but I 
wonder if it's not naive to think there would ever be consensus 
surrounding those assumptions and those allocation 
determinations that have to inevitably be made to produce a 
profit and loss statement to everyone's satisfaction.
    So I'm skeptical that it can happen. It's clearly not 
impossible to produce a P&L statement.
    Mr. Mascara. The other observation was I would like to have 
seen someone from the SEC that we could have asked questions 
of.
    And that leads me to the next question, Mr. Britz. I 
understand that the SEC Advisory Committee on Market 
Information is currently examining many of the issues that we 
are discussing here today.
    It seems to me that our subcommittee should wait for the 
recommendations of the experts, whatever that means, on the 
SEC's Advisory Committee, before considering any legislation on 
market data.
    After all, we are not experts. I'm here exploring new 
ground for me. But don't you agree that we should review the 
Advisory Committee's recommendations before determining whether 
to legislate in this area?
    Mr. Britz. Well, I would never be so presumptuous as to 
advise this subcommittee as to what it ought and ought not to 
do. I would say that the Seligman Committee is 25 professionals 
from around the securities industry, both the buy and the sell 
side, various types of broker/dealer firms, not simply one 
category around that table. The vendor community is around that 
table, and various academics representing the public are around 
that table as well, so there certainly is a wealth of expertise 
around that table.
    I don't have the clarity of vision to know what the end 
product of this committee will be. But I think it will be an 
interesting and a provocative and thought provoking one.
    Mr. Mascara. Well, thank you, Mr. Britz.
    And thank you, Mr. Chairman.
    Mr. Baker. Thank you, Mr. Mascara.
    Mr. Ney.
    Mr. Ney. Thank you, Mr. Chairman.
    The question I had of Mr. Knight.
    If we change the market distribution system into a 
competitive model, would any loss in the total revenues created 
by restructure of the market data system be passed on to the 
consumers?
    If so, what impact would that have on the investors who 
invest in the market?
    Mr. Knight. If you're asking about our market choice 
alternative, it's our belief that competitive forces exist now 
that if the National Market System Plans stepped back and 
allowed those forces to play out, people would step forward to 
put together the national best bid and offer, and that other 
competitors would spring up and that that is the best mechanism 
to go.
    And that that will result in lower prices for the investor 
for this information, and better information because of 
innovation and competition. That's a system we're willing to 
work with.
    The existing one is the product of circumstances that may 
have passed in the 1970s, where this information wasn't coming 
together. But in the end, people need to recognize the reason 
the SROs were given the responsibility is because, and 
explicitly in the statute, Congress had a concern about the 
integrity of this information, and we live under regulatory 
requirements that broker/dealers and other vendors of 
information don't have to carry.
    Mr. Ney. Well, the SROs could recoup, because they'll be 
selling the data because the SROs would have a recourse.
    I'm just saying though that the consumers and that cost 
passed down, does that increase costs and how does that 
affect----
    Mr. Knight. I would think that with more competition, the 
costs would go down.
    Mr. Ney. OK.
    Mr. Britz. Congressman, if I may come at that in a 
different way. If your question is, in my shorthand, if you 
vaporize market data fees, will that have an impact on the 
operations of the exchange, or more importantly the ultimate 
end customer.
    And I don't know the categoric answer to that. But back to 
the $130 million toothache, water seeks its own level, and the 
most obvious thing that our board would do, without presuming 
what they would do, is that they would gravitate toward the 
transaction charge that both we and the over-the-counter market 
have.
    And that's clearly a charge in the form of brokerage 
commissions that would inevitably find its way very directly to 
the end customer.
    Mr. Ney. A question of Mr. Putnam.
    We're not going to haze you on this question now. I found 
your testimony very interesting.
    The question I had, if we know, change from a monopolistic 
structure, and the consumer relies on reliability and 
trustworthiness of data, would there be anything lost due to 
competition, as far as reliability of data, trustworthiness of 
data?
    Mr. Putnam. Well, we've suggested that we take an 
incremental step initially to protect investors from just that. 
That we wold maintain the current plans to provide a baseline, 
a minimum baseline of information, introduce competition to the 
system, and then hope that the utility died.
    If it turned out that market data was a natural monopoly, 
then we'd have to rely on SEC oversight and antitrust 
regulation to help determine the outcome on market data 
pricing. We don't believe that. We believe we're seeing it now.
    The New York Stock Exchange is offering more and more, and 
they're getting ready to offer a lot more information, and I 
believe competitive forces have driven them there.
    The same thing on the ECN side of the marketplace. We're 
offering information for free to investors, as a way of 
competing with one another.
    So we really think that's the way to get there.
    Mr. Ney. So you don't have any hesitations, if this was 
changed from the current structure, about reliability if it was 
changed?
    Mr. Putnam. I think there are other examples in our current 
market where the SEC mandates a minimum level. So if you have 
someone who chooses to be a market data consolidator, that they 
are held to a standard of performance, system reliability, 
those sort of things, or they wouldn't be able to be a 
consolidator of data.
    I think we can get to it that way.
    Mr. Ney. Thank you.
    Thank you, Mr. Chairman.
    Mr. Baker. Thank you, Mr. Ney.
    Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    Let me just ask your indulgence for a second. This is new 
to me, sitting on this subcommittee, this particular issue.
    So let me just ask Mr. MacDonald, first. I just want to be 
sure that I completely understand and ask you, can you explain 
to me why transparency in the market information is important, 
first of all?
    Mr. MacDonald. Well clearly, you want the investor to be 
informed about the best bid offer. Mr. Meeks, if you called my 
broker and you got one of my brokers, one of my registered reps 
on the phone, and asked him for a quote on AOL, he would give 
that to you for free.
    If, Mr. Meeks, you dialed into my website, and attempted to 
get a quote on AOL, you would effectively pay, either directly 
or indirectly. Directly, because you've signed a subscription 
agreement to get unlimited quotes, real-time quotes, for $4 a 
month. Or because indirectly because I'm paying on a per-quote 
basis.
    So we have a situation that's patently unfair to the 
individual investors. The system was designed for larger 
institutions who that sort of cost to them is incidental. It is 
not incidental to the person who trades periodically once every 
couple of months.
    Mr. Meeks. Let me next ask then, I briefly read or 
understand that the SIA Subcommittee had released a report on 
transparency and made a recommendation or several 
recommendations.
    Now I'm trying to figure out I should ask then Mr. Britz 
and/or the gentlemen from--Mr. Knight, whether or not, did you 
participate in that subcommittee's report or in the hearings or 
anything of that nature, or have any input whatsoever in that 
report?
    Mr. Knight. I don't think we were excluded, but I think 
it's important to note that that report was not adopted by the 
SIA, Congressman, in any official way. So I think associating 
it too much with the position of the SIA would be incorrect.
    Mr. Britz. Congressman, that report was largely a survey of 
broker/dealers, so I guess I'm not sure how to answer the 
question as to whether we participated.
    We were aware it was happening. And at the end, we were 
sent a draft for our comments. So to that extent, yes. But we 
were not the intended audience of that report.
    And I think what Mr. Knight said is absolutely true. That 
is a report of a subcommittee of the SIA. When that 
subcommittee asked the board of the SIA to approve that report, 
the board declined to do so, and effectively distanced itself 
from that report.
    Mr. Meeks. Either Mr. Britz or Mr. Knight, let me then ask 
this question, and I think it was somewhat asked, but I'm not 
clear on the answer.
    If say, the current plan structure was completely 
eliminated, and you, as an individual SRO, were able to sell 
data individually, how, and could you provide consolidated data 
and how would you charge for supplying that data?
    Mr. Knight. Well, under the plan we submitted to the 
settlement committee, we believe the competitive forces that 
exist now, particularly in the information technology area, 
because of the demand that the consumer has, that they would 
pull together, that vendors would spring up to pull together 
that information for the public because of that demand. And we 
would sell to those vendors.
    Those vendors would be subject to certain rules from the 
SEC. Currently, they are called the Vendor Display Rules, and 
other mechanisms. But what would happen is there would be 
competitors also spring up to supply the same information, and 
we believe that competition would set the price as opposed to 
the cost-based ratemaking or some other Government alternative 
to setting that price.
    We believe that is the better way to go.
    Mr. Meeks. And finally let me ask one of the others, I 
think I heard someone testify to the fact that one of the 
drawbacks in the inconsistency of distributing delayed quotes, 
and mentioned differences between NASDAQ and the New York Stock 
Exchange.
    My question is, if individual SROs could sell their data 
independently, would you be concerned about greater 
inconsistencies in the distribution of real-time or delayed 
quotes?
    Mr. Britz. Well, first of all, if I may correct something 
that was said earlier, the New York Stock Exchange does not 
produce delayed quotations. Nothing leaves the Stock Exchange's 
factory, as it were, that isn't real-time.
    Several intermediaries in the distribution chain, for 
whatever reason, may choose to delay it along the way, but 
we're not in the business of delayed quotations. We think 
that's an inferior product and that's why we've pushed so 
aggressively to make real-time data more pervasive.
    Viz a viz the quality, this is a tough one. I think that 
from a pure self-interest point of view, the New York Stock 
Exchange would like to be able to distribute an NYSE-only 
product.
    And indeed, based upon a number of discussions with buy and 
sell side brokers, there's a demand for that product. But I 
wonder whether--and the tension here is whether you uncouple 
New York from Philadelphia and Boston and so on, whether or not 
there is something that happens there that dilutes the 
integrity of the product.
    And particularly, whether the end users, and I don't worry 
about the institutional end users, because they'll get the New 
York product, particularly whether the less sophisticated end 
user, who may get a secondary market's bid or offer discrete 
from another bid or offer in the New York, and whether or not 
the quality of that information product will be up to what the 
primary market is.
    So, Congressman, there is a tension there as between just 
full and complete competition, unbundling of product, and 
whether or not you somehow deteriorate the quality of the 
product to the unsophisticated end user.
    Chairman Baker. Mr. Meeks, your time has expired. Thank 
you, sir.
    Mr. Weldon.
    Mr. Weldon. Thank you, Mr. Chairman.
    My colleague, Mr. Mascara, asked whether Congress should 
wait for the SEC's Seligman Committee to produce a report 
before we act on this issue.
    Ms. Dwyer and Mr. Putnam, you are both participants in that 
committee. Do you believe Congress should not seek to promote 
greater transparency in competition in market data 
dissemination absent the Seligman Committee's report?
    Is that committee producing results that you believe will 
lead to necessary reform?
    Could you answer those questions for me?
    Ms. Dwyer. Sure. We don't know what the committee will 
recommend at this point. It's still very much involved in a 
lengthy discussion of what is actually a very, very complex 
issue, and essentially is operating to pull the views of a 
group of 27 or so folks each time we meet.
    I know that Dean Seligman's committed to producing a report 
on September 15th, but it's a slow process. I don't see 
anything wrong. In fact, I wholeheartedly welcome this 
subcommittee's interest in educating itself about this issue.
    Because it is complex, it's not something that anyone would 
want to act on precipitously, but I don't necessarily--I think 
the Seligman Committee will probably produce some very 
interesting results.
    I don't know that anyone needs to wait in considering these 
issues for that to happen.
    Mr. Putnam. I agree with Carrie. It's difficult, at this 
point, to tell exactly what's going to come out of the 
committee and there is still considerable disagreement on what 
we ought to do.
    And I think if we wait until December, to see what the 
committee produces, and then for this subcommittee to start to 
act or examine market data, we're just stalling a process that 
needs to be looked at now.
    Mr. Weldon. Thank you.
    I just have one other question. The exchanges point out 
that market data revenues have remained steady as a percentage 
of total revenues, so why is anybody complaining about 
excessive market data fees?
    And, Ms. Dwyer, maybe you can tackle that one first, and 
then I'd like to hear Mr. MacDonald's response to that.
    Ms. Dwyer. Sure. Well, just as Bob has had some difficulty 
portioning out the costs of market data, I don't know much 
about the revenue situation at the New York Stock Exchange. But 
I will say that our market data fees three years ago, when the 
internet first took off, went from about $7 million a year to 
all the exchanges, within one year up to almost $20 million, 
that was due to this increased usage that I talked about 
before.
    Partly due to, I think Schwab can take some credit, also 
some other people at this table, and people who aren't here.
    Due to the consternation of the huge run up in revenues and 
costs to us, due to the internet usage of individual investors, 
the rates have come down. And we've had many negotiations with 
both the plan operators at the CTA Plan, NASDAQ Plan about 
that.
    There has been some accommodation. But in terms of our 
costs, that has left us basically flat. Because as the costs 
have come down for individual investor usage, certain kinds of 
usage, their usage has simply escalated and gone up.
    And we are continuing to develop products such as, you 
know, real-time portfolio monitoring products, streaming quotes 
and so forth. As we introduce those, our costs are simply going 
to continue to escalate.
    And I may say that the costs of our brokers, ten thousand 
brokers at Schwab, who get market data delivered to them on a 
terminal, those costs have not decreased appreciably at all 
over the last several years.
    And somebody mentioned that as insignificant, but when you 
have ten thousand brokers, it's not an insignificant amount of 
money.
    Mr. Weldon. Mr. MacDonald, would you like to respond to 
that?
    Mr. MacDonald. I would. The innovation of the internet has 
changed the playing field pretty dramatically in the last year 
or two.
    So, the cost that we experience is not a fixed cost. It is 
a linear cost, and those costs are passed on to our customers.
    We, right now, represent one of the lowest price points for 
customers at eight bucks a trade.
    I gave you the example where, in order for you to obtain 
real-time quotes on an unlimited basis, you have to subscribe 
at $4 a month.
    Half my customers do less than one trade every 2 months. 
Those customers are, therefore, very disadvantaged.
    I have to absorb those costs, and I already produce one of 
the lowest price points in the industry.
    So, these costs to me are linear. They are not fixed. They 
go up with volume usage.
    I think Carrie makes a very good point that the other 
innovation that is then stifled is, as we start to deliver 
those products and services that our customers want so they can 
make more informed decisions--things like real-time charting, 
real-time portfolio analysis--they are significantly 
disadvantaged against the institutional investor.
    Chairman Baker. Mr. Weldon, I am sorry, your time has 
expired, sir.
    Mr. Weldon. Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Weldon.
    Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman. Mr. Chairman, I 
apologize for not being here. I had two committee meetings at 
the same time. Unfortunately, I missed this panel's testimony, 
and I apologize to you. I look forward to reading your 
testimony, and I don't have any questions at this time.
    Chairman Baker. Well, thank you, Mr. Bentsen.
    Mr. Fossella.
    Mr. Fossella. Thank you, Mr. Chairman, and good morning, 
everyone.
    Mr. Britz, you have testified that the New York Stock 
Exchange wishes to withdraw from the CTA, and I am curious as 
to what's the motivation. You touched upon it in your 
testimony, but, if you can expand upon that a little bit, but 
also what the implications that you see down the road from that 
decision, how it would work, how it would be structured.
    Mr. Britz. Well, the overriding implication, I think--and 
this is perhaps something that the entirety of the panel agrees 
on--is a more competitive environment.
    Congressman, we didn't wake up one day and decide to do 
this.
    The CTA, for whatever reason, has become a magnet for--
noise, for lack of a better word.
    When that noise comes from a particular broker, or even a 
couple of brokers, and it is obviously a competitive-
positioning kind of noise, we are all big boys and we deal with 
that.
    On the other hand, when the SEC begins to take that so 
seriously that it issues a concept release on market data, then 
it raises questions as to whether or not there is a problem 
with market data, and goes so far as to suggest, if not 
propose, possible solutions to the problem.
    Those solutions look like bandaids rather than a 
straightforward approach to the real or perceived problem, 
which is the consortia. There are lots of other reasons, not 
the least of which is what the SEC and the Justice Department 
have done recently vis a vis another consortium, the OPRA--
Price Reporting Authority.
    We became increasingly uncomfortable with our participation 
going forward in consortia like the CTA.
    Very clearly, if there ever was a reward for the New York 
Stock Exchange--and it is debatable as to whether there ever 
was--the risk/reward situation is way of out balance. That is 
what triggered our decision, and, when you understand that we 
can withdraw--and that is all we are suggesting, by the way. We 
are not so presumptuous as to suggest a market data landscape 
for the industry--we simply want to withdraw, and we know we 
can do that and continue to meet our statutory obligations 
exactly as written.
    That is really what is behind our position.
    Mr. Fossella. What do you envision--it seems like you have 
a problem with the construction. What are the implications as 
you see them?
    Mr. Britz. I think it might be as simple as the New York 
withdrawing and perhaps other markets continuing to band 
together in organizations like CT, in which case the world will 
hardly notice.
    Certainly, the end customer will never notice. The 
individual investor or the professional investor hitting the 
enter key and calling up a bid or an offer will have--will 
not----
    This will be completely invisible to them. I do think, as 
other commentators have suggested, you'll introduce 
competition.
    Someone raised the issue of value here.
    The New York will be able to contract for its own market 
data, which is a product we have great belief in.
    It can be decoupled or uncoupled from other markets. We can 
get directly and discreetly at the value of that data.
    So, I think there are a number of positive benefits. At 
worst, it will be invisible to the end user. At best, it will 
have positive benefits.
    Mr. Fossella. Two questions, because I know my time is 
limited, so I will throw one first at Mr. Putnam.
    In your testimony, you recommend a soft landing. I would 
like for you to expand a little bit as to where the airport is, 
for example, in your opinion, and how this soft landing would 
take place.
    Then, I am still a little confused, which is not abnormal, 
on this whole issue where one side says ``costs of market data 
have dropped dramatically and precipitously in decrease.'' The 
other side is saying ``we haven't seen the benefit of those 
lower costs and investors are still paying.''
    I am trying to figure out where the money is going, if I 
can do that.
    Mr. Putnam. We think the reason to take an incremental step 
is, in the interest of investor protection, you should----
    One, brokers need to know what the best bid and offer is 
across competing marketplaces in order to fulfill their best 
execution obligations.
    So, in order to guarantee or preserve that--I think I am 
agreeing certainly with what Bob is saying, is that keeping the 
exchanges staying on the current system is a way of 
guaranteeing that the best bid and offer is available.
    Last-sale information is a good idea. We introduce, at the 
same time, competition so that New York, ourselves, NASDAQ is 
free to go and contract with other vendors or to provide the 
data directly themselves.
    That will introduce competition into the system, and then 
we no longer have to keep the utility that was created in the 
1970s in place.
    Then, ultimately, that will get us to where we will start 
to competitive price market data.
    As far as commenting on the cost of the data and the cost 
to the end user, it is really not my area of the marketplace. 
We generate market data.
    Mr. Fossella. That second question was to sort of anybody 
else who has heard somebody else comment on fees going down, 
but costs either remaining the same or----
    Chairman Baker. If we can get a single panelist to respond 
to that.
    That wraps up your time, Mr. Fossella. Anybody choose to 
respond to this?
    Ms. Dwyer. I'd be happy to respond to it in case I was 
unclear before.
    Some of the fees have been reduced. There are--You know, 
you would have to see the fee schedule.
    They are very complicated schedules around this. An 
individual retail customer could choose to subscribe and pay a 
set fee, as was referred to by Randy.
    They can pay on a per-quote basis. There are a variety of 
ways of delivering data to customers.
    They are all priced differently. Some of those have, 
indeed, gone down quite dramatically over the last couple of 
years.
    But, at the same time, their quote consumption, has gone up 
geometrically and will continue to do so as people become more 
and more used to using real-time data.
    If they can have it, they want it. They don't want 20-
minute delayed quotes.
    The New York Stock Exchange used to be in the business of 
selling those.
    They realized several years ago that there is no value in 
that, and more and more investors are wanting to not look at 
what their portfolio was like 20 minutes ago, but what it is 
like right now, especially on a day like today, you can 
imagine.
    So, the cost of providing that even at a lower rate 
continues to escalate for a firm like ours.
    Mr. Fossella. I think I am a little more clear. Thank you 
very much.
    Chairman Baker. Thank you, Mr. Fossella.
    Ms. Jones.
    Ms. Jones. Like my colleagues, we--thank you, Mr. 
Chairman--we all have a number of other committee meetings, and 
we ran in and out.
    What I didn't hear--and I was trying to flip through your 
testimony--is what do they do in other parts of the world to 
deal with this subject matter?
    What kind of costs do they have? Is there anything going on 
somewhere else in the world that we ought to copy?
    Anyone can kind of respond to that. Did I miss that? We 
haven't talked about that? Good, OK.
    Mr. Britz. They actually do very similar things. I didn't 
bring it with me. I wish I had and would be happy to supply it 
to the subcommittee.
    The Federation of International Stock Exchanges--FIBV--
publishes a report on a great many subjects including market 
data, prices, and fees, and revenues and such.
    You have to look down that column of worldwide stock 
exchanges for quite a long time before you get to the CT/New 
York Stock Exchange level of price.
    It is in descending order by price. I should have said that 
straight away.
    The simple answer to your question is that they do very 
much like what we do here in the States.
    But, the data worldwide is dramatically more expensive than 
it is in the States.
    Ms. Dwyer. May I also add I think that would be a very 
interesting set of issues for the committee to look at.
    I think there are some markets that are moving toward a 
free model.
    I would point out here in the United States the ECNs which 
are the newest kind of stock market that we have. The majority, 
if not all, including one that Schwab created a few years ago, 
give away market data for free.
    We see it as advertising, like, when you walk into WalMart, 
you are not charged to look at the prices on the cereal boxes.
    We think it generates business to give it away for free, so 
we set it up that way, so that would also be something to 
factor in.
    Mr. MacDonald. With regard to the costs, one of the recent 
impositions on the industry--and it was a fairly expensive one 
to put in place--was the OATS System, which is basically an 
auditing system so that you know, from cradle to heaven, what 
has happened to a transaction.
    So, I would ask New York and NASDAQ to speak, that when 
they talk about cost allocation, I would suggest that we have a 
very robust, very expensive system to keep track of those 
things.
    Ms. Jones. What would you propose as an alternative to that 
system from cradle to--whatever the other word you used?
    Mr. MacDonald. I think the systems in place, I think, it is 
extremely robust.
    The point is simply there is a great auditing system for 
getting at the real cost of this.
    I think that the technology that we have arrived at here in 
the United States--we are very technologically proficient in 
these markets--one would argue that those costs should plummet 
as we become that technologically proficient.
    Mr. Knight. I would just confirm that our data also shows 
that the cost overseas, a place like London, for instance, is 
much higher than here in the United States for similar 
information.
    Ms. Jones. I yield back my time.
    Chairman Baker. Thank you, Ms. Jones.
    Mr. Shays.
    Mr. Shays. Thank you, Mr. Chairman.
    Mr. Chairman, as a new Member, I want to thank you for 
holding this hearing and also thank all our witnesses. It is 
very enlightening to me, and I would say just up front I will 
probably expose my ignorance, but, hopefully, by the time I 
have to make decisions I won't be.
    I am struck by the fact--I bring to the table a general 
view that, if you don't have competition, you have regulation.
    But, the last thing I like seeing is regulation, and I 
think there is a general consensus that change has to take 
place.
    My question to the panel is, basically, is this change 
going to have to take place through legislation, through some 
decisions by the SEC, or will you all be able to work it out 
among yourselves?
    Mr. MacDonald. I'll tackle that one. The SEC has authority 
in this case.
    We are supporting that there be a piece of legislation that 
Congress do mandate that there should be blue sky, that we 
understand better what the costs and the revenues are.
    If there are excess revenues, then what has happened to 
those excess revenues?
    Are they going to build in competitive systems that will 
compete with market participants?
    Mr. Shays. Mr. Britz, will you----
    Mr. Britz. Congressman, I am perhaps one of the few non-
lawyers in the room, so I won't comment on what has to happen 
from a legal----
    Mr. Shays. That makes you first among equals.
    Mr. Britz. I won't comment what needs to happen from a 
legal-process point of view. But, I would tell you that----
    Mr. Shays. I didn't ask what needs to happen. I need to 
know what the mechanism is. Is it going to be worked out 
amongst you?
    Mr. Britz. We will have shortly before the Securities and 
Exchange Commission a petition for the New York Stock Exchange 
to withdraw from the Consolidated Tape Association.
    I have no idea what they will do with that petition. They, 
in fact, may hold it pending the deliberations of the Seligman 
Committee, and so on.
    But, if they were to acknowledge that we have provided them 
or will have provided them with a plan that comports with all 
of our requirements vis a vis consolidation and disclosure, and 
certainly the existing CT/CQ plans allow participants to 
withdraw.
    Mr. Shays. This sounds like a more confusing answer than 
most lawyers would give me with regard to this.
    Mr. Britz. OK, sorry. If we withdraw from the CTA, it may 
be the spark that gets you to a more competitive environment.
    Mr. Shays. Thank you.
    Ms. Dwyer. Anybody else care to answer?
    Ms. Dwyer. Yes, I would just say I think even the Seligman 
Committee is the----
    Some of the things we are talking about would require 
legislation. Unfortunately, 25 years ago, when Congress looked 
at this issue, it crafted a statute that described the world as 
it was. So, when you go to undo something like that, quite 
often you are going to have to go in and look at the statute. I 
don't believe the parties are going to work it out among 
themselves.
    Mr. Shays. You say you don't?
    Ms. Dwyer. I don't believe so, no.
    Mr. Shays. Fair enough.
    Ms. Dwyer. It has been a long couple of years. The SEC 
didn't act on my petition in 1999, so I don't know what they 
are going to do with Bob's.
    There is a simple solution, and that is to continue a level 
of regulated disclosure of the NBBO and then have a free market 
and any other data above and beyond that depth of other kinds 
of prices.
    Mr. Shays. In fairness to disclosure, I happen to represent 
the 4th District. I am very proud that NASDAQ is there, so I 
don't want you guys to do anything to hurt NASDAQ, so we will 
have to----
    Ms. Dwyer. We are one of NASDAQ's best customers and one of 
the New York Stock Exchange's as well.
    Mr. Shays. Mr. Knight, how do you think this is going to be 
worked out?
    Mr. Knight. We believe that the Seligman Committee is very 
constructive in the approach it has taken. They are listening 
to all parties. We believe it is quite possible they will reach 
a solution here. I think, of course, as we all know, there has 
not been a chair named to the SEC at this point. I think that 
is part of the issue here, too, is the SEC's response to that.
    We would want to see what the new commission's views are in 
this area.
    The way the law is structured, in our view, is sufficiently 
flexible to deal with the situation, and we think, frankly, 
Congress should be very proud.
    If you look at Congressional history and the economic 
history of the United States, the securities laws have served 
us very well.
    Mr. Shays. Right, they have, but I do think--I will say, 
even with my preliminary look, I do believe that there will be 
some change, and the question is, what will that be?
    I would question, and let me give you the opportunity to 
answer it. Do you believe that there is discrimination in 
pricing? Do you think that takes place?
    Mr. Knight. No, in fact, we have a statutory obligation, 
which is policed by our board and by the SEC to avoid that.
    That is one of the reasons why our pricing is out on the 
website.
    That is one of the reasons we are heavily monitored in this 
area, so we don't believe we are----
    Mr. Shays. So, are you different than the New York Stock 
Exchange?
    Mr. Knight. Both are subject to the same rules.
    Mr. Shays. Could you use your mike, please? Use your mike.
    Mr. Britz. We have the same view. We are subject to the 
same regulatory regime as the----
    Mr. Shays. So, in the ten seconds I have left, someone on 
the other side tell me how it is discriminatory.
    Mr. MacDonald. Well, I would ask that both New York and 
NASDAQ, they have the power to do that--allow firms like online 
brokers--and I am including Merrill Lynch and all the others 
who are going online--to not have the discrimination of having 
a customer call a broker and the quote is free, but they go to 
the website, they get charged. That is discriminatory. That 
needs to change immediately. It is within their power. They 
should do it.
    Mr. Shays. I'll follow up in the next round.
    Chairman Baker. Thank you, Mr. Shays.
    Mr. Ford.
    Mr. Ford. Thank you, Mr. Chairman. I will be very brief. I 
want to just, sort of, one more time for the record: there are 
three--according to the notes we have been provided, there are 
three of the witnesses--and I was not here at the beginning of 
the testimony, so I do apologize. But, three of the witnesses 
serve on this advisory committee. Which three members?
    The three right there in the middle, so your advice to 
those of us on the committee, in a lot of ways, is to 
essentially ignore what that advisory committee would be doing, 
because it has reached the point where you--if I am 
mischaracterizing it--you have come today to suggest that we 
act in light of the fact--during the face of the fact that the 
advisory committee is meeting.
    I guess we have--those of us on the committee don't know a 
whole lot about the market.
    We read the Wall Street Journal, and we think we are really 
empowered and smart about what is going on.
    We are led to believe that some progress is being made on 
this committee--with this advisory committee. If that is not 
the case, it would be helpful for those of us on the committee.
    Two, in light of your participation with this committee, 
you are advising us to act even though the committee is in the 
process of trying to figure this out.
    Is that a fair characterization?
    Mr. Britz. Certainly not on behalf of the New York Stock 
Exchange, with the proviso I mentioned earlier that we would 
never presume to suggest what Congress ought and ought not to 
do.
    There are about 25 people around that table at the Seligman 
Committee, a broad cross-section of customers, providers, 
users, vendors, representatives of the public, and so on, who 
have been discussing this since October of last year.
    As Carrie said, the end-product is due around the middle of 
September of this year.
    I would not presume to give you advice as to wait or not 
wait, but it is inaccurate to reflect the New York Stock 
Exchange position that we are asking you to act before that 
committee.
    Mr. Knight. NASDAQ is a member of that----
    Ms. Dwyer. NASDAQ as well, yes. We were invited to come 
here today to help educate the subcommittee on the issues. So, 
at least, I did not come with any idea that we were 
recommending legislation.
    I think I am being realistic in answering the question that 
was posed to me by the other Member.
    Mr. Ford. Would you be opposed if we were to act prior to 
the advisory committee making a recommendation?
    Ms. Dwyer. No, I wouldn't oppose that at all, but I think 
that this subcommittee and the large committee need to get into 
this issue, understand it, and understand where the Seligman 
Committee is coming from. You may know very soon what the 
ultimate recommendations will be. I don't know that you would 
need to wait for a final report.
    Mr. Putnam. And, as Carrie pointed out earlier, it may take 
legislative action at the end of--when the committee produces a 
report.
    Certainly, this subcommittee educating itself is going to 
be helpful if we are going to get something done quickly if 
that legislative action is required.
    Mr. Ford. Thank you. I know that this subcommittee, and 
certainly many on this subcommittee have--and I am new to the 
subcommittee, obviously a newly created one. I often believe 
that the marketplace can figure out a lot of these problems.
    So, consistent with that, I hope that we don't pick and 
choose when we want the market to act and when we want to act.
    I guess my last question sort of deals with who actually--
and we have all of these questions they provided us, and some 
are good, and some are not so good.
    One that sort of stands out is the sort of the ownership 
aspect of this data.
    As one who is trying to be educated here today, in the eyes 
of those on the committee--those who have testified--who 
actually owns this data?
    I mean, it reminds me a little bit of what a lot of the 
people in my district do with Napster.
    Obviously, there are some steps being taken now to 
correct--to remedy that and to ensure that everyone gets their 
fair share of the pie.
    In the eyes of those testifying today, who actually owns 
the data?
    Would you say those who compile it own it, those who access 
it own it, those who own it need it, or those who know more 
about it own it?
    I am just curious.
    Mr. Britz. Congressman, again, as a non-lawyer, I am not 
qualified to answer that question. I would quote Professor 
Seligman.
    Mr. Ford. I am a lawyer, and I know I am not qualified to 
answer the question.
    So, any light you could shed would be helpful.
    Mr. Britz. Professor Seligman thinks it is a great article 
for a law review and not much more than that. I don't know who 
owns it, to be perfectly honest with you.
    I know that the New York Stock Exchange and other markets 
invest great sums of money to produce it. I know that the New 
York Stock Exchange has been charging for market data for 130 
years.
    I know that 34 Act as it exists today talks about terms 
that are fair and reasonable, and not unreasonable but 
discriminatory, and clearly, if not explicitly, implicitly 
refers to the cost as being part of those terms.
    So, there is a great deal of history. One of the committee 
members at our last meeting said it is an irrelevant question. 
It doesn't matter who owns it. It is important to produce it.
    There is a cost associated with producing it, and you ought 
to be able to recoup that cost.
    Mr. Bell. Mr. Ford, if I could just speak up very quickly, 
basically our point of view is that these----
    Chairman Baker. Pull the mike up just a little closer.
    Mr. Bell. All right. This market information, we believe, 
is really in the public's ownership.
    We believe these are facts. We think we are bringing 
together a buyer and a seller. The result of that information 
is market data, and it should be available to the public.
    Chairman Baker. Mr. Ford, you've exceeded your time.
    Mr. Ford. Thank you for letting me go over a little bit, 
Mr. Chairman.
    Chairman Baker. Yes, sir, Mr. Ford. To not inconvenience 
our panel unnecessarily, we have a vote with about--I 
understand two votes with about six minutes left on the first.
    It would be my intent to recess for approximately 15 
minutes.
    We have at least three, maybe four, Members who would like 
to ask another question. I would point out to those Members, 
when I return, we will convene.
    So, if you will timely return Mr. Crowley, Mr. Barr, Mr. 
Shays, I will recognize who is here first so we can move this 
meeting along a little better.
    We stand in recess for at least 15 minutes.
    [Recess.]
    Chairman Baker. If I could ask the hearing to come to order 
and our witnesses to take their seats, please.
    We will have other Members returning momentarily. I would 
recognize Mr. Bentsen at this time.
    Mr. Bentsen. Thank you, Mr. Chairman. I have a couple of 
questions.
    As I read through the testimony and try and grasp the 
issue, I want to pose a question to you, and tell me whether I 
am right or wrong.
    If I am right, then I assume I will get a variety of 
answers.
    But, it would appear that the issue here, at least in part, 
on the fee structure that Ameritrade and Schwab, and other 
primarily online or discount-brokerage firms, are concerned 
about is, as more of your clients are directly trading 
themselves, they are incurring this cost on a per-capita basis, 
as opposed to someone going through a traditional brokerage 
operation where they would call up Merrill Lynch or whoever.
    That cost is maybe passed on or not, but, also, because 
Merrill is able to absorb that cost through the 2000 terminals 
they have hooked up around the country and disseminate that to 
their brokerage operations, they carry that cost.
    I guess my question is sort of two-part. I mean, one, 
doesn't a Merrill or a traditional brokerage operation--I mean, 
they incur that cost, and they are able to spread it out. But, 
they are also incurring a lot of overhead costs that the online 
brokerage is not incurring. So, doesn't it all come out in the 
wash in that respect?
    Second, isn't that just part of the disintermediation that 
is occurring where, I mean, there are some costs associated 
with it, that nobody is getting anything for free here. It is 
just a business plan between what the online brokerage has and 
what the traditional brokerage has. In fact, as we see more of 
the traditional brokerage houses go to an online subsidiary or 
component, they are sort of affected by both.
    So, is that a correct analysis of what is going on?
    If it is, I am not sure that I understand where the equity 
is in your argument.
    The second part, I think I do have a different feeling, and 
that is that, with the disintermediation that is going on, the 
question that these changes do have certain exemptions under 
the law based on the 75 amendments to the Act then does raise 
some questions and how they raise their fees, and how they 
allocate.
    So, I understand that equity argument, but the first part I 
am not sure I see where your equity is.
    Ms. Dwyer. Well--so, let me say first of all that a 
statement was made earlier that it is primarily the online 
firms that are carrying this issue.
    We have been the noisiest for sure, because the effect has 
been so immediate and sharp for us.
    But, Merrill Lynch, Morgan Stanley, Smith Barney are all 
represented on the Seligman Committee.
    There has been consensus with those firms as well that a 
real hard look needs to take place at the governance and at the 
level of costs that they absorb, too.
    So, it is not simply an online issue. It will be more of an 
issue for them as they transfer more of their business to 
online.
    I don't think--you know, if you understood Schwab's 
business, we have 350 branches. We have the same kind of 
overhead that a firm like Merrill Lynch would have.
    We have, to support our internet business, a tremendous 
investment in infrastructure.
    I think we have the largest mainframe computer system in 
the world, possibly, certainly the largest transactional one.
    So, there is a tremendous--I don't think there is a huge 
difference in the cost of doing the brokerage business even 
though our customers may choose to access us sometimes over the 
internet.
    The issue about the cost of quotation information, the 
market data, is that it is differentially priced depending on 
how the customer chooses to access the data.
    If a customer chooses to call his broker at Merrill----
    Mr. Bentsen. Let me interrupt you for a second. I 
understand that.
    But, the point is that, through a discount brokerage 
operation where you offer a much more discounted price than the 
traditional brokerage operation, there are some underlying 
costs that have to be assumed somewhere.
    Doesn't the client ultimately have to assume those costs if 
they are going to go directly as opposed to going through----
    Ms. Dwyer. The difference is that the costs are being set 
by the exchange. The exchange has no incremental costs or even 
interest in how the quote is supplied. It doesn't affect the 
exchange in any way, shape, or form. There is no reason why a 
customer who calls Merrill to get a quote is charged nothing.
    The firm absorbs a per-terminal cost. Our firm absorbs 
10,000 terminal costs.
    If a customer chooses to access us over the internet, he or 
she pays on a usage basis.
    There is no reason why the exchange, as the setter of those 
costs and the entity that gets the revenues--why there should 
be any difference there.
    That is the issue. It's not the firm's business model so 
much as the fact that the exchange has no incremental cost once 
it provides the quote.
    The quote is distributed over our network or over 
Merrill's.
    We have the cost of creating that network and supplying it 
to the customer, but the pricing of the data itself is 
different.
    Does that answer your question?
    Mr. Bentsen. I guess I still don't--I would like to hear 
from the exchanges, but I still don't understand.
    Is the price for access to the data different between you 
as an individual and--when you get it off of your home computer 
terminal and the price that Schwab pays when it gets it off its 
terminal in Schwab San Francisco, or wherever?
    Ms. Dwyer. Well, we may not charge the customer at all.
    Mr. Bentsen. But I mean the price between the computer 
that----
    Ms. Dwyer. Yes. Yes, it is a different.
    Mr. Bentsen. There is a different price?
    Ms. Dwyer. It is a different fee schedule based on the 
usage.
    One of the issues that many of us have had is there are 
different usage models and different fees associated with how 
you use the data.
    We think that should be blind to the exchange, because it 
doesn't raise the exchange's cost to provide us with a data 
port or a per quote, or whether we provide per-quote stream to 
our customers or to provide to a broker's terminal.
    There should be no difference in that pricing, and yet the 
exchanges have over the years developed pricing models 
depending on our usage.
    So, that is really the issue rather than what the customer 
pays or doesn't pay, is that clear?
    Mr. Bentsen. Sort of.
    Mr. Baker. Yes, Mr. Britz, could you respond?
    Mr. Britz. I think your analysis is incredibly perceptive. 
You synthesized the discussion better than I could have myself.
    The notion that there is discrimination as between online 
and so-called full-line traditional broker-dealer is actually 
quite silly.
    For example, Merrill Lynch, when I call them up and ask 
them for a quotation, is paying for the display device that 
enables them to give me that quotation in the first place.
    Just to put this in some context, that display device 
revenue is the overwhelming portion of the New York Stock 
Exchange's revenue and market data north of 85 percent.
    Merrill Lynch non-online firm, in general, is the single 
largest payer for market data.
    So, I think you need to understand that context and the 
notion that prices are escalating in a linear way belies the 
fact that there is an enterprise industry-wide cap, at least 
within the CTA organization, of one-half-a-million dollars a 
month.
    Mr. Bell. Mr. Congressman, if I could just give you my 
perspective as a vendor.
    One of the things we brought up earlier was the fact that 
the individual investor can go to a website that is being 
offered by----
    Mr. Shays. Excuse me, sir. I have a real hard time hearing, 
and I know you have something important to say. You talk away 
from the mike. I need you to talk into it.
    Mr. Bell. I'm sorry. I was just trying to give you my 
perspective as far as a vendor's concern.
    We are trying to innovate in this market by providing all 
kinds of monitor screens and real-time information to our 
users.
    What concerns us is that we now have competition from the 
exchanges who are also putting this real-time information on 
their websites.
    The difference is that we have to choose as a vendor to 
either absorb the cost of us putting those real-time prices up 
on those--our analytics or passing them on to our clients, 
which eventually then gets passed on, we believe, to the 
individual investors.
    So, now, we are in a competition situation where the 
exchanges are displaying the same information that they get for 
free essentially versus what we are paying for.
    Mr. Bentsen. I would just say, Mr. Chairman, you all are an 
intermediary of information.
    I am familiar with--or used to be familiar with your 
product. It has probably changed a thousand times since then.
    But, that seems to me a somewhat different issue, but a 
real issue, and it is something that the subcommittee ought to 
take a look at.
    Thank you, Mr. Chairman.
    Mr. MacDonald. Mr. Bentsen, this is Randy MacDonald. In my 
mind, it is very simple.
    Merrill Lynch has 14,000 salesmen out there, and they are 
moving to online. They are going to have the same exact problem 
that we have, but let me demonstrate my point by extreme.
    Ninety-eight percent of all of our trades happen in an 
automated fashion.
    That is not the case for Merrill Lynch. We both have 
overhead, so the issue for me is we are impeding progress here. 
Innovation is being impeded to the disadvantage of the 
individual investor.
    The fact that I can call Merrill Lynch rep and get the 
quote for free, whereas if I go onto an Ameritrade website I 
have to pay, is discriminatory.
    It is arbitrary and capricious on the part of the SROs, and 
it needs to change.
    They have the power to change it right now, and they 
refuse.
    Chairman Baker. Thank you, Mr. MacDonald.
    Mr. Shays.
    Mr. Shays. I really appreciate my colleague from Texas 
asking the question he did, because that is where I ended up 
with the discriminatory.
    The only example I heard was the issue of calling up a 
broker and not having to pay a fee.
    I did think it is slightly different, because my sense is 
that, when I deal with a broker, I am paying for other costs.
    I would say to you, Mr. MacDonald, that I don't watch TV, 
because I don't like advertisements. But, if I knew when your 
advertisements were on, I would watch TV just for the 
advertisements. I love them.
    Mr. MacDonald. Thank you.
    Mr. Shays. And I would think--but, what I get a sense of is 
that, if I deal through you, my costs are less; if I deal 
through a broker, my costs are higher.
    So, I don't want to call, and my sense is that I will get 
the information the way I want when I want instead of having to 
go through someone who tells me something.
    So, I guess--tell me another discriminatory pricing.
    Mr. MacDonald. Well, the other one I mentioned was the 
actual subscription agreement.
    If you and Mr. Shays want to get unlimited real-time 
quotes, I have to have you sign a subscription agreement. We 
have attempted to do that through the web through a click-
through method that has been--the process of which is now being 
rejected again.
    We also are being rejected, because we have the ability for 
people in multiple locations to sign on to their account, so 
that my wife can be on our account looking up news, weather, 
sports, her net worth, account, and so forth.
    I can be on the account at the same time trading, and the 
exchange has told us that that cannot happen.
    I say, well, the telephone is the exact same thing. If my 
wife calls up a broker at Merrill Lynch and I am also on the 
phone from Merrill Lynch, it is free, and you're telling me 
that--again, it is discriminatory in my mind. Just because the 
device is the internet versus the telephone, there are 
different rules.
    I am not getting it. Now, on the issue of unbundled 
execution, I think you are 100-percent correct.
    The cost structure is very different, because we represent 
an unbundled execution.
    We have given our customers the choice of just an 
execution.
    You don't have to pay for research. We are not in the 
advice game, so that is the big difference in pricing.
    That is what we have always represented is choice for the 
consumer.
    We are having a very difficult time right now dealing with 
these SROs.
    Mr. Shays. What I am trying to wrestle with is my general 
concept of a monopoly somehow is regulated.
    What is the protection to the public that the fees that you 
charge will be fair, reasonable, and nondiscriminatory and 
consistent with your obligations under the exchange?
    What protects me as a----
    Mr. MacDonald. Well, one thing I have to do----
    Mr. Shays. I'm not asking you. I'm sorry, I meant the 
exchanges.
    Mr. MacDonald. I'm sorry.
    Mr. Britz. Congressman, the process that I described before 
is one that begins with either an idea at the SRO level or the 
customer bringing an idea to us.
    It is then vetted with a wide variety of customers, either 
individually or through trade associations, again, up to our 
board to the extent it continues to have some traction, finally 
to the SEC for public comment, and the ultimate disposition one 
way or the other with the SEC.
    Keep in mind, even at our board level, it is 50 percent 
chief executive officers of member firms--the payers.
    Mr. Shays. Does the public get to see all your data on 
costs?
    Mr. Britz. Sure they do. That data is filed with the 
Securities and Exchange Commission and available for public 
viewing.
    Mr. Knight. We have the same process, and we are subject to 
the same discovery, if you will, by the SEC.
    The process is a public process where public comment can be 
involved and where the board structure----
    It is important to understand that these entities--
exchanges--have a board structure unlike any other in the 
American corporate world.
    We are required by statute to have a certain composition 
that reflects a non-industry interest in our market that 
reflects the public interest.
    Those boards must approve this knowing very well their 
legal obligations here to the public to protect them. Then, and 
only then, will it go to the SEC, where they go through a 
similar process of asking these questions and allowing the 
public to comment again.
    Ms. Dwyer. I always hate to be in a position of 
contradicting my regulators.
    But, let me just give you an example of how this process 
doesn't always work.
    Mr. Shays. And who are you referring to as your regulators?
    Ms. Dwyer. My primary regulators are the NASDAQ and the New 
York Stock Exchange.
    A couple of years ago, our customer usage fee was doubled 
in a filing that was effective on filing, perfectly legal, but 
does not provide any opportunity for notice of public comment.
    Mr. Shays. The notice of filing takes effect----
    Ms. Dwyer. The filing takes effect on filing, and your only 
right is to get the SEC to abrogate it if you feel that it 
wasn't properly effected.
    Mr. Shays. And does it go back to the fees that were 
already paid, or does it just start?
    Ms. Dwyer. Well, if it is abrogated. So, I will finish the 
example.
    The fees were doubled, no notice. In fact, we were very 
surprised. We were in the middle of a negotiation with the 
exchange at the time, and we saw it in the Federal Register 
after it had been filed.
    We asked the SEC to abrogate it, because we felt that the 
multiple was huge--the effect on us was huge, there should be 
public comment.
    The exchange withdrew it and instituted the fee for awhile 
as a pilot program.
    SEC did not abrogate it. There was no public notice and 
comment, and the fee stayed.
    Now, subsequent negotiations got those fees down, and they 
were properly filed.
    We have gone on with a lower rate structure, but there are 
other pilots out there that don't go through the process----
    Mr. Shays. Mr. Chairman, could I just have someone explain 
to me why it is--do you mind if I----
    Chairman Baker. No, please.
    Mr. Shays. Explain to a new Member here, when you say a 
pilot project, I don't understand why it is a pilot project. 
You said it ultimately became a pilot project.
    Ms. Dwyer. Pilots--this is something we touched on in our 
testimony.
    Under the CTA plan, the exchanges are allowed to conduct 
pilot programs to test pricing models. They do not go through 
the rule--they are not considered rules or changes to the 
plans.
    Mr. Shays. No, I understand. What I don't understand is, if 
it is a pilot project, it only affects certain of its customers 
or anyone?
    Ms. Dwyer. Well, yes. For instance, Schwab had a pilot 
program for 7 years with a pricing structure with one of the 
markets. Schwab was, to my knowledge, the only participant in 
that program
    Mr. Shays. Maybe in the next round. I would just like to 
understand what protects each of the so-called--I call you a 
customer--each of the customers from knowing that they have the 
best price that their competition has and that there are not 
special arrangements for particular groups.
    Chairman Baker. Thank you, Mr. Shays. I'll follow up on 
that, too, to some extent.
    Ms. Dwyer, would it be your opinion that the result of the 
pilots is to artificially distort the pricing mechanisms at 
least momentarily or for some duration while the pilot is 
operative?
    Ms. Dwyer. Well, I think that is so. If the pilot cannot be 
taken advantage of by all, if it is not well-known, absolutely. 
Then, as I said in my testimony, we were beneficiaries of one. 
We enjoyed it very much.
    But, you know, it leads you to wonder what else is out 
there and leads you to think there should be more transparency 
in the system.
    Chairman Baker. Let me take a slightly different tack from 
my earlier line of questioning, particularly for Ms. Dwyer and 
Mr. Putnam.
    The exchanges have developed extensive infrastructure and 
spent a lot of money to facilitate transactional activity. The 
benefit or sideline of that is the data which comes from those 
transactions, which obviously has some value.
    But, without the data, there wouldn't be transactions for 
anybody, because I am not going to go out and buy X shares of 
whatever depending on what the price is.
    On the one hand, we have an unusual problem the SEC has 
created, and the Congress by law, a requirement to have a 
consolidated source for information to facilitate economic 
transactions which should be neutral and blind to all 
participants operated at a fair market cost to incentivize 
these transactions.
    It would appear, coming at this issue from a different 
direction, that it is much like having a public utility who is 
told you have to deliver the electrical service, do it in non-
profitable areas as well as profitable areas, to make sure all 
people have access, do it in a fair, reasonable, and 
nondiscriminatory standard. And now somebody wants to come in 
and take certain parts of that utility's operation that are 
profitable and share in the revenue stream.
    Am I missing it, or what is the distinction there between 
what you are asking for and what the exchanges have 
historically done and provided?
    Mr. Putnam. I think that your example of public utilities 
is exactly the problem.
    The way the system works there isn't competition among 
market centers and providers of data, so that we can get at a 
fair price----
    Chairman Baker. But, when you deregulate public utilities, 
all too often in some States I have heard about, the 
consequences may not be necessarily beneficial, because you 
don't have an infrastructure that is properly funded that can 
provide market integrity with the delivery of the product.
    I have wrestled with this privately before our hearing. How 
do we fix this?
    You can't blow up the public utility. We need them. Whether 
you like them or not, you've got to have them if you want to 
have a market.
    I have heard you say--I heard Ms. Dwyer say a specific 
recommendation for action.
    I have heard you say it ought to be incremental, but give 
me an increment or two.
    Mr. Putnam. Well, it gets back to our view, which is 
different than the over-the-counter marketplace or the New York 
Stock Exchange's view, at least my perception of what their 
view is.
    We believe that the market data belongs to the customer, 
actually, the one who started by placing an order in the 
system.
    Therefore, we don't charge for that data. What we do charge 
for is the facility that we operate where we execute orders 
when customers want to interact with those bids and offers.
    So, we charge execution fees. There is, obviously, a cost 
for us to produce that market data.
    We just absorb it through transaction fees when customers 
come to buy and sell.
    Chairman Baker. I can understand that. Instead of saying 
here is your charge for market data, here is your charge for 
transaction fees, you take market data off the shelf and say 
here is your enhanced charge for transaction fees which covers 
the cost of the market data.
    Everybody does that. You've got to make money in the 
business, or else you are not going to do it.
    I don't have a problem with profit. That is not what is 
bothering me.
    The only thing that is a problem for me is if there is, in 
your view, a monopoly which now governs the issuance of this 
market data, which then leads to transactions off which 
everyone prospers.
    Is there a mechanism you can suggest to provide alternate 
competition that is not disruptive to the current system, 
thereby putting it all in jeopardy?
    In other words, we don't want to shoot the guys. We want to 
provide another racehorse in the race to see if they can do it 
better or more efficiently, and thereby reduce cost as a result 
of competition.
    I think that is what I have heard you say.
    Mr. Putnam. We've suggested that we maintain the Government 
utility consolidator, at the same time allowing for competitors 
to come in the system.
    The reason for maintaining the current utility is just to 
guarantee that the baseline of information, a bid and offer, 
and a last-sale is available.
    Chairman Baker. I agree with you on that. We're there. Next 
step? How do we get to that competition you are talking about?
    Mr. Putnam. The next step is--one suggestion has been to 
create a category of consolidators. So, you go to the SEC and 
you say, ``I want to be a consolidator of information. Here is 
the system that I am going to operate. I have adequate capacity 
and reliability, and I am signing up as a consolidator,'' just 
like we do as an ECN today.
    We sign up as an alternative marketplace, and we have to 
meet certain standards.
    Then, we go in the business of providing that data. I think 
New York would like to be one of those.
    We think that they should have the right to be one of 
those.
    At that point, market forces will start to decide on what 
price the data is.
    Chairman Baker. May I ask Mr. Britz on that point? Does he 
want to be one?
    Mr. Britz. No, Congressman. I think we are unlikely to be a 
consolidator.
    But, we are not against the notion of competing 
consolidators at all.
    Mr. Putnam. And I guess they would like to provide their 
own information at that point.
    We also think that there is some value--not some value--a 
big value in allowing market-data providers who want to be non-
consolidators.
    That example would be Yahoo, where they are giving away 
certain data for free, but they don't have to provide 
consolidated data.
    With adequate disclosure, maybe the customer that Randy was 
talking about that trades once every 1\1/2\ months decides that 
that is good enough for them, and they don't want to go the 
extra cost of getting the superior data and that that is 
adequate for them to look at.
    We think that having the second category is another way of 
introducing some competition in the process.
    Chairman Baker. Not to go on at length, let me just request 
from any participant if there is a suggestion for specific 
statutory modifications that you think facilitate additional 
transparency, or the consolidator approach which Mr. Britz has 
said there to which there is little objection if properly done.
    Let's explore that avenue. It would appear to me that what 
every member is about is making sure any participant in the 
marketplace has access to real-time information at the lowest 
cost possible. That benefits everybody, because that means you 
are more likely to have transactions that occur, and everybody 
goes away happy.
    At the moment, it appears there may be some inhibitions to 
all parties having access to real-time information at what they 
perceive to be an unfair cost basis.
    Now, I don't know that is the case, because I don't know 
what the cost is, which gets me back to my eventual starting 
point.
    Mr. Bentsen, did you want another round?
    Mr. Bentsen. Well, Mr. Chairman, if I could just for a 
second.
    Yes, I want to echo what you said, because, Mr. MacDonald, 
you made the comment that your clients are paying for it and 
other clients aren't paying for it.
    Ms. Dwyer has said there is a different fee structure, and 
I guess, you know, that is something we are going to have to 
learn--I'm going to have to look into, because I don't know all 
the details.
    But, somebody is paying for it. Whether it is being passed 
on directly to online purchasers versus full-line purchasers, 
somebody is paying for it somewhere, because the information is 
not free.
    I do agree that we are sort of entering this new world of 
technological innovation we've got.
    We have this tremendous market disintermediation in all 
sectors of the economy just about, not just here in the power 
sector and elsewhere.
    But, I am not yet convinced, and maybe I will be, that 
there is still a service that exchanges that provide, to the 
extent that Mr. Putnam and his colleagues are creating sort of 
sub-exchanges, I guess, if I understand your business.
    There still is a question, or a desire, I think, for market 
integrity that does, at least in theory, and I think generally 
comes along with exchanges, and also the liquidity that is 
provided in market-makers, and all of that.
    There is a price associated with that, so I guess what we 
have to get to is exactly how that floats out at the end of the 
day.
    I mean, again, you all are able to offer trades at $8 a 
bundle versus $80 a bundle, or whatever the going rate is, and 
so the other costs have to be made up.
    But, I think actually this is a pretty fascinating issue, I 
have to tell you, the more I listen to it.
    Let me ask, Mr. Bell, you talked about in your testimony 
the MSRB's proposal for the muni bond repository of information 
and the fact that this is a regulatory imposition upon the 
market to provide this. Wasn't that as a result of concerns--as 
we know, municipal bonds are not under the Securities and 
Exchange Act--are not subject to SEC registration, nor should 
they be, in my opinion.
    But, there was a concern that, even with the broad 
institutional and retail market--secondary market for municipal 
securities, that there wasn't sufficient price transparency.
    So, as sort of a compromise, this idea of putting together 
this information repository would provide greater price 
transparency.
    Is that a fair tradeoff, or, in your testimony, you're 
saying that is a concern that now the Government is imposing it 
here and saying provide this information free of charge to 
everybody?
    Mr. Bell. Well, I think it is a good question. I think that 
the municipal markets are a very different market from, let's 
say, the equity markets in the sense that----
    For example, for one municipal bond, Bloomberg, collects 40 
different pieces of data. You need all those 40 pieces of data, 
we believe, in order to accurately determine whether the price 
is right or not--whether it is a fair price.
    As a NRM-Serv--and I think there's five different NRM-
Servs--we take a proactive approach toward getting all this 
information.
    Other NRM-Servs seem to take a more reactive approach. As a 
NRM-Serv, all the issuers in the banks are required to provide 
documentation to the NRM-Servs at some reasonable timeframe.
    So, you can sit back and get that piece of paper that says 
three weeks ago there was a refunding on this bond. As a result 
of this funding, it has now gone from, let's say, Double A to 
Triple A in its rating. Obviously, if the rating changes, goes 
up, it usually becomes more valuable.
    So, what we tend to do is we say, ``Look, we know that this 
is something that's happening. We're going to call up the 
issuer ourselves.''
    We bear the costs ourselves, and we bear the cost of the 
people. We have about 15, 16 people that do this on a daily 
basis.
    We get that information before the piece of paper comes 
out, and we put that out on the system.
    So, even though eventually the data will all be the same 
and eventually you will be able to determine if that price is 
fair once that official notice comes out, if you take more of a 
proactive approach, you have added value to that information on 
that bond. As such, if you have that information, you can then 
determine quickly whether that price is fair or not.
    So, it tends to be, I think--you know, the approach the 
NRM-Servs take are different. As a result, if we were to have 
to pool all that information and make it available on a common 
basis, then the value-added would obviously--you know, we would 
be giving our value-added away.
    Mr. Bentsen. So your concern as an information provider is 
that you would have to give away some of your property or some 
of your intellectual property that is associated with that, not 
the--I am not familiar with the acronym yet--but not the 
repository--the idea of the repository itself or the fact that 
the market-makers have to provide the information voluntarily.
    Your concern is that other providers of information such as 
Bloombergs or others might later have to provide that and that 
would undercut your own business?
    Mr. Bell. Well, I mean, in a simple example, if we are 
taking a proactive approach, then the person--the NRM-Serv who 
is taking a reactive approach could just sit back and wait for 
us to tell them, ``Hey, this is refunded.''
    So, they don't have to spend the money of having those 
people call up and find out if it has happened three weeks 
before it actually becomes official by a piece of paper.
    So, we are actually then giving our value to our 
competitors, if you will.
    Chairman Baker. Can I jump to Mr. Shays? Mr. Shays.
    Mr. Shays. I find this absolutely fascinating. You referred 
to, the SRO says, your competitors. But, they are also your 
service providers and, in some cases, they are your competitor. 
But, isn't it true, also, that some of you sit on their board?
    Ms. Dwyer. Yes.
    Mr. Shays. I mean, it is really not all that kind of, you 
know, precise and clean.
    Ms. Dwyer. Highly incestuous.
    Mr. Shays. It is. No, I think--I am saying that is the way 
it has to work. But, in a way--are you in a sense making an 
argument to us that you are like the post office, you have to 
provide universal service and that your potential people you 
provide services compete with you and will take--will cream--
you know, go after what is most profitable?
    Mr. Britz. No, Congressman, I was making no such argument.
    You are absolutely right. Our board room is an interesting 
place.
    Sitting around that board table are our owners, our 
customers, and our competitors.
    Mr. Shays. In that sense, it is like the post office, 
because FedEx and UPS are helping to make decisions on why the 
post office prices itself.
    Mr. Britz. But, because of the regime that we have today--
and this I think is what Jerry was referring to--markets 
compete today--not only markets--markets compete with broker-
dealers.
    We are a competitor of Schwab and others on a certain 
level.
    Markets compete in lots of arenas, certainly for execution, 
but because of the regulatory regime we have today vis a vis 
the Consolidated Tape Association, they don't compete in terms 
of distributing market information.
    Mr. Shays. But what I hear on the other side is they are 
basically fearing that you are using the fees to subsidize 
other parts of your business that compete with them.
    You know, that is a valid concern if it is true.
    Mr. Britz. I think if you ask them they will not make that 
suggestion about the New York Stock Exchange.
    I think there may be examples of other markets that may be 
doing that. They can't make that suggestion vis a vis the New 
York Stock Exchange.
    Mr. Shays. Mr. Knight, so basically they are making it 
against you?
    Mr. Knight. I can't imagine that they are complaining about 
a dollar a customer fee or the fact that we are providing 
information for free, although, when we applied to the SEC to 
provide information for free on our website.
    Mr. Shays. That's a dollar a month?
    Mr. Knight. Right.
    Mr. Shays. That's not a dollar a transaction?
    Mr. Knight. No, in fact it is an unlimited amount of 
transactions for an individual.
    And many of these were delivered by pilot programs, but I 
think the important point here is that we feel there could be 
more competition put into the system.
    We and the New York Stock Exchange and Archipelago are all 
suggesting different ways to do that.
    But, they share the common characteristic of eliminating 
the current single processor and have multiple consolidators.
    We are willing to live with that system, and we think it 
would bring even more competition.
    But, right now, the oversight by the SEC, the oversight by 
our boards, and the nature of the current process does give the 
public a large measure of protection.
    Is it perfect? No. Can it be improved? Yes. Are we on a 
road to improvement? I believe we are. We will know more in a 
few months.
    Mr. Britz. Congressman, if I may, there are some regional 
stock exchanges who pay for order flow, make a payment to a 
broker-dealer.
    Some broker-dealers who are sitting at this table receive 
such payments, and they are on record as having said that they 
are using excess market-data fees to fund at least a portion of 
those payments.
    I would go back to a statement I made earlier, some 
markets--the percentage of market-data revenues to total 
revenues is enormous relative to the New York Stock Exchange.
    So, perhaps that is the reference.
    Ms. Dwyer. Can I just add a couple of things, or are we out 
of time?
    Chairman Baker. Certainly.
    Ms. Dwyer. I wanted to say that the NASDAQ fees, for 
example, there is a dollar a month rate that you can get if you 
want to subscribe, if you are going to use a lot of quotes.
    There is also per-quote fee of one-half a cent, but that is 
on pilot.
    It is going to revert back without change to a penny on May 
31st.
    This additional----
    Mr. Shays. So then it will only be service?
    Ms. Dwyer. Pardon?
    Mr. Shays. It will revert back to service?
    Ms. Dwyer. Unless somebody extends the pilot, it will 
revert back to a higher rate. There's also, if you want----
    Mr. Shays. I just need to understand, a higher per-
transaction rate?
    Ms. Dwyer. Per quote. Yes, per quote. There is also, if you 
want Level 2 data, which is the good data on the NASDAQ 
market--it gives you more depth of market--you need that in a 
decimalized world--that is $10 a month per customer. That is 
also on a pilot that is scheduled to revert back to $50 a month 
if it is not changed.
    So, yes, the fees have come down quite a lot, but, you 
know, this is why we concentrate on the structure of the 
setting of the fees, because it is an unstable situation.
    Mr. Shays. Well, you be nice to my NASDAQ.
    Chairman Baker. If I may suggest, just as a summation for 
the subcommittee's purpose, we would very much appreciate 
specific recommendations with regard to statutory modifications 
anyone might think appropriate.
    There appears to be some agreement, surprisingly, on the 
multiple-consolidator approach. I am sure there are variations 
on how that is achieved. We would like to understand that more 
fully.
    I think you can tell from the number of Members who 
participated and the duration of this hearing, which many would 
not have expected to last quite this long, that there is 
considerable interest, because we believe that the markets are 
dynamic, they are growing, and that there are significant new 
numbers of investors who are now investing the $200 a month, 
perhaps, toward the first home, the college education, or that 
retirement one day.
    They are people who are brand new to this market, and, 
since 1995, the boom in online investors is nothing short of 
staggering.
    There is great sensitivity, therefore, by the Members of 
Congress to ensure that the system works efficiently and 
fairly.
    We need to better understand how this process is working, 
because the basis on which these investment decisions are made 
is information.
    We recognize the value and timeliness of that information.
    We certainly want to recognize that the exchanges have done 
an extraordinary job with huge investment in providing this 
service.
    But, we are bumping up against a changed economy that does 
make relevant review of these proposals, I think, very timely.
    To that end, Members may have additional questions they may 
wish to submit for the record. We will leave the hearing record 
open for an additional 30 days. Certainly, we appreciate any 
additional comments you would like to make, as well, for the 
record.
    I appreciate your patience, your participation, and our 
hearing is adjourned. Thank you.
    [Whereupon, at 12:56 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             March 14, 2001

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