[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
MARKET DATA: IMPLICATIONS TO INVESTORS
=======================================================================
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
__________
JULY 26, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-40
U.S. GOVERNMENT PRINTING OFFICE
74-410 WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice Chair BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio KEN BENTSEN, Texas
BOB BARR, Georgia JAMES H. MALONEY, Connecticut
SUE W. KELLY, New York DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
CHRISTOPHER COX, California MAX SANDLIN, Texas
DAVE WELDON, Florida GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
BOB RILEY, Alabama FRANK MASCARA, Pennsylvania
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois JANICE D. SCHAKOWSKY, Illinois
WALTER B. JONES, North Carolina DENNIS MOORE, Kansas
DOUG OSE, California CHARLES A. GONZALEZ, Texas
JUDY BIGGERT, Illinois STEPHANIE TUBBS JONES, Ohio
MARK GREEN, Wisconsin MICHAEL E. CAPUANO, Massachusetts
PATRICK J. TOOMEY, Pennsylvania HAROLD E. FORD, Jr., Tennessee
CHRISTOPHER SHAYS, Connecticut RUBEN HINOJOSA, Texas
JOHN B. SHADEGG, Arizona KEN LUCAS, Kentucky
VITO FOSELLA, New York RONNIE SHOWS, Mississippi
GARY G. MILLER, California JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia WILLIAM LACY CLAY, Missiouri
FELIX J. GRUCCI, Jr., New York STEVE ISRAEL, New York
MELISSA A. HART, Pennsylvania MIKE ROSS, Arizona
SHELLEY MOORE CAPITO, West Virginia
MIKE FERGUSON, New Jersey BERNARD SANDERS, Vermont
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
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Page
Hearing held on:
July 26, 2001................................................ 1
Appendix:
July 26, 2001................................................ 45
WITNESSES
Thursday, July 26, 2001
Bernard, Richard P., Executive Vice President and General
Counsel, New York Stock Exchange, Inc.......................... 11
Callcott, Hardy, Senior Vice President and General Counsel,
Charles Schwab & Co., Inc...................................... 4
Ketchum, Richard G., President, The Nasdaq Stock Market.......... 12
Lackritz, Marc E., President, Securities Industry Association.... 8
Smith, Cameron, General Counsel, The Island ECN.................. 7
APPENDIX
Prepared statements:
Baker, Hon. Richard H........................................ 46
Oxley, Hon. Michael G........................................ 48
Kanjorski, Hon. Paul E....................................... 49
Bernard, Richard P........................................... 73
Callcott, Hardy.............................................. 50
Ketchum, Richard G........................................... 82
Lackritz, Marc E............................................. 68
Smith, Cameron............................................... 58
MARKET DATA: IMPLICATIONS TO INVESTORS
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THURSDAY, JULY 26, 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 2 p.m., in room
2128, Rayburn House Office Building, Hon. Richard H. Baker,
[chairman of the subcommittee], presiding.
Present: Chairman Baker; Representatives Shays, Oxley,
Biggert, Miller, Kanjorski, Ackerman, Bentsen, Sandlin,
Sherman, Inslee, Moore, Crowley, and Israel.
Chairman Baker. I would like to call this hearing of the
Capital Markets Subcommittee to order. I am informed that Mr.
Kanjorski is on his way and will be here momentarily for his
own opening statement.
Today, the Congress faces the challenge of reviewing the
national market system to determine how securities laws may be
amended not only to reflect today's technology, but also be
flexible enough to adapt to the changing market condition.
This is our second hearing on market data, the stock price
information that is basically the lifeblood of our capital
markets. In a sense, we are beginning to weigh in on very
difficult questions, but one with very important implications.
What is the metaphysical status of market data? Where does it
reside? Who owns it? How can the system be improved so that all
investors have equal access?
The 1975 amendments to the 1934 Act reflect the need for a
system that would provide consolidated quotes so investors
could easily match lowest offers with highest bids. While the
plans established as a result of the amendments have provided a
valuable function, they do not operate, in my view, in a truly
competitive environment. Moreover, recent technological
advances and explosion of the internet usage were not and could
not have been contemplated in 1975.
In March we focused on how market data is collected,
consolidated and distributed. We examined whether the fees
collected by the exchanges from users, investors, are being
used solely to fund the Government-mandated consolidating
functions, or whether fees were subsidizing other activities.
Today, we will discuss whether there should be additional
legislation to explicitly establish a proprietary right over
the market database or to give special protection to the
operators of the databases through new private causes of
action.
The plans claim they already have a property right in the
data because they build and maintain the system and add value
to the information. Others, including the electronic
communications networks and online trading systems, argue that
the quotes from their customers are what give the databases
their value. These same market participants claim that opening
the market data system to a competitive environment would allow
them to provide investors with better quality and depth of
information and perhaps even at lower cost.
In a time when we are considering the entire national
market system, we are faced with the question of whether
Congress should act to give further legal protections to the
exchanges over market data. Today, we will examine whether
there is a need for such legislation and whether or not the
cost and dissemination of market data to investors and other
participants is adequately served. More importantly, we will
ask whether legislation on this issue is appropriate when there
is such a broad array of concerns with the underlying national
market system itself.
I would note, beyond the prepared statement, that in
reading all of the testimony last evening, there is a clear
bifurcation in opinion. From one perspective it is our data,
and we not only want to preserve and protect it, but we want an
additional right of civil action against those who use it
inappropriately. From the other perspective it is not yours, it
belongs to me, and you should give it to me for very little
cost and perhaps create an environment in which the generation
of that data itself is put in jeopardy.
So this is no easy question to resolve. Clearly there is a
need for modification. The question is the appropriateness of
those modifications and whether we bring about any disruptive
consequences of suggesting those alterations.
[The prepared statement of Hon. Richard H. Baker can be
found on page 46 in the appendix.]
With that, Mr. Bentsen, do you have an opening statement?
Mr. Israel, do you have an opening statement?
Mr. Israel.
Mr. Israel. Thank you, Mr. Chairman. I am pleased to be
here, and thank you for convening this hearing, and I would
like to welcome the witnesses.
Mr. Chairman, as you know, the securities markets have been
producing market data for two centuries. In my home State of
New York, the New York Stock Exchange provides an essential
liquidity source for the collection of information of millions
of orders every day and creates valuable, reliable and accurate
market data that is relied upon by investors worldwide. The
markets invest billions of dollars in state-of-the-art
technology to ensure that the public receives real-time data on
demand, and no one has to worry that that data is not truthful
or that its integrity has been compromised.
Now, some would suggest that the New York Stock Exchange
and the other security markets do nothing more than collect
orders and charge others to receive the data. I strongly
disagree. I visited with the New York Stock Exchange, I have
seen their technology, and I am convinced that the New York
Stock Exchange provides an efficient forum for price discovery
that produces accurate and valuable market information that is
unparalleled worldwide.
It does concern me that as we move to a greater reliance on
the internet, enterprising hackers could make unauthorized uses
of market data and hurt investor confidence in market
information. So we have to ensure that any legislation that
this subcommittee chooses to consider protects the authorized
use of data and provides a uniform Federal standard. Efforts
that would deter those who would pirate market data and attempt
to damage the integrity of the greatest capital markets in the
world would be a welcome tool.
I thank you, Mr. Chairman, for holding this hearing. I look
forward to the testimony of our witnesses, and I yield back.
Chairman Baker. Thank you, Mr. Israel.
Mr. Kanjorski.
Mr. Kanjorski. Thank you, Mr. Chairman. And thank you for
the opportunity to comment on market data issues, and
particularly the implication to investors and for market
transparency of granting ownership rights over stock quotes,
before we hear our witnesses today.
We last discussed this issue of market data at a hearing in
March. At that time, I noted that 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 data 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 an
efficient price discovery and the best execution of customers'
orders.
In our current system for distributing market data,
millions of investors worldwide have easy access to market
data. The world, however, has changed substantially since
Congress enacted a law governing market data in 1975, and we
are therefore reexamining these issues to determine whether we
need to refine our approach on such matters. For example, the
Securities and Exchange Commission (SEC) has recently begun to
examine these difficult issues and other related and
complicated questions through its Advisory Committee on Market
Data.
As you may also recall, at the end of our last hearing, Mr.
Chairman, you and I wrote to the SEC inquiring about the
activities of its Advisory Committee on Market Data issues. In
her response, SEC Acting Chairman Unger noted that she expects
the Advisory Committee to issue its report no later than
September 15. She also expects this report to be quite helpful,
not only to the Commission, but to others interested in
reviewing market data issues. Although it is appropriate for us
to begin to educate the Members of our subcommittee about this
complex issue, I would hope that our subcommittee would wait to
pursue any further action on market data issues until we hear
and fully digest the recommendations of the Advisory Committee.
In closing, Mr. Chairman, I want each of our witnesses to
know that I continue to approach the issue of market data with
an open mind. The comments of our panelists about securities
database issues and market data ownership rights will therefore
help me to discern how we can maintain the efficiency,
effectiveness and competitiveness of our Nation's capital
markets in the future.
I yield back.
[The prepared statement of Hon. Paul Kanjorski can be found
on page 49 in the appendix.]
Chairman Baker. Thank you, Mr. Kanjorski.
Mr. Shays, would you have an opening comment?
Mr. Shays. Thank you, Mr. Chairman.
For disclosure, since Nasdaq is in my district, I disclose
that it is in Trumbull, Connecticut, but I intend to have an
open mind, but be very slanted toward Nasdaq.
Chairman Baker. As your historic conduct has indicated.
Thank you, Mr. Shays.
Any other Member have an opening statement? If not, at this
time I would like to proceed to introduce our first witness,
pleased to have you here, the Senior Vice President and General
Counsel of Charles Schwab, Mr. Hardy Callcott. Welcome.
Mr. Callcott. Good afternoon.
Chairman Baker. And I am sorry for interrupting already.
Everyone's full testimony will be made part of the official
record. Please feel free to summarize as appropriate, Mr.
Callcott, and you will need to pull those mikes pretty close.
They are not as sensitive as you might think.
STATEMENT OF HARDY CALLCOTT, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, CHARLES SCHWAB AND COMPANY
Mr. Callcott. Thank you. Thank you, Chairman Baker, Ranking
Member Kanjorski and Members of the subcommittee. My name is
Hardy Callcott, and, as you say, I am senior vice president and
general counsel of Charles Schwab and Company. Schwab offers a
full range of financial services to our more than 7.7 million
active customer accounts, helping our customers manage more
than $850 billion in assets. Thank you for inviting me to
testify this afternoon.
As many of you are aware, Schwab has at been at the
forefront of the debate on market data for several years. In
1999, our rulemaking petition to the SEC was a catalyst that
helped bring this issue to the forefront. We have participated
in the SEC's Advisory Committee on Market Data, which the SEC
formed last year after its 1999 concept release on market data,
which was, in turn, a response to our rulemaking petition.
We asked the SEC to review the market data system for one
major reason. Our clients and millions of individual investors
that make the U.S. capital markets the most vibrant in the
world want and deserve a system that uses cutting-edge
technology to provide the robust, innovative market data
essential to success in today's volatile markets.
Over the past 2 years, we have come to recognize that
market data reform for the 21st century is absolutely essential
for our markets, and that reform must be based on three basic
principles: deregulation, competition and equal access. Today,
individual investors are disadvantaged in several ways by the
current Government-granted monopoly in market data.
First, the high cost of market data prevents brokerages
like Schwab from offering its customers the best possible
product. It is technologically feasible for Schwab to provide
real-time streaming quotes to all of our online customers so
that, just like institutional investors, they can watch the
markets as they move. But providing all currently-available
streaming data to our customers who have electronic access
would cost in the neighborhood of $157 million a year, some
nine times what we currently pay for market data. As a result,
we can't afford to offer streaming quotes to most of our client
base. With rapidly changing quotes in today's market, static
market data places individual investors at a disadvantage
compared to other market participants.
Second, the introduction of decimal pricing in our markets
is making the monopoly quotes irrelevant for all investors.
Decimals have lowered the bid-ask spread for stock, saving
billions of dollars for investors. The decimals have also
decreased the depth of quotations, the amount of stock
available for purchase that the inside bid or ask, by some 60
to 80 percent. As a result, the basic market data provided by
the markets, the inside bid and ask, no longer provides
investors with enough information to make informed trading
decisions.
No market currently provides a retail depth-of-book quote
product. Nasdaq does provide a Level 2 quote product for an
additional fee, which provides the best quote offered by each
market-maker in a given security, but even Level 2 is not a
true depth-of-book product, and the Consolidated Tape
Association, (CTA), which processes quotes for exchange-traded
stocks, has no product even equivalent to Nasdaq Level 2. As is
always true when the Government grants a monopoly, product
innovation and technological development is stifled.
Further, because of the increasing cost and decreasing
relevance of the monopoly quotes, internet portals such as
Yahoo now provide real-time quotes from ECNs in preference to
the quotes produced by the markets. Brokerages like Schwab are
legally precluded from providing these alternative quotes to
clients without also having to display the market data provided
by the self regulatory organizations.
With that context, let me briefly address two important
issues today. First is our view of what not to do, and that
relates to the database protection legislation that has been
proposed in the last three Congresses. The second is our
suggestion of what Congress can do to make a market data system
that best addresses the needs of all investors.
For the past several years, the SROs have advocated
database protection legislation that would grant them a
property right over market data. But market information is a
set of facts: bid prices, ask prices, limit order prices, last
sale prices. No one can own facts. The Supreme Court's
unanimous 1991 decision in Feist Publications v. Rural
Telephone Service Company held that facts, in that case
telephone numbers, cannot be owned, and we see no reason why
this set of facts should be any different. In the several years
that the markets have sought a property right in market data,
they have not been able to point to any real-world abuses which
would justify such a lucrative windfall.
Moreover, it is investors and brokerages who create these
facts, not the securities markets. Brokerages are required by
law to provide these facts to the SROs without any
compensation. Brokerages are then required by law to buy this
information back from these Government-created monopolies and
provide it to our clients.
Schwab is not advocating that brokerages be given property
rights in market data, but if we are legally required to
provide the information free of charge and then are legally
required to purchase it back from the markets, in our view it
would be grossly inequitable to grant those markets property
rights in that information in preference to us. Moreover, such
a property right would be counter to Congress' laudable goal of
ensuring ready public availability of the information.
Let me now turn to the principles Schwab believes should
form the core of a reform plan. The solution is not to require
more regulation of what should be displayed and how. Rather, it
is to deregulate market data systems so that multiple vendors
can compete to provide the most innovative and cost-effective
market data products. To promote competition, legislation
should require the SROs to make available the same raw data
that brokerages and clients are required to report to them. The
SROs would then be required to offer all of that data on the
same terms to everyone; not just inside quotes, but also depth-
of-book information. This would enable brokerages and market
data vendors to disseminate real-time market data independently
in ways that best respond to investor needs.
Second, all aspects of the market data system must have
greater transparency.
Third, under our proposal, regulatory oversight would be
limited to ensuring fair and nondiscriminatory access
requirements are enforced so that no one is penalized because
of how they use or distribute market data.
Finally, database protection legislation should not give
the securities markets a property right over market data in
preference to brokerages who create the information.
Thank you very much for the opportunity to testify this
afternoon, and I look forward to answering your questions.
[The prepared statement of Hardy Callcott can be found on
page 50 in the appendix.]
Chairman Baker. Thank you very much, Mr. Callcott.
Before I recognize our next witness, we have been joined by
the Chairman of the full committee, Congressman Oxley. I would
like to recognize him at this time if he has an opening
statement.
Mr. Oxley. Thank you, Mr. Chairman, and I will submit my
full opening statement for the record, but simply to welcome
our witnesses on a series of hearings on market data. And as
the last hearing pointed out, clearly there is a crying need
for reform and modernization through the structure governing
market data dissemination, but obviously a lot of different
views on how we should do that. Ultimately our subcommittee
will be working on making certain that whatever ultimately the
outcome is, it is based on transparency and giving the average
investor and the market players adequate information that they
can use and at a reasonable cost.
And so I want to commend you, Mr. Chairman, for what you
have been able to accomplish in setting up an excellent panel
that will focus in on all sides of this very difficult issue,
but one that we simply have to address, and obviously the
sooner, the better.
And with that, let me yield back, and I look forward to the
rest of the testimony.
[The prepared statement of Hon. Michael Oxley can be found
on page 48 in the appendix.]
Chairman Baker. Thank you, Mr. Chairman, and as always I
certainly appreciate your interest in these issues and
participation in the subcommittee's work.
Our next witness is the General Counsel for The Island ECN,
Mr. Cameron Smith. Welcome, Mr. Smith.
STATEMENT OF CAMERON SMITH, GENERAL COUNSEL, THE ISLAND ECN
Mr. Smith. Good afternoon, Mr. Chairman, Members of the
subcommittee. I commend the Chairman and the Members of the
subcommittee for holding these hearings concerning the integral
part of our securities markets, market data.
Island has played a leading role in providing investors
with unprecedented access to market information through the
Island Book Viewer, a free real-time view of all open buy and
sell orders on Island. It is available to all investors on our
website. For this reason Island greatly appreciates the
opportunity to share its views on market data.
In brief, it would be a mistake to grant exclusive
proprietary ownership rights in market data before reviewing
the outdated policies that create regulatory monopolies for the
producers of market data. Therefore, we should embrace those
reforms that promote competition and innovation.
I am Cameron Smith. I am the general counsel of Island ECN.
Island is an automated trading system for equities securities.
We function as a pure auction market directly matching buy and
sell orders. Island is a network of approximately 700 broker-
dealers represent ing a diverse array of market participants.
On an average day, Island will trade over 320 million
shares, approximately 16 percent of Nasdaq's transaction
volume. Through June of this year, Island has traded over 44
billion shares worth almost $1.5 trillion.
Since Island introduced the Book Viewer in 1998, hundreds
of thousands of investors have visited the Island website to
get the latest market information. In light of the popularity
of the Island Book Viewer, the New York Stock Exchange has
recently announced OpenBook, and Nasdaq plans to introduce the
Super-Montage. Both initiatives are designed to provide
investors and market participants with a broader and deeper
level of market data.
It was the very success of Island's Book Viewer and its
competitive effect on the market that drove the subsequent
market reforms. Consequently, we risk undermining the very
process of competition and innovation if each market were
granted an exclusive proprietary right in its market data.
Let's briefly review the extensive regulations currently
governing market data. By regulation, all broker-dealers are
required to become members of self-regulatory organizations
such as the National Association of Securities Dealers or the
New York Stock Exchange. By regulation self-regulatory
organization members are required to report transactions
exclusively to the applicable SRO. By regulation this
information is required to be consolidated. And by regulation,
any party disseminating market data must only disseminate
consolidated market data from every SRO.
As you can see, there are no competitive free market forces
at work with respect to market data. The price is determined by
SROs, subject to SEC approval. The SEC, therefore, is entrusted
with a difficult task of regulating market data fees.
One of the key regulatory requirements underpinning the
current regulatory monopoly enjoyed by SROs is what is known as
the vendor display rule. The decision as to whether to abrogate
the vendor display rule is the key decision in creating a truly
competitive market for data. In its simplest terms, the vendor
display rule requires every vendor market participant to
disseminate only consolidated quotation information. Thus, the
issues related to market data rates that Charles Schwab, among
others, has long raised all emanate from the existence of the
vendor display rule. Ultimately the decision concerning whether
to continue the vendor display rule should only be made after
careful consideration of the cost and benefits.
Let me briefly identify three of the clear costs to the
rule. First, the current regulatory structure confers monopoly
power on the SROs that could only be checked by Government
regulation.
Second, a vendor display rule subsidizes smaller markets,
thus distorting competition between markets.
And third, the vendor display rule harms innovation by
either directly prohibiting new data services or making such
new data services cost-prohibitive to provide to investors.
In conclusion, Mr. Chairman, given the comprehensive
regulatory structure already governing market data, it is not
an appropriate time to create additional proprietary rights in
market data. Instead, we must first reexamine the current
regulatory structure, particularly the vendor display rule.
I look forward to working with you and your colleagues in
introducing competition and innovation to market data and
thereby strengthening our Nation's equity markets. Thank you.
[The prepared statement of Cameron Smith can be found on
page 58 in the appendix.]
Chairman Baker. Thank you, Mr. Smith.
Our next witness is no stranger to the subcommittee,
President of the Securities Industry Association, Mr. Marc
Lackritz. Welcome, Mr. Lackritz.
STATEMENT OF MARC E. LACKRITZ, PRESIDENT, SECURITIES INDUSTRY
ASSOCIATION
Mr. Lackritz. Thank you, Mr. Chairman. It is a pleasure to
be here, Chairman Oxley, Chairman Baker, Mr. Kanjorski and
distinguished Members of the subcommittee. The Securities
Industry Association, (SIA), appreciates the opportunity to
testify today on the implication of granting ownership rights
in stock market information.
SIA member-firms, regulators, legislators and other market
participants have been reconsidering the current system of
providing securities market data now for several years. We have
examined the appropriate avenues to collect and consolidate the
information, the fees charged for this information, and the
role of revenue derived from those fees. The issue is complex,
and the impact on market structure will be quite significant.
As the database industry in the United States continues to
grow, efforts are now underway to grant new protections to
those who collect and compile information, including securities
information processors. We believe that legislation that would
create new property rights in stock market information would
seriously undermine the current effort to reform the process of
consolidating and disseminating stock market information.
Moreover, it would be contrary to the goals that Congress set
forth in the Securities Act amendments of 1975. We believe that
adequate protections currently exist to address information
theft, and to legislate in this area would disrupt the
regulatory and contractual regimes that make real-time market
information so widely available today.
Securities markets are synonymous with information. Market
information, that is the quotes at which people are willing to
buy and sell stock and the price of the last sale of the stock,
is truly the lifeblood of the market. The widespread
availability of this information, also known as transparency,
ensures that buyers of securities do not pay more than the
lowest price at which someone is willing to sell, or sellers do
not sell for less than the highest price at which someone is
willing to buy.
Transparency of market information has also given
individual investors unparalleled access to much of the same
information that previously was available only to market
professionals. Unrestricted easy access to this information is
what has made the U.S. capital markets the envy of the world.
Our markets are deep, liquid and fair. Transparency is one of
the reasons.
The advent of the information age has raised concerns about
database piracy and the need to protect those who compile
information in online databases. Copyright law will generally
prevent the wholesale copying of an entire database as long as
there is at least a minimal amount of original expression, but
it does not protect the extraction and reuse of individual
facts.
Securities market information, that is, the best bid and
offer and last sale reports, is no more than a collection of
facts derived from various market participants. Database
publishers, including securities information processors, also
rely on contracts, common law and technological measures to
prevent the misappropriation and misuse of data that the
publishers compile.
Such measures have always been sufficient, at least until
recent actions in Europe created the possibility of powerful
new rights for database publishers. We must be careful not to
let international initiatives trigger the dismantling of a
system that has grown up over the last 30 years in the U.S.
securities industry. Any legislation that would create an
intellectual property right in securities market data would
have huge implications on the system for collecting and
disseminating market information that Congress so carefully
devised in the 1975 Act amendments.
In addition, conferring new property rights could impede
the flow of real-time market information, because as single-
source monopolies, the markets could charge excessive fees and
restrict the downstream use of that information. Because they
are SROs subject to SEC oversight, this may not seem
problematic at this point in time, but these markets may soon
be operating as for-profit enterprises that will be obligated
to shareholders to maximize their earnings.
Under SEC rules broker-dealers are required to submit last
sale and best bid and offer information to the markets
securities information processors. Vendors in turn receive and
distribute market information from the processor pursuant to
various contract and licensing arrangements. Although it is
important to protect the markets' joint investment in data
technology and infrastructure against persons who would take
market information without paying for it, we do not believe
that markets are without protection under the current
structure.
Our industry strongly supports broad dissemination of stock
market information. Granting new property rights in market
information through database protection legislation, no matter
how well-intentioned, will vest control of market information
into the hands of single-source monopolies in the securities
industry, and that would be the antithesis of broad access to
market information that Congress intended in enacting the 1975
Act amendments.
With new proprietary rights in the information, the only
constraints on pricing would be the statutory standard that
requires fees to be fair, reasonable and not discriminatory.
What is considered fair and reasonable by an exchange might be
very different than what is considered fair and reasonable by a
market participant that conducts business off of the exchange.
If costs should prove to be excessive, the result is likely to
be less information available to investors. Legislation that
would restrict such downstream use of market information would
cripple this industry and impede, rather than enhance,
investors' access to information.
Bids, offers and last sale prices are nothing more than
facts generated by investors. Alone they have no value, but
when they are consolidated into a single stream of information,
they tell investors what the market for a particular security
is at a given point in time. The value of this information is
unquestioned. It generates hundreds of millions of dollars each
year.
Today, a combination of regulation, copyright, contract and
common law ensures that information is widely accessible to all
investors, and that compilers of information are adequately
compensated for their efforts. New property rights will
unnecessarily upset this careful balance.
Thank you, Mr. Chairman.
[The prepared statement of Marc E. Lackritz can be found on
page 68 in the appendix.]
Chairman Baker. Thank you, Mr. Lackritz.
Our next witness is the Executive Vice President and
General Counsel for the New York Stock Exchange (NYSE), Mr.
Richard Bernard. Welcome, Mr. Bernard.
STATEMENT OF RICHARD P. BERNARD, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, NEW YORK STOCK EXCHANGE
Mr. Bernard. Thank you, Chairman Baker and Mr. Kanjorski
and Members of the subcommittee. I am glad to be here on behalf
of our Chairman Dick Grasso and have the opportunity to testify
about protecting market data, and it is with particular
pleasure I note that this is our 134th year of electronically
disseminating market data, the ticker having been invented and
used since 1867. It is the 26th year since your predecessors
gave jurisdiction over these matters to the SEC, and as a
personal note, it is 22 years since I wrote my first memo on
proprietary rights in market data. So this is a special
opportunity for me.
To the extent I have time, I will touch on three themes
briefly. First, contrary to what some of my colleagues have
suggested, we don't merely collect data, we create it.
Second, the law, as Marc has indicated, already recognizes
proprietary rights, not only the common law such as State
misappropriation law, but also the 1934 Act itself.
And thirdly, lest we forget, those same members of Mr.
Lackritz's group are also members of the New York Stock
Exchange, and they, through our board of directors, are the
ones who decide how much market data fees ought to be and what
percentage of our costs ought to be covered by market data
fees. And so the very structure of the New York Stock Exchange
is where the subcommittee should be looking to satisfy itself
that what is being done with market data fees is fair and
reasonable and fairly allocates our costs.
We exist to provide market data. We provide a mechanism to
discover prices, and to echo a point that Congressman Israel
made in his opening remarks, the orders that come from
investors and the proprietary trading interests of broker-
dealers, these are the inputs to our process, but the output is
the trade and the last sale price, and that is what happens at
the New York Stock Exchange. That is why I characterize what we
do as creating data and not simply collecting data.
Second, in this regard I want to point out that current
law, as I mentioned, protects the stock exchange, as Marc has
mentioned. You can look to copyright law. You can look to the
State common law on misappropriation. You can look to contract
law, and you look to Section 11A itself, which very explicitly
recognizes that the exchanges have the rights, or, I should
say, confirms, since we have been doing it for some 100 years
before Congress got around to speaking on the topic, but
confirms a right that had been recognized by the Supreme Court
of the exchanges to use market data as a way of fairly
allocating their costs among their members.
Mr. Chairman, you will recall from last March's hearing
that many people tried to take the matters that Mr. Kanjorski
mentioned of the Seligman Committee and keep trying to boil it
down to a matter of who owns the data. We think that this
debate is somewhat misplaced, and it is not just because the
Supreme Court settled these matters a century ago, but it is
because the real issue is if you are going to change the
system, you have to think about how you do it in a way that is
revenue-neutral to the stock exchange and the other markets and
doesn't create winners and losers among the broker-dealers and
others who bear the market data fees. And for all the rhetoric
that has accompanied this topic, both here, in previous
hearings, and the hearings that your predecessor subcommittees,
and before the Seligman Committee and at the SEC, no one has
come forward with a better answer to the questions that the
exchanges face as we try to fairly allocate our costs for
creating this market data in the first place.
Let me close by simply reminding the subcommittee that we
support legislation that will Federalize and codify the
existing common law around misappropriation, although we are
not a prime mover for it and were not part of the original
discussions in the 104th Congress. But we think it will be a
useful thing, in particular in reference to the Feist case, but
more importantly, if a Federal law made clear the rights beyond
what the statute does today, of the exchange to use market data
as we do, then it would be simply confirming the process of our
constituents, our listed companies, our broker-dealers and
those who represent the public in using market data fees as one
of the tools which they have to equally allocate the costs of
creating this extraordinary database.
Thank you very much.
[The prepared statement of Richard P. Bernard can be found
on page 73 in the appendix.]
Chairman Baker. Thank you, Mr. Bernard.
Our final witness is the President of the Nasdaq stock
market, welcome to you, Mr. Richard Ketchum.
STATEMENT OF RICHARD G. KETCHUM, PRESIDENT, THE NASDAQ STOCK
MARKET
Mr. Ketchum. Thank you. Mr. Chairman, Members of the
subcommittee, I am Richard Ketchum, President of the Nasdaq
stock market. I want to first commend you on holding this
hearing on extremely timely issues, and I welcome very much the
opportunity to continue our dialogue with this subcommittee on
market data issues.
Under the thoughtful leadership of Congress and the SEC,
the U.S. capital markets are the envy of the world. In
particular it is under this leadership that markets like Nasdaq
have been able to provide American investors with wide access
to the highest quality, most current and lowest-cost market
data of any major nation.
Initially, I would like to address the questions you raised
in your letter of invitation. Within that context, though, I
don't want there to be any misunderstanding. I strongly agree
with what Mr. Lackritz said that in effect and in large part
the environment today works well with respect to the regulation
of market information data. As I indicated, that data is widely
available; available not only to market participants, but
public investors as well at costs substantially lower than
available in the rest of the world. In addition, our rights to
that data and other markets' rights to that data are properly
protected, and we are quite comfortable with those protections
that exist today.
And finally, and somewhat contrary to what may have been at
least implicitly suggested before, entities that are not
markets are not restricted from making available their order
information, as long as they do so consistent with SEC rules
and requirements that look to both encouraging competition
among markets and look to ensuring that investors have
knowledge of what the best prices in the markets are.
Within that context and within the recognition that indeed
the environment today does work well as the internet expansion
continues and other communication modes develop, some
additional legislation to protect databases may be necessary.
We believe that a database of market data, like any other
valuable database, would benefit from greater protection
mechanisms. The value of that market data is in its integrity.
When unauthorized parties can misappropriate it and perhaps
change it, that integrity is jeopardized to the detriment of
investors here and worldwide, and for that reason we would be
pleased to continue to work with the subcommittee as we have in
the past in your efforts to evaluate possible legislative
action.
In this regard I would like to highlight several reasons
why Nasdaq, as with any exchange or self-regulatory
organization, has a right, first, to protect its market data
and, second, to be able to establish prices for its market data
consistent with basic free market principles.
First, Nasdaq's market data is created within our
marketplace and is shaped by our regulatory framework and
internal quality controls. It is in this way that Nasdaq adds
layer on layer of value to our market data. In particular
Nasdaq has created a market structure designed to promote
liquidity and transparency. Our market is supported by quality
market participants, such as on the panel today, that are
subject to stringent marketplace rules. We have also developed
and maintained sophisticated automated market surveillance
tools to monitor trading and issuer activity.
The investments made by Nasdaq in our market, regulatory
and technological infrastructure facilitate universal access to
quality market data that investors can trust.
Second, under the contracts we have established with our
market data subscribers, investors enjoy broad access to our
quality market data at fair and reasonable prices. In 1975,
Congress made certain that our national market system must be
premised on investors having access to consolidated market
data. Nasdaq has long recognized the importance of market data
to investors' decisionmaking process and has sought to
disseminate our market data to the broadest population of
industry professionals and investors.
In fact, Nasdaq's market data today is distributed to over
550,000 industry professionals and millions of investors, and
investors have enjoyed a 75 percent decrease in our market data
fees over the past 2 years. In fact, a full month of Nasdaq
market data costs only $1, less than a single ATM transaction.
Third, our Nation's markets operate in a highly competitive
environment which acts as a natural regulator of market data
fees. Exchanges and other self-regulatory organizations
vigorously compete for issuers' listings, market participants
and trading volume, which culminates in the ultimate value of
particular markets' quote and trade data.
Fourth, in this competitive environment Nasdaq understands
the need to protect the flow of its market data to contracted
parties. However, the risk of unauthorized use of our market
data by others is an issue that requires some attention. If
markets like Nasdaq are to continue to seek innovative ways to
ensure unparalleled market integrity through greater market
transparency of high-quality data to investors, our ability to
limit the flow of this valuable market data to parties who have
contracted for its use must be apparent and expansive relative
to existing rights.
In summary, it is important to ensure that the core policy
goals established by Congress in 1975, including broad public
access to consolidated market data, the maintenance of stable
and orderly markets, and the ability to promote competition,
are preserved and encouraged to the greatest extent possible.
Our legislative and regulatory framework, such as exists today,
that encourages competition and innovation among markets will
result in a continued development of quality market data that
investors can trust.
Nasdaq stands ready to assist the subcommittee as it
continues to consider this very important issue, and I thank
you again for allowing me to participate in this hearing.
[The prepared statement of Richard G. Ketchum can be found
on page 82 in the appendix.]
Chairman Baker. Thank you, Mr. Ketchum.
I do very much appreciate all the witnesses' participation
here today, and your openness to discussion of this topic,
which is a very difficult one.
Mr. Bernard, in your written statement, you make reference
on page 7 to the importance of market data, and actually make
the comment that it is important to preserve the revenue stream
for the market that is generated by the fees associated with
the sale of that data. And, Mr. Ketchum, I think I recall
reading something where Nasdaq's revenue stream, approximately
a quarter to a third of that comes from market data fees. Is
that still a broad statement of accuracy?
Mr. Ketchum. It is broadly accurate, though each year is a
little different, broadly accurate that somewhat less than a
quarter of our revenue comes from that.
Chairman Baker. All I wanted to establish is the
significance of this to both markets as an element of your
stability so I understand the sensitivity of this discussion.
Second, the basis on which you feel the current revenue
stream is appropriate is still difficult. You will recall from
the hearing in March, I raised the issue, how do we know about
appropriateness if we can't allocate the costs associated with
the function? The response to this is that the breadth and
depth of the data we collect and the assimilation and the value
added are all very difficult to segregate. Therefore, we may
not have the ability to generate a fixed dollar cost per
transaction, for example.
In looking at the provisions of Section 11A, which you made
reference to, Mr. Bernard, it does allocate the responsibility
to the SEC to make a determination as to whether the charges
are fair and reasonable, and I have asked staff basically to
look at the elements that are reviewed, and I got back fair and
reasonable. It doesn't seem to be real clear.
On the other hand, both have taken some credit in recent
years for significant fee reductions that, depending on which
type of investor we are examining, reductions could be from
significant to very significant. It again is a troublesome
point, and that is, if we are able to reduce fees and
acknowledge that that fee reduction has come about through
efficiencies, how does one measure the appropriate level of
fees if you can't tell me what the cost basis for the fee is to
begin with other than perhaps pressures from the consumer side
of the equation are saying this is too much? Which then, I
think, gets to Mr. Kanjorski's issue of what is it you do to
the data that is the value-added aspect of the process?
And I am going on a bit, because we have got a vote, and I
am going to give you a chance to respond at length during the
vote, but, for example, Mr. Kanjorski and I enter into a
transaction, the broker-dealer executes, the trade is done, it
is a $20-per-share activity, you record it. I assume your
response would be, yes, that is correct, and we just report the
$30 trade, but we do it across market breadth so we have the
depth and assure quality of that information. So therein is the
value; not one transaction, but perhaps thousands. And you
would claim that the value added is the quantity and quality,
verification of that activity is what is representing the value
of that transaction.
In looking at the report language of the 1975 Act, which I
had here somewhere, it went on to say that we must be sure that
the central processor is not under control or domination of any
particular market center. Any exclusive processor is, in
effect, a public utility, and thus, it must function in a
manner which is absolutely neutral with respect to all market
centers, all market-makers and all private firms.
The point here is that the function, as I am understanding
it, it is a collection of data, a distribution of data, with an
obligation to do so for the national economic good as a public
utility, and the argument that the fees are not related to the
cost associated with this transaction is the difficult point
for me. I am at a loss as to how we establish the fairness of
the transactional cost associated with your process, because
you are, in effect, aggregating a utility as a utility, a
publicly reported value of a transaction.
Lastly, with regard to the competitive action aspect, and I
am restating Mr. Smith's testimony on these points, by
regulation every broker dealer who wants to trade has to be a
member of some SRO, let's just say Nasdaq. If I am a Nasdaq
member, I have got to report exclusively to you on my
activities. Then you are required to consolidate and make that
available to investors, and that anybody we catch disseminating
this inappropriately is subject to some SEC enforcement action.
That is a different model of free market competition. I will
admit that the problem is that we don't have a counterparty
ability for someone else to do this, because by Government
regulation, the responsibility is created and the authority to
govern solely granted to the particular SRO.
So in a broad context we have a fee system established
without an understanding of the cost basis which has been
reduced over the last few years that is required by a law to
preserve the economic function of our investment community.
Help me out here. Give me a picture that makes me
understand why significant modifications--and let me answer Mr.
Kanjorski's opening statement, I have no intent to do anything
anytime soon. We are certainly going to wait on the Seligman
Committee before I would recommend any action. And this is not
with the idea that tomorrow morning we are going to wake up
with a new national market system, but I certainly have
concerns in light of the explanations given about how these
functions are conducted.
Mr. Bernard, why don't you take a swipe at it.
Mr. Bernard. I think I tracked about five questions within
your comments, and let me try to answer them in turn.
First, just as a point of reference, about 17 percent of
our revenue is from market data, and as you will remember from
Mr. Lackritz's testimony, that has been consistent for about 70
years. That is as far back as we can trace it.
When you get to the question of fair and reasonable, it is
important to remember that Section 11A is not the only
provision in the 1934 Act. If you go to Section 6, under which
we are registered as an exchange, and under which Rick will
shortly be registered, you will see that we are obliged to have
constituent boards, with fair representation of everybody, not
just the broker-dealers, but also the listed companies and the
public. And so if you look at the scheme as a whole, the SEC is
just a fail-safe mechanism. The real defense to ``fairness and
reasonableness'' lies in having the very people who pay the
fees decide what the fees shall be. The SEC is a fail-safe. The
focus should be on the board of directors, and you will see in
recent SEC actions over the last 10 years that the SEC has
intervened with the Nasdaq and with the Philadelphia Stock
Exchange to make sure that those boards of directors really do
do a good job of representing all the constituencies.
Second, to characterize us as being in the business of
collecting data is not accurate. We don't have any conventional
vendors on the panel today, but such companies, like ILX or
Bloomberg, those people are in the business of collecting data.
We are in the business of generating data. Two people don't
just show up and do a trade and tell us. Rather, we provide a
facility for price discovery, investors send orders through
systems to the New York Stock Exchange or call them into
brokers on our floor, we provide a facility for that. We
provide a facility for arraying those interests. We provide a
facility for figuring out which of those interests by itself
are aggregated with others as the best quotes, and we provide a
facility for actually making that execution take place. So we
are far more than a mere data collection operation.
And in that lies the answer to your third question
regarding whether we are just charging for the quality and
quantity. First of all, we are not charging for anything. What
we are doing is allocating our costs, as our members and our
listed companies and investors direct us to, into various
``buckets,'' i.e., listing fees, transaction fees, market data
fees and other fees. They have chosen in their wisdom to put
about 17 percent of our costs into market data fees.
No one is trying to decide that listed company fees are
collected to only pay for services provided to listed
companies. What we are talking about is one big machine, one
big factory, the NYSE, to use an earlier analogy, and how do
you finance that thing, and what are the vehicles for financing
it.
To your fourth question regarding the 1975 language, not to
prejudge the work of the Seligman Committee, but I should tell
you that consistent with the NYSE's position for more than a
year-and-a-half now, the Seligman Committee does seem poised to
recommend the New York Stock Exchange and the Nasdaq and the
other exchanges withdraw from the Consolidated Tape Association
and the other consortia. That language that you are talking
about was very specifically related to anticipating that these
consortia would be created, and they were. Now they are about
to be dissolved, and so this issue of exclusive authority to
process evaporates if the Seligman Committee makes the
recommendations and the SEC supports them as they go forward.
And I think I will yield to Mr. Ketchum, if I might, on the
last question having to do with competition in membership.
Mr. Ketchum. Thank you, Mr. Chairman, and I would agree
with everything that Mr. Bernard has said. I will just add two
additional points and certainly get to your point with respect
to the membership question.
My first point is to reiterate what he has said, the level
of SEC oversight with respect to reasonable fees. The
Commission does look at and does recognize that both the
membership participation and investor participation in the
board has a governing effect on fees as well as it looks very
closely itself to ensure that we are reacting to an expansion
in the numbers of investors and numbers of participants taking
the fee and the growth in those fees. So it is not an accident.
It is not an accident from the standpoint of competition from
the desire of our marketplace to increase the dissemination of
public information, because increasing the dissemination of
public information increases the volume in our market,
increases the desires of investors to trade. The Commission
looks very, very closely at those issues.
The last piece I will just mention as you go is that while
it is true a broker-dealer must be a member of an exchange and
must be a member of the NASD, they are not required to be a
Nasdaq market-maker or required to be a dealer or participant
in any particular market. They can choose to bring their orders
or participate as a dealer in any market that they choose, and
with that have the ability and indeed in many cases have the
ability to share in transaction fees as those markets compete
with each other.
Chairman Baker. If I may, Mr. Ketchum, we will return to
this. We won't cut off any discussion. I am told we have about
3 or 4 minutes left on the vote under consideration. There is a
subsequent 5-minute vote. Depending on the outcomes, could be a
third. So at best expectation the most we will be gone is about
15 minutes, and we will recess momentarily. Thank you.
[Recess.]
Chairman Baker. Mr. Ketchum, I curtailed your remarks at
the end of the last question if you wanted to respond for us.
Mr. Ketchum. Mr. Chairman, I think you gave me the
opportunity to finish my response, and I guess the only thing I
would add from what I said, just on the particular point you
raised is to emphasize again the choice that brokers have
between other markets, the fact that those markets do compete
very aggressively to have them choose, and the one point I did
not indicate; that the SEC has spent a great deal of time
looking at the policy issues involved of brokers that wish to
operate free from the marketplace, including the right way for
them to do that is to register as an exchange. And in fact
Island, represented at this table, has begun the process of
doing exactly that.
Chairman Baker. I read through a Nasdaq subscription
agreement, and I am not a subscriber, just for the sake of
saying I had done it.
Mr. Ketchum. I admire you for merely taking up the----
Chairman Baker. You can tell I am not well. Section 7 of
that agreement has an interesting provision, and I wanted you
to explain it to me, because I understand this is the agreement
that would be used for a retail agreement, is that not only do
you make records available--and that is understandable--upon
reasonable notice, but ``subscribers shall make its premise
available for review of said records and for physical
inspection of vendor services.'' Does this mean in a technical
sense that if I sign the agreement and my computer at home is
the location for distribution of the data, do you have the
right to examine that physical location?
Mr. Ketchum. No. That provision is basically aimed at
professional participants in the marketplace. It does not apply
to a nonprofessional agreement and to an individual investor
from that standpoint, as I understand it, Mr. Chairman.
Chairman Baker. Oh, sure. Well, have your folks look at it,
because I went back and read it a couple of times to make sure
that I didn't want to bring it up inappropriately, but I didn't
find any qualifying conditions around it, and if it is
something you want to get back to me on later, that is fine.
Mr. Ketchum. Mr. Chairman, it has just been added to the
fact that it can be read as client and nonprofessionals, and I
think it is a good point. In fact, we are in the process of
looking at it and making sure that if--we have never invaded
the premise of an individual investor with respect to----
Chairman Baker. The market consequences of that headline
would not be favorable, but, you know, examine it, get back to
me, and it is something that I found--it is a basis for saying
we need to be looking at the whole subject matter.
We have been joined by Chairman Oxley, Mr. Kanjorski has
just returned. And Mr. Kanjorski has waived his right at the
moment. Mr. Chairman, if you would like to proceed.
Mr. Oxley. Thank you, Mr. Chairman, and I appreciate the
gentleman from Pennsylvania's courtesy. Let me ask Mr.
Callcott. You mentioned the Seligman Advisory Committee during
your testimony. If the Seligman Committee were to recommend a
competing consolidator model, what would be your position? Does
that really provide the kind of competition we are looking for,
or do we need to look at other avenues?
Mr. Callcott. I think a lot of the participants in the
Seligman Committee have been advocating a competing
consolidator model, including us. It depends what that model
consists of. For a competing consolidator model to work, as Mr.
Smith indicated, in our view, you have to eliminate the display
rule, because otherwise the requirement under the display rule
is that you display the quotes from every market. And so even
if you have competing consolidators, every market has the right
to charge monopoly rents. But we think a competing consolidator
model, as we have outlined in our testimony, where every market
has to sell information on the same terms to every customer
does create the possibility of actual price competition. That
would bring down the prices for market data, and, in our view,
improve the quality and innovation in market data products.
Mr. Oxley. Mr. Smith, do you agree with that?
Mr. Smith. Certainly I do. I want to make clear that we
certainly would not be opposed to a market owning its market
data, but in order to get to that ultimate goal, we do need to
reexamine the current regulatory structure. And as Mr. Callcott
said, the vendor display rule. And I was struck by something
Mr. Bernard said earlier about how the board sets the prices
for the market data. The board meets and they, in consultation
with their members and other constituencies, decide the price
for the market data. That struck me as not a very market-
oriented approach to deciding a price. To me, a price is
determined by a free market, where a buyer meets a seller,
instead of having it be set. If we could all determine prices
like that, that gives--to the extent that, for instance, Nasdaq
has capacity issues or something, I suppose we could have this
subcommittee to meet and decide the closing prices for the
stocks each day, because that would be certainly much more
convenient than having the market forces decide the closing
prices.
Mr. Oxley. Mr. Smith, while you are on, let me ask you, Mr.
Ketchum observed in his testimony that competition in the
marketplace acts as a natural regulator of market data fees. Do
you agree with that perception?
Mr. Smith. Yes. It is certainly their duty to ensure that
all fees are fair and reasonable. Clearly, it is a very
difficult position for the commission, but it is a role that
they do play.
Mr. Oxley. And Mr. Callcott, what do you think about that?
Mr. Callcott. Well, there is active competition right now
between the markets for listing. There is no question about
that for listed companies, but as we set forth in our
testimony, right now each of the major markets, the exchanges,
Nasdaq and options, has a monopoly in the market data area. And
so there is not effective competition in the market data area,
and all the competition in the world on the listing side is not
going to create competition on the market data side.
If I could expand on that, I very much agree with what
Chairman Baker said earlier, that as the exchanges are going to
for-profit status, this idea of cross-subsidization, that you
have a monopoly in one area that cross-subsidizes other areas,
becomes even more problematic. I mean, their boards are going
to have a fiduciary duty to their shareholders--and we are a
shareholder in Nasdaq--to maximize their profits, and that is
just an inherent conflict for us with the idea of having low
priced, widely available market data as the 1975 Act amendments
contemplate.
Mr. Oxley. I will start with Mr. Bernard and respond to Mr.
Callcott's last statement.
Mr. Bernard. Well, first, for the record, the New York
Stock Exchange has no plans to demutualize. So its members will
continue to run the exchange in order to minimize their costs
while getting the best services possible, deciding how much of
those costs ought to be recovered by market data fees. The
structure is like a condominium or the New York City
cooperative building in which I live, or a golf club. So, at
least in the context of a mutualized institution like the New
York Stock Exchange, I don't understand that issue.
Mr. Oxley. Mr. Ketchum.
Mr. Ketchum. Thank you, Chairman Oxley.
I think the point we meant in our testimony with respect to
competition, why we do think it is quite effective, as Hardy
correctly indicated, there is aggressive competition between
markets, both for listings and also for market share. Beyond
that, there are efforts by markets in as many ways as possible
to increase the amount of trading that occurs on their
marketplaces, and overall in the United States. Market
competition--that is a natural competitive regulator with
respect to price and market information.
It is our desire and always a balance to both be able to
gain sufficient return with respect to market information to
support, not cross-subsidize, but to support the things that
make that market information valuable. The running of the
technology, the maintenance of the network that allows market
makers and ECNs to collect information and to compete and the
regulatory surveillance that ensures fair and orderly markets
and the accuracy of that information.
But within that balance on the other side is the need to
have the prices sufficiently low enough that as Mr. Lackritz
said before, that in the United States, we have the widest most
broadest dissemination of market information in the world, and
that is equally critical to our mission if we are going to
succeed as a market.
Mr. Oxley. If I could have one more question, Mr. Chairman.
And as the Chairman pointed out, you have had a lowering of
costs, and that has been rather significant in some areas. What
drove that cost lower, and if there is no competition--or not
adequate competition, then why would those costs be lower?
Mr. Ketchum. Well, I guess part of the answer to that is
that there is adequate competition, in our view. Those costs
were driven lower, and indeed the initial decisions, both with
respect to Nasdaq and its securities and with regard to listed
securities where we participate in a joint plan, resulted
basically from the initial decision to have separate pricing
for when data was disseminated to individual investors or
nonprofessionals in the marketplace. That was because of our
desire to expand the availability of that information, a
continuing desire to expand that information, continuing belief
that the lower the price, the more focus on that information,
particularly with the revolution as a result of the internet
and online investing that would lead us and allow us to benefit
in two ways: One, if a price is low enough, more investors will
take it; second, if more investors take it, more investors see
that information. They will be more interested in trading and
have a higher degree of trust and confidence in the
marketplace, which will encourage their trading as well, and
that is how we gain our primary means of being able to operate
and profit as a marketplace.
Mr. Oxley. Well, that turned out to be a softball for you,
Mr. Ketchum. Let me just finish with asking Mr. Callcott and
Mr. Smith essentially the same question. If, indeed, those
prices have gone down, wouldn't that indicate that competition
is truly working in the market data area?
Mr. Callcott. I think the prices have come down per
individual. The market's revenues for market data have been
growing at double digit rates because of the increase of
individuals who are coming online and are paying prices for
quotes that they never paid before. I would say that the
market's prices have come down precisely because in the last 2
to 3 years, the SEC and the Congress has been paying attention
to this issue and putting pressure on the markets, and as a
result of that, monopolies respond to their regulators, not to
market price.
But the fact is, their revenues have been growing at 18 to
20 percent annual rates for the last half-dozen years.
Mr. Oxley. But, there haven't been any changes in the
regulations, nor have there been any changes in the statute.
Mr. Callcott. Right. The change has been that once the SEC
started putting out concept releases and Congress started
holding hearings, the markets all of a sudden had a very
substantial incentive to keep their prices fair and reasonable.
Mr. Oxley. So ergo, if we keep having hearings, the price
will continue to drop; is that correct?
Mr. Callcott. This is a very useful function that Congress
serves, Mr. Chairman.
Mr. Oxley. Well, Mr. Chairman, I had no idea we had that
kind of power.
Chairman Baker. And I am so appreciative of this. You have
finally learned I am worth something, Mr. Chairman.
Mr. Oxley. Let me let Mr. Smith take a crack at it, and
then I will yield back.
Mr. Smith. Thank you, Mr. Chairman. At the risk of sounding
repetitive, I think I would return to my earlier comments.
While it is certainly good that market data prices have
declined, there is still the fundamental fact that the price
charged by the consortium of SROs is still not determined by a
competitive market. It is determined by a group of individuals
who, after canvassing market participants, decide on what they
think an appropriate price is.
Mr. Oxley. That describes a cartel, doesn't it?
Mr. Smith. I agree, yes.
Mr. Oxley. I yield back.
Chairman Baker. Thank you, Mr. Chairman.
Mr. Kanjorski.
Mr. Kanjorski. I just want to make the observation, Mr.
Chairman, that if you look at the panel, we have two of the
investor groups, and then we have two of the exchanges, and in
the middle we have the association. It probably is interesting
and what is reflective of the issue. I want to address it,
first, to the investor groups. I listened to your testimony,
Mr. Callcott, and isn't this just a fight over how much and who
pays?
Mr. Callcott. It is a fight about money.
Mr. Kanjorski. Do you have any feeling about being a little
guilty of talking about the freest market in the world and
charging the exchanges with being monopolistic utilities?
Mr. Callcott. We would like to provide the best possible
information to our customers. There is very good market data
information out there, streaming market data that professional
investors, institutional investors use. Most investors, because
of the current cost structure, do not have access to that data.
We would like to provide it to them. We can't afford it at the
current rates, and most individual investors can't afford to
pay for it themselves at the current rates. We think we could
make that available under a competitive structure.
Mr. Kanjorski. OK. On the other hand, you have to concede,
don't you, that this is a utility and a monopoly? I mean, this
portion of it? There is nobody else that can announce to go out
there and create this information. You are really granted this
right through the SEC and through the Federal legislation. I am
not criticizing what you have done, and I cannot go into
business tomorrow and compete against you.
Mr. Bernard. If you break up the consortium, which we have
been a strong advocate of, what you are talking about is ten or
more stock exchanges competing with each other for order flow.
Now, it is certainly true that the New York Stock Exchange has
consistently enjoyed market share of about 85 percent, but that
hasn't been because of an absence of competition. It is
because----
Mr. Kanjorski. But you are not representing the same
companies on the same exchanges. They are different.
Mr. Bernard. Oh, yes, we are. Nasdaq has what they call the
``intermarket'' that trades in New York Stock Exchange-listed
stocks; Philadelphia, Chicago, Pacific trade NYSE stocks.
Island, for that matter is trading New York Stock Exchange
stocks.
Mr. Kanjorski. So when they do greater volume, they are
just better than the New York Stock Exchange?
Mr. Bernard. Well, they haven't done greater value. We
continue to do 85 percent. The rest of them together do 15
percent. So I guess that means we are doing better.
Mr. Kanjorski. This is going to call for the wisdom of
Solomon, I think, and I don't know any of my colleagues up here
that possess that type of wisdom. The one thing that really
does disturb me is the fact that when you are privatizing, this
does seem to go to that conflict. It was indicated that there
are just two fiduciary responsibilities that have to be there,
the charge that you are under to charge reasonable and fair
rates, and to disseminate this information; on the other hand,
to earn as much for the investors as possible. Why can't we
take market data and treat it like a monopolistic utility and
just set it over there and with the SEC as the regulator, to
take the complaints of the new internet market and other things
that weren't here in 1975, and treat the data in that regard.
This will ensure a fair return on an investment, that you
continue to have the excellence for which that material goes
out, but that no one feels disadvantaged as to price, nor do
they want to come in with another competition.
I have to mention that just the other day, as you know, we
have had deregulation recently in telephones and utility
companies, and I can address just the telephone problem that
was interesting. My wife called me up, and she said, you know,
we have a telephone, but we are only listed in one book. And
there are four books that are disbursed, but we would take
advertisements or whatever we have to do to get the other three
books, which costs me four times what it is going to cost
today.
I don't know that we can get in there every year with new
technology and new methodology, trying to figure out who is
advantaged or who is disadvantaged, but if we look at this
market data accumulation and disbursing and we did it and said
this is a utility. It is monopolistic, because the SEC has
given it to you. You are entitled to a fair return on your
investment, as a utility would be, and then the SEC will be
your regulator when there are complaints and changes in the
marketplace that this information should be available. Because
quite frankly, if you think about it, nothing stops you from
charging $1,000 a hit, and that would take away all day
traders.
I am not sorry if it probably took them away, but, you
know, that is one nice way to get rid of day traders, just hit
them so hard, that they cannot participate. That wouldn't be
the fair thing to do if we really have a free and open
competitive market. And on the other hand, we can't anticipate
where Schwab or other firms are going and what is the change in
evolution of technology that is going to occur over the next 2
or 3 years. By the time we get done drafting a bill, it will
probably be obsolete and not relative to the situation.
But if we did recognize that the 17 percent of your
revenues that come out of data processing get carved out of
whatever you are going to do in privatizing and put that into a
utility-type, agreed-to monopoly and give you a decent return
on your capital and evaluate that fairly, and then have a very
broad board or representation of users to help set rates, and
even they won't be able to finalize it, and have the final
determiner the Federal Communications Commission, wouldn't that
be fair to both sides?
Mr. Ketchum. Congressman, if I could, let me try to address
each of the points that I think you have made. I guess the
first point is that indeed there is somebody who stands between
us and imposing a $1,000 charge with respect to this
information, and that somebody is the SEC that has the ability
and responsibility to both ensure that the fees are fair and
reasonable and the authority to look at all relevant issues,
including our costs involved with the information.
The second thing is I do have to respectfully disagree. I
don't believe in any way this is a monopoly, or certainly as
Rich Bernard indicated, it does not raise any consortium issues
if indeed the position, both Nasdaq and the New York Stock
Exchange, is taken, that we should eliminate the plans and each
market should have the ability to offer its data separately and
separately price it. Third, not only are there 10 exchanges
operating today, but there is also the ability for trading
systems, such as Island, to become an exchange and to compete
directly with respect to----
Mr. Kanjorski. Do you think by defining that as a property
right and maintaining your own data collected that you would do
a favor to the free market system that we have, and the
transparency and access that we have in this market? Isn't it
to the advantage of the members of the Exchange that they have
the absolute access to the most investors possible, that it is
accurate, reliable? I mean, that is the precondition to good
trading. It wouldn't seem to me so that you could get some
return on, quote, this property right interest, which I still
have some difficulty with. It would seem to me that you would
be shooting off your toe to spite your foot.
Mr. Ketchum. Well, again, I think it very much is an
advantage to the members of the Exchange or from the standpoint
of Nasdaq, of Nasdaq, for there to be wide dissemination of
this information. It is just as much to the advantage of Nasdaq
to occur, because it does attract activity and increase
confidence in the market. That is the very reason why the
prices have been reduced as much as they have and why there is
a different price for access to the information of the
individual investors. And indeed, I wonder if you had utility
rate regulation, whether there would be anything such as a
separate charge for individual investors.
Mr. Kanjorski. Maybe there wouldn't be.
Mr. Ketchum. And I think that necessarily wouldn't be in
the interest of our----
Mr. Kanjorski. Why?
Mr. Ketchum. Because I think you would not necessarily have
seen the innovation of providing lower cost information.
Mr. Kanjorski. Well, if you were making a decent return on
your investment as a utility, you mean you are only driven to
make more, and that is the only reason that you change?
Mr. Ketchum. The primary reason we are driven to provide
the information is, because it increases investor confidence
and increases investors.
Mr. Kanjorski. That's right. So giving this information
out, if you could effectively do it for nothing or almost
nothing, and increase the activity of the market and increase
the activity of capitals in general in the United States, that
is to your benefit. You are going to drive brokerage fees and
other fees and transactions that are going to make more than
enough money for you.
Mr. Ketchum. And that is usually what competition is quite
effective in driving forward, if indeed it is to our benefit,
and I would agree it is, and it is exactly that reason why we
have continued to reduce the price and to distinguish the price
for individual investors over market professionals.
Mr. Kanjorski. Well, how about if we allocate part of this
excess money that the SEC is collecting to you fellows, some
portion of it, so we do not have to charge the other fellows
anything, or an extremely low rate. Is that a fair way to do
it?
Mr. Ketchum. Well, those other fellows are the same ones
being charged that other fee, and we think it is a great step
that Congress has taken to try to reduce transaction fees,
which is an important step to ensuring the continued
competitiveness of the U.S. markets.
Mr. Kanjorski. I am sort of disappointed that we have to
have--I mean, I know our activity and attention to this
probably plays to make all parties work better together, but it
just seems to me you are almost disproving the effectiveness of
the private market to work these things out. This shouldn't be
before the Congress, and if it has gotten to that point, you
know, we certainly should not cut favoritism on either side.
But then, you know, don't argue if we start regulating things.
Do we want to empower the SEC as a great super-regulator to
constantly be hearing who is being charged what? It seems so
infinitesimal, in terms of the whole capital market of the
United States, that you all have to come together and do what
is right and what is reasonable.
And that would get a return on investment that is
reasonable. I would say make it a utility rate or both. It
doesn't matter to me. But not exceptional. I mean, you know, it
is possible that, as a result of technology or change or
activity, you could end up like these banks with the ATM fees.
I mean, you know, I keep telling my friends in the banking
business, and incidentally the credit union business, that they
keep making more money on ATM fees than anything else, they are
apt to get themselves regulated, because I am one of the guys
that will do it.
I mean, I find that incomprehensible that a college kid has
to pay a buck-and-a-half or $3 bucks to get $20 or $30 out of
an ATM machine. And they say that is not the cost of the
transaction, but they can get it. Do we want to get into that
regulation? You are almost forcing us to get into the exchange
regulation. I don't see that as very profitable for the
Government to start thinking in your business and regulating
your business any more than we absolutely have to.
So I would hope you take away--I am hoping--and I look at
Art Folcum in the middle there. It is your job to come up here
or tell these fellows to work this out. And this is something
that should be able to be negotiated in the private market
without Government involvement. If it requires Government
involvement, all five of you are going to come up here and be
yelling at us, oh, you are moving into the private market and
you are doing things, but you are not giving us a heck of a lot
of choice.
Yes, Mr. Bernard.
Mr. Bernard. If I might respond, first of all, neither the
New York Stock Exchange or the Nasdaq is a proponent of
creating database legislation. That is coming from the outside.
Second, the very negotiation that you want to have happen
happens every other month at the board table at the New York
Stock Exchange. You may be hearing from some people who don't
like the outcome of that consensus, but that consensus, for at
least 70 years by our count, has said that market data fees is
a good way to cover about 17 percent of the New York Stock
Exchange's expenses.
I don't think Congress should intervene and tell Merrill
Lynch and Goldman Sachs and Salomon Smith Barney and IBM and
Leon Panetta, representing the individual investors--and by the
way, I don't know why you call two broker dealers more of a
representative of individual investors than the New York Stock
Exchange or Nasdaq. I have got three people on my board who are
specifically charged with representing the interests of
individual investors, not to mention ten broker dealers. So I
don't understand that dichotomy.
But to finish my thought, that board decides that 17
percent is a good number. All the continued recognition of our
proprietary rights does is permit that negotiated outcome to be
activated.
Chairman Baker. Thank you, Mr. Kanjorski.
Mr. Shays.
Mr. Shays. I have questions, but Mrs. Biggert needs to
leave, so I will defer to her.
Chairman Baker. Certainly.
Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman. And I thank the
gentleman from Connecticut for yielding.
Mr. Bernard, you just mentioned that you are a proponent of
the legislation. Why do you need this legislation to protect
your databases?
Mr. Bernard. I am sorry if I said I was a proponent. I
misspoke. What I said was that we did not initiate this
legislation. However, if there is going to be database
legislation, then discriminating against markets' data as
opposed to baseball scores is not something that we think ought
to happen.
Mrs. Biggert. Well, I guess I was changing the question a
little bit. I assumed that you thought that you needed
legislation and I just wondered if you could cite any examples
of someone who has disseminated your stock quotes, those
obtained from you without your permission?
Mr. Bernard. Well, it does happen when we don't know about
it, but when we catch it, let me just quickly explain. First of
all, the common law of misappropriation, which is all you are
proposing to do in the database legislation simply tries to
federalize and codify an existing common law that has been out
there for centuries, and is one of the protections that we
enjoy today.
The second, of course, is contracts. The contract that the
Chairman was reading, although I believe it applies to
professional subscribers, it is those network of contracts that
helps us make sure that no one is pirating the data. And just
to finish the point, remember what is the relevance of
preventing pirating? We are allocating the cost of running the
Exchange among various users as those users have chosen. If
someone is pirating the data, they are cheating. They are not
paying their fair share. And that is why it is important that
we be permitted to do this, but we are not proponents of
legislation.
Mrs. Biggert. So you have been able to use the current
copyright protection laws, as well as the contract laws?
Mr. Bernard. Not the copyright laws, although the copyright
laws may protect us. It is a fine question for the litigators,
but clearly the State law, the common law of misappropriation,
as well as contract law, have been the two pillars upon which
we have been able to minimize any pirating.
Mrs. Biggert. OK. What has been the practical effect, then,
of the 1991 Supreme Court, their first decision?
Mr. Bernard. Well, we have seen no impact in our world, and
I point out the case was about putting together a telephone
directory. As I have already mentioned, we don't simply collect
data. We actually create the data. So we are in a different
place from someone who puts together a telephone book anyway.
So it has had no impact.
Mrs. Biggert. I guess I was looking for what would be
creating the data?
Mr. Bernard. Well, as I have mentioned--let me go a little
slower on it. If Island and Schwab and Salomon Smith Barney and
Merrill Lynch and the rest of them all send orders to us--and
take General Electric, the world's largest company--to the New
York Stock Exchange, our job is to have systems that collect
those orders, safe-store them, validate them, route them to the
place where the stock is traded, have them interact with each
other, and with the brokers on the floor who are representing
institutional investors and with the specialists who are market
making and have them all come together, and when the buyer
meets seller, to perform an execution.
When we do that execution, we have systems that disseminate
that data out to the world. That is the market data side of it.
It also reports the trade back to Salomon and Merrill Lynch and
the rest of the firms and sends it into the Securities Industry
Automated Corporation. So it is no different than producing
anything else. We are in the business of producing trades under
the allowed sale prices.
Mrs. Biggert. OK. Thank you. That is all I have. Thank you,
Mr. Chairman.
Chairman Baker. Thank you, Mrs. Biggert.
Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Is the position of Schwab and Island that--if I read this
right, Mr. Callcott, is that you believe that the exchanges
should provide the raw market data to anybody at no price or
the same price, or what do you mean exactly?
Mr. Callcott. Our concept is the Most-Favored-Nations
concept. So if they provide it to anybody, everybody else gets
the benefit of that best price that they offer to anyone, and
then our expectation is that private sector enterprises like
Reuters, Bloomberg, Bridge, and so on, will compete to
aggregate that data in ways that is both cost-effective and
innovative in terms of the quality of the information.
Mr. Bentsen. And so, under the current structure, as
allowed under the 1975 Act, the raw data is just provided by
the exchanges to their own processors, and then resold to the
market. And the processors are effectively subsidiaries of the
exchanges?
Mr. Callcott. That's correct.
Mr. Bentsen. And then members of the exchanges are able to
subscribe to the refined data, but rather, you would almost--
you would want to--I mean, I don't know that they charge for
the raw data. So maybe it is a bookkeeping exercise. I am not
sure how it works out with the exchanges. I guess I have two
concerns. One is do current SEC regulations, govern how the raw
data is refined? I don't want to say ``manipulated,'' but that
may not be the appropriate term. I think it is, but it has
unfair connotations. But are there any regulations governing
how the raw data is refined and then made public? Because there
are regulations in how it is utilized by the brokerages after
it is made public, the crosses and things like that.
And the second is--are you arguing that there is no value
in that?
Mr. Callcott. The answer to the first question is the plans
are subject to SEC regulation and any amendment to the plans
has to be approved by the SEC, and no, we are not arguing that
there is no value in the Exchange's function. What we are
arguing is that there can be alternative sources. If the NYSE
or Nasdaq or the Pacific Exchange decides to charge too much to
all-comers, we could put together a quote today from Schwab,
Waterhouse, Island, Datek, Knight, which we think would have
equal or greater value to the quote products currently being
offered by the Exchange or Nasdaq. If there is that level of
competition in the markets, we think that will keep the prices
down and improve the quality of the overall information.
Mr. Bentsen. Is there a risk that, you know, Schwab is a
pretty good-sized company. Is there a risk that if you were to
open up the primary market for this data, if you will, that the
bigger, well-capitalized players would have access to it, but
the smaller brokerages wouldn't necessarily have the ability to
go in and create the systems to refine the data and make it
available. Could there potentially be a disadvantage to the
smaller brokerages?
Mr. Callcott. Under a competitive system, our view is that,
sure, they probably wouldn't do it themselves, but they would
have multiple different vendors, such as Bloomberg, Bridge,
Reuters, plus bigger brokerage firms from which they could buy
the data. There would certainly be competition. Of course,
those little brokerage firms are overseen by the NYSE or the
NASDR, and so if they were providing something that was so far
out of the mainstream that it was problematic from an investor
protection standpoint, there would be that level of regulation.
Mr. Bentsen. But the other point is that the smaller
brokerages are--if I understand the essence of the exchanges,
already two parts to it. One are the members who make the
Exchange, and the other are the stocks that trade through the
Exchange. Wouldn't this be unraveling the exchanges effectively
and unraveling the national market system as we have it today?
And maybe we want to do that. I don't know, but I suspect there
is a structure in place. And it may be a cartel. But we
established these exchanges so you had some regulated exchanges
to ensure that the most accurate market data was available to
the consumer and that somehow has to be paid for.
Mr. Callcott. Well, that is a good question. Right now we
have, as Mr. Bernard and Mr. Ketchum have indicated, a great
deal of competition on the listing side. Different Nasdaq
market makers compete with each other. The New York competes
with Island and with Nasdaq third market makers and with the
regional exchanges. So on that side, the natural market system
is built on competition. In 1975, it wasn't feasible to build
competition on the market data side. Computer systems just
hadn't sufficiently evolved. Today, 26 years later, we think
that evolution has occurred and that it is worth exploring the
possibility of competition.
Mr. Bentsen. I guess, then, with the Chairman's indulgence
here, could you make an argument that the members of the NASD
and the members of the NYSE and the other exchanges, for that
matter, pay their dues and created these systems and created
these exchanges and made the initial capital investment and
created these markets and created the asset? And even if it is
a regulated asset and they have monopoly power, you now have
Island. You have got other market makers out there. You have,
you know, these electronic networks that can trade stocks. You
have after-hour networks, things such as that. Why should
somebody who can set up their own operation receive a
preferential benefit to information that these others set up
earlier?
Mr. Callcott. Well, we are legally required by the 1975 Act
amendments and the rules to buy the information from the
existing consolidators. That is the display rule. We have to
show it to customers, and I should tell you, Chairman Baker, we
have tried for 3 years to convince Nasdaq to drop that very
clause that you read, because we get hundreds of complaints a
year from customers saying, well, why does Nasdaq want to come
into my house to examine my computer? And the Nasdaq subscriber
agreement, you have to check in six different places.
Furthermore, because it is a monopoly, they don't have to
negotiate with us on those terms and conditions. So, again, our
view is if you can create a competitive system, you won't have
those sort of hallmarks of monopoly behavior.
Mr. Bentsen. Can I ask another question?
To Nasdaq and NYSE, it seems to me the problem here is that
with the change in the structure of the market, particularly
the retail market, where people like Schwab and others--they
have more individual trading on their own, and I think this is
where Mr. Lackritz is coming from, whereas the SIA membership
consists of brokers and dealers with their rates and all
sitting up on the phone calling and making trades. Now you have
more online brokerage through traditional brokerage houses.
Would it not be appropriate--and maybe this is what the
Commission is looking at--to revisit the pricing structure?
I mean, on the one hand, it is not fair to say that, well,
online brokerage should get a better deal, a group deal when
traditional brokerage houses have to carry the freight, because
they are the ones that have 10,000 brokers or 12,000 brokers or
whatever. On the other hand, the marketplace has changed, and
maybe there ought to be some weighted form of pricing for the
service. To me, somewhere in between there seems to make more
sense than disrupting the national market system, which I think
is not necessarily a bad thing. I think, as you have said in
your testimony, it has served us quite well. I mean, what would
your comment be on that?
Mr. Bernard. First of all, we have done exactly the
weighting you are talking about. The New York Stock Exchange's
revenue for market data--74 percent of it comes from charges on
traditional market participants; that is, broker dealers who
are operating with registered representatives interfacing with
customers and individual traders and institutional investors
who are taking the data as professionals. Only 17 percent in
2000 came from the sort of consumer end. These are the $1.00 a
month that we charge to nonprofessionals or the so-called ``per
quote'' or ``pay as you go'' at a penny per quote that is
capped.
So we have done exactly that and it is exactly as you say.
If you start from the premise that you are going to collect 17
percent or cover 17 percent of your costs from market data, you
want to hit each of the market data users in a fair way, and we
have struggled with that. And the reason that the prices have
not come down for the professional, except in real terms, but
the nominal amounts have been stable for a very, very long
time. But the rates for non-professionals have dropped and
dropped and dropped, and that is because the explosion of the
internet has greatly increased that end of the spectrum, and so
we have responded by reducing those charges.
Chairman Baker. Thank you, Mr. Bentsen.
Mr. Shays.
Mr. Shays. Thank you, Mr. Chairman. I love being on this
subcommittee, but I am not ready for prime time yet. So I ask
these questions with some trepidation. From my simple mind, I
have this basic sense that if innovation should be rewarded
that cost should be covered. I see Nasdaq and I see the New
York Stock Exchange as providing the service. I came here
thinking that Nasdaq and the New York Stock Exchange and others
were asking for something to happen that doesn't exist right
now. In the hearing, I am realizing that the court case
basically established a challenge. We want to see a change. Am
I wrong?
Mr. Callcott, am I wrong? I mean, you are basically asking
for the change; correct?
Mr. Callcott. We are not asking for database protection
legislation.
Mr. Shays. That is not what I asked. What I asked, though,
is you don't like the present system. You want the present
system changed. Basically, the court has established that they
have a right to own this data and that they can charge a fee
for it. Isn't that accurate? I am not saying in the end I won't
agree with you, even though if there is a tie, I am going with
my constituent.
Mr. Callcott. And we have tens of thousands of constituents
in your district, Mr. Shays.
Mr. Shays. That is a problem.
Mr. Callcott. Anyway, the court case said that facts are
not something that anybody can own. So we are in complete
agreement with the Feist case. The legislation that we think is
necessary is to reform the 1975 Act amendments and introduce
competition into this one area of market data where Congress
established a set of monopolies.
Mr. Shays. So you are saying the Feist case basically left
this question unanswered?
Mr. Callcott. No. We think the Feist case resolved the
ownership question in our favor. Facts are facts. You can't own
facts.
Mr. Shays. Would the New York Exchange agree that that is
what the case determined?
Mr. Bernard. I don't believe that was a fair reading of the
Feist case. It was relating to telephone pages. That is what we
do.
Mr. Callcott. It is related to data; can you own data, can
you own facts?
Chairman Baker. And if I can further complicate your
picture, Mr. Shays, as I understand it.
Mr. Shays. The way you talk, you need to talk more slowly
with me.
Chairman Baker. That is a rare comment on a southerner.
Thank you. Let me say it this way. I believe the gentleman
represented correctly that the court determined that facts are
not intellectual property which belong to an individual, but
that intellectual value or some asset must be added to the fact
that creates a property right which the exchanges would say is
their role. They are taking the facts, the dollars from the
sale, and doing things to it that create value to that asset,
to which the other team is saying, no, you are not. We want the
raw data. It is a fact. Give us the raw data, and then we can
compete with you in the marketplace. So that complicates your
problem, I think.
Mr. Ketchum. One thing, Congressman, I think you are
absolutely correct on your characterization. Both, I think,
Nasdaq and the New York Stock Exchange are perfectly
comfortable with our interpretation of the law at the present
time and our ability to enforce our rights from adding the
value that the Chairman has articulately stated. So we don't
believe there is a need for Congress to be involved in that
determination.
Mr. Shays. Let me just ask, why is the remedy here and not
in the courts? I am just curious, from your standpoint.
Mr. Callcott. The basic concern we have is with the
regulatory system set up in the 1975 Act amendments for market
data. And so that can be changed either perhaps by the SEC, but
more probably by Congress.
Mr. Shays. So the bottom line is your reading of the 1993
case--is it 1993 or 1991?
Mr. Lackritz. 1991.
Mr. Shays. The 1991 case. Your reading of the 1991 case
suggests that the 1975 law is somewhat in conflict with that
case?
Mr. Callcott. No. Again, the issues are about who owns the
market data. We are satisfied with the status quo on that
issue, as are I think the exchanges and Nasdaq. The problem
that we see is with the regulatory issue, which has caused the
price of this data to be so high. That is a separate issue, in
our view, from the ownership issue as resulted from the Feist
case.
Mr. Shays. Just a basic question. Is Nasdaq and your
exchange and other exchanges getting complaints from general
consumers, or is this basically being generated by companies
like Schwab and others that are saying, you know, they want
Congress to deal with it?
Mr. Ketchum. I can speak for Nasdaq, Congressman. No, this
is not an area where we receive complaints from investors or
consumers. To my knowledge, if we have had any, it has been
very few, and I am not aware of any.
Mr. Shays. What practical difference does it make as to who
owns the market data? I open that up to any of you.
Mr. Bernard. May I just make a point regarding Rick's
point? The reason consumers aren't complaining----
Mr. Shays. I want the mike a little closer.
Mr. Bernard. I am sorry. The reason the consumers aren't
complaining is they never see these charges. These charges are
imposed on broker dealers, not on individual investors. So if
an individual investor is even aware of them, it is because the
broker dealer has made a decision to pass through this
particular cost in a more explicit way and all the other costs
they face in doing business.
Mr. Shays. See, that wouldn't bother me if they made that
cost clear to their consumers, to their clients. And you do
that? You let clients know that that is part of the cost?
Mr. Callcott. We do.
Mr. Shays. Is the cost so small that it is almost
insignificant to point out?
Mr. Callcott. Well, to provide the Nasdaq level 2 data to
our customers, costs $10 per customer per month. We are able to
pass that on to some customers, but very few. We make that data
available for free to a very small number of our very best
customers. We would like to make that best quality data that
institutional investors get available to all of our customers.
Technologically, it is perfectly possible to do that, and it
wouldn't impose any additional marginal cost on the exchanges
at all. We can't do it because of the current cost structure.
Mr. Shays. What practical difference does it make as to who
owns the data? What is the practical effect of that?
Mr. Callcott. Our view is that this data is pervasively
regulated in the public interest by legislation, and that is
the way that it is and should be and should stay. So that
basically no one owns it. It is facts.
Mr. Lackritz. If I could just address that for a second.
The whole issue of property rights and the reason that we don't
think there needs to be legislation providing property rights
to market data is, because owners of property can control its
use after it is gone. And so, for example, if there is a
database of historical data, if there is a property right to
that data, then it would be illegal to take that historical
data and use it for other purposes or put it into new products
or services. So, property rights would provide an impediment to
users from getting access to large bodies of data, in essence.
Mr. Bernard. I am sorry. I don't understand the
conversation. We have had property rights recognized by the
Supreme Court for more than 100 years. This discussion is not
about adding proprietary rights. If anything were going to
happen in the area of database legislation in regard to market
data, what you would be talking about is federalizing common
law. That is an accurate statement of the law as it exists.
As to why it matters, it is as I said before. If the broker
dealers and the listed companies and the representatives of the
individual investors on our board feel that market data fees is
a good way of allocating our costs among themselves in an
equitable matter, then you need the legal tools to make that
stick. It was the question about pirating data that I addressed
to your colleague before. That is why the proprietary rights--
--
Mr. Shays. OK. And maybe one of the three, not with the
Exchange, could just explain to me. How do you view their board
as being representative of your interests or not being
representative of your interests?
Mr. Callcott. Not particularly representative of the retail
interests. Our view is their board tends to be dominated by
their institutional and floor membership.
Mr. Shays. So is this a battle between the institutions and
the general consumer?
Mr. Smith. I think I have a unique view on this. I keep
coming back to the same point. Island is troubled, because----
Mr. Shays. A little louder, please.
Mr. Smith. Island is troubled, because the whole price-
setting mechanism is determined by a board rather than the free
market, and a board can never completely represent all
interests it needs to represent. We are certainly not
represented on those boards.
Mr. Shays. Let me just conclude. If the 17 percent
disappears, how do you cover your costs?
Mr. Bernard. Well, first of all, that 17 percent--the
answer is that the members who could decide tomorrow to make
that 17 percent disappear, would have to look to other sorts of
ways of allocating the costs among themselves, the members of
the listed companies. Presumably that would mean we would raise
listing fees, raise transaction fees, or we would institute
other charges.
Mr. Ketchum. Congressman, if I could, I just would like to
clarify, because I don't want you to leave an impression that
certainly the board of the Nasdaq stock market doesn't reflect
firms that are actively involved in serving individual
investors. Among the members of the board of the Nasdaq stock
market is Dave Pottruck, the CEO of Schwab. Another member is a
CEO of Knight Securities, which from a market making
standpoint, has its basic business providing executions and
service to, again, individual investors.
Mr. Shays. Well, that is weird, frankly.
Mr. Callcott. And he is correct that we feel better
represented on the Nasdaq board than we do on the New York
board.
Mr. Shays. Oh, that is a good answer.
Mr. Bernard. I think I would point out that just as every
citizen of the United States is not sitting in Congress, so,
too, not every broker dealer or every listed company can sit on
the New York board. But we have ten positions that are
allocated to so-called public directors, included listed
company representatives, institution investors and individual
investors. Ten director positions are allocated to broker
dealers, four from the Exchange floor, the other six from
``upstairs'' firms. At least one of which includes DLJ Direct,
which is a major online broker.
Mr. Shays. Let me just ask another question of the three.
Are you basically saying that you are paying for a service in
which you are overpaying for the cost of the service you are
getting and that you are, in a sense, by the fee, paying for
other parts that the Exchange should cover by other expenses?
Do you understand the basic question? Do you feel that
basically you are paying more than your fair share of the cost?
Mr. Callcott. We do, and moreover, the current cost
structure prevents us from providing the best quality
information to all of our customers. If we were to purchase
that, it would increase our costs approximately ninefold over
what we are currently paying for market data.
Chairman Baker. Mr. Shays, if I can, I am going to go to
one other Member, and we will come back for another round.
Mr. Shays. I didn't know another Member was here. I
apologize.
Chairman Baker. Mr. Inslee, did you have a question?
Mr. Inslee. I will pass.
Chairman Baker. Do you want to start a second round?
Mr. Shays. Yes. Let us do that.
Chairman Baker. Let me try at a summary here and get a
reaction. On the one hand, the exchanges will not acknowledge
the view that you are in the role of a public utility, which
would perform a public service at a cost plus a percentage rate
of return, which would require supervision by an outside
Government party, SEC, to determine whether or not the charges
for the public good are fair and reasonable. It is my view the
SEC has not exercised that authority, to my knowledge, has
never acted unfavorably toward a rate structure, if they have
reviewed them. And second, that there is no understandable
methodology by which an outside party today can look at the
Exchange's operations and come to a conclusion as to the
promptness of the rate schedule in relation to the cost of
providing that service. So if you are a public utility, which I
know--I am not saying that you are acknowledging this. It is
just part A. If you are a public utility, it would appear we
need to have additional authority or have the authority now
granted be exercised to understand the now apparent mystical
methodology which does not lead one to conclude as to the
reasonable charge associated with data production.
On the other hand, if we assume that we are corporations
funded by investors who are making a profit, which I still have
to believe is OK in America, and that you are providing a
service, you should not, however, then be in a privileged
position, granted by statute, regulation or other provisor,
that enables you to engage in a service or activity which
others are not offered the opportunity to provide. I don't know
how you describe the circumstance differently, but take a shot
at it, because if we are A and we are a public utility, I have
a problem. If we are not and we are a private corporation, then
the benefits of business conduct that are afforded those
enterprises should be removed, or at least, similarly, granted
to others, to enable them to compete in a similar regulatory
environment. Are either observations close or are both wrong?
Mr. Bernard. I think ultimately we are somewhere in between
what you just described, but let me make one point. The only--
this display rule--we need to talk about this, because it is
the only SEC regulation that is creating what is being called a
monopoly here, and you should know that that rule was invented
to prevent the New York Stock Exchange from being the only
source of data. We are trying to promote competition by forcing
vendors--in those days they had different names, but just like
ILX today--from only displaying New York data.
When that issue was before the Seligman Committee, we had a
real conflict on that issue, because on the one hand, we agree
with Schwab and Island and others that if you want to get the
most power out of dissolving these consortia, you should get
rid of the display rule and let the strongest competitive
forces apply. The reason that New York was among the majority
that voted against getting rid of the display rule was for the
very reason why the SEC continues to feel that that display
rule is important, because no one is worried about broker
dealers or institutional investors getting any data they want.
They have got enough clout. The issue is the individual
investor, and the fear that if you drop a display rule, then,
perhaps we will be back to where they only see the New York
data and they only see the 15 percent of the----
Chairman Baker. Let me interject on that point. This is not
1901. It is 2001, and the ability of an investor to get access
to information via the internet, for example, or telephone or
any other mechanism, is extraordinarily different from the
environment in which many of these rules were constructed. And
I think the person who is investing $200 who makes $30,000 a
year is going to be just as interested in knowing where his
money is going as a fellow investing $200,000 who makes $3
million a year.
I think the investing environment is different, and you
know, I don't want to pass anybody up for blame here, but you
know the media, to a great extent, contributed to a lot of this
enthusiastic activity until the last few months, I would say.
So people have a different mindset. We have a different set of
market conditions which are being constrained by rules written
many years ago, although I am not agreeing with the ECN
approach to resolve this.
I don't think we ought to blow up the national market
system, but it sure appears on its face if you can't explain to
me what the charges relate to, other than a board meeting, you
know, some mechanism, maybe not the Congress, maybe not the
SEC, maybe somebody ought to have to be able to make that
assessment and your problem goes away.
I think the question that is being asked here from a market
practitioner's view, are the fees that are being charged for
the service being rendered appropriate in light of the services
that are available, and if they aren't, perhaps adjustments are
required.
I think the most onerous suggestion would be to rewrite all
the rules and have 50 people claiming to be able to process
this data knowing full well the enormous investments you make
preclude most people from doing it at the level of competency
which you provide.
So I have regard for your ability and what you do, but we
need to have more disclosures to understand it in order to take
a position that stands in defense of the practice. Do you
understand our dilemma?
Mr. Ketchum. Mr. Chairman, if I could say one thing on
that, and you are right there, it is 2001. There is enormous
access in the internet. It is for exactly that reason that we
applaud, and think it is a great idea that a variety of brokers
like Island and other ECNs do provide information available on
the internet that provide one picture of what is going on in
the marketplace.
I think our experience has been, and I think any study
would find, most investors don't avail themselves of that
information. Some sophisticated investors will, and that is
good and it should be there and available. Most investors look
at the consolidated information. They look at it because it is
the simplest and easiest way to gain a picture of the
marketplace, and as Rich indicated before, there was a
requirement of consolidating information. Vendors simply did
not make that information available and brokers given the
choice of providing to their customers all information in all
markets, speaking as a primary market in the securities we list
as a competing market to the New York Stock Exchange and
sectors we don't, vendors and brokers didn't make that
information available in the third market of the other
competing exchanges.
Chairman Baker. But today, we have the delayed tape
disclosures, which prior to that determination, it was viewed
as being a highly controversial decision to let this
information go out, even on a 15-minute tape delay for fear
there might be some inappropriate market response. My view of
that is that the 15-minute tape delay for free is an exact
comment about its value. If you don't know what is going on at
the moment, you are trading in the dark. So I take no comfort
in the fact that we shouldn't disclose real-time information to
any investor who chooses, and let them, through their own
judgment, make whatever decision they may make. That is my
problem. I think we are giving people information that is
worthless.
Mr. Bernard. No one disagrees with that. The SEC's concern
is that that is not what would happen. They would never see, if
the past is prologue, the prices from Boston or Philadelphia or
Pacific. That is the SEC's concern, and you can take it for
what it is worth, but it is a thoughtful discussion. Although
that rule was passed, I think when this guy was running the
division, we looked very carefully at that.
Chairman Baker. But the next logical step is to assume that
because we are giving people information that is of no value
that we are providing a public service. How do we argue, if the
real value is in real-time data and the trouble with these
gentlemen is that if they provided real-time data to all
customers within their base, they make the allegation they
would have to pay $157 million annually in order to get that
level of access, level two disclosure is that correct?
Mr. Callcott. Yes.
Chairman Baker. And our judgment is that may be
appropriate, but how do we know that if we can't get disclosure
of the cost associated with the management of the data?
Mr. Bernard. Well, I did tell you we were hybrid and I owe
you an answer to those questions.
First, remember, we are like the guy who produces a cow,
when you produce both the leather and the steak. I can't tell
you, and you keep asking me and my colleague to tell you how
much do I spend on producing market data and how much do I
spend on producing trade executions.
Chairman Baker. Your illustration is perfect. If I find out
the guy who is selling me the leather is doing it in the same
room where he is making the steak, I ain't buying. They have
got to be separately allocable activities to which a reasonable
business--I will tell you, I have dealt with some--the
Government sponsored enterprises are extraordinarily complex
organization, and they can almost break it down to the
microsecond expenditure of what they do and where they do it,
even given their level of sophistication. Now, I can't do it
and I may not understand it, frankly, even if you give it to
me. But the point is there has got to be some way to come to a
defensible position in understanding the broad subject matter,
and maybe there will be art form judgments made as to
allocation of cost. As for capital costs, I know they are
traditionally costs such as real estate--you are going to
allocate those to different areas of your activity, but what do
you call that?
I mean, is that an investment cost? Is it an advertising
cost? I understand the problem, but I think there is a remedy
to it.
Mr. Bernard. Mr. Chairman, if I am feeding grain to the
cow, I don't know whether it goes to the leather or to the
steak. My problem is that I produce last sale prices and quotes
at the same time I produce trades. What I can tell you is that
I only allocate to market data 17 percent of my costs. So I am
very comfortable in telling you that whatever I am doing, I am
not allocating too much cost to market data.
Chairman Baker. But when the board sits down and makes that
judgment from the broad array of participation you have, what
information do they look at that helps them decide 17 percent?
Mr. Bernard. I have already testified, they don't care
about that question.
Chairman Baker. But I do.
Mr. Bernard. That is a question that's being posed by
others. The board is saying I have $700 million or $800 million
of expense to cover next year to run the stock exchange that
produces, among other things, market data. What is a fair way
to hit listed companies, broker dealers and institutional
investors in doing that, what is the fair way? And over the
years, they have come up with a variety of ways of doing it.
That is how the board looks at the question, and I don't know
that Congress, when it imposes taxes, tries to understand, does
any kind of a cost allocation, either. Congress says I have got
this budget, we make decisions about expenses, Congress makes
decisions about expenses. Once you have done that, you have got
to cover those expenses, and then the question is not cost
allocation, you know, how much goes to the military, so we will
have a military charge. It is fair allocation of those costs,
in your case, through taxes and through us, the different types
of charges.
Chairman Baker. That engenders a longer conversation, which
I won't abuse my fellow colleagues with.
Mr. Bentsen.
Mr. Bentsen. I think that is all, with due respect,
somewhat simplistic observation of the budget process up here.
Mr. Shays would agree with that. We have sat on the Budget
Committee for a while and I think, Mr. Chairman, that after
hearing this, that you should rename this subcommittee when you
brought up the GSEs, this ought to be the subcommittee on
hybrids.
But I think what Mr. Bernard is saying, to use the cattle
analogy, is that the butcher and the tanner are the same
person, and because you are getting the information on pricing
at the same time that you are executing the trades, and so it
is hard to tell whether he spends more time with his right hand
or his left hand.
But again, I mean the fundamental issue here, it seems to
me, and I may be wrong about this, is that Mr. Callcott feels
that in on-line trading and very broad discount brokerage, that
under the current fee structure, you are paying too much for
the information that you are getting, and that you ought to
just get--that this information, these facts of trades are
basically public domain, and you ought to have access to them
and you manipulate them how you want and you make whatever
investment you want.
And that, I would understand, if it was just this sort of
open marketplace, that anybody could show up in the morning and
trade and there was no regulation, but the market system
doesn't work that way, does it? I mean, it is an organized
exchange with listed companies. There are fees allocated to it.
There are investments that are made and somehow that cost has
to be recouped. And you get the benefit of this stable
exchange. Isn't there some value to that?
Mr. Callcott. Sure there is, but what I should say is that
at the New York, they compete for listed companies, they
compete for trade executions. There is a monopoly for market
data, and when they are allocating their costs among those
three, it is very easy for them to say, well, let's put some
more on the market data side, because we know we are going to
get that. You know we don't want to raise the cost on listed
companies, we don't want to raise the cost on transactions,
because we might lose those to other markets. It is the cross-
subsidization problem when you have a monopoly that is the
basic core of what we see as the problem here.
Mr. Bentsen. Would then the analogy be that--Congress went
through this a few years ago, and we are still going through it
in the telecommunications industry, and we said that the
regional Bell companies had to open up their monopoly markets
for local phone service, and, in return, they would be allowed
to get into the local long distance market. I mean, would the
corollary be here that the exchanges could go beyond just being
an even exchange and get into the brokerage side and the sell
side, buy and sell side of the business?
Mr. Callcott. Well, I think that is a very appropriate
analogy. If they provide the raw market data to everyone on the
same basis, they can set up a separate subsidiary to aggregate
that market data and sell it at whatever the market price would
bear for their aggregation services as long as everybody is
getting the same raw feed on the same terms.
Mr. Bentsen. But the Bell companies are doing that. In
theory they are going to sell their local phone service at the
same time they are allowing others to come in and sell local
phone service, but they are going to also include the long
distance companies, but then they are going to get into the
business of selling long distance as well within the local
region. So what would preclude Nasdaq or NYSE to set up their
own discount brokerage operation? Would that be fair trade?
Mr. Callcott. Well, the concern is, of course we are
members of them and we are regulated by them. If they were to
get into the brokerage business, I think they would have to
move that regulatory responsibility they have into a separate
organization that was independent from their market. Indeed,
the SIA has done a white paper suggesting precisely that, and
Schwab supports that idea.
Mr. Bentsen. I guess that is my point. They are a separate
entity that has sort of a regulatory function, and they are
ideally an honest broker where trades are executed and market
data is made available and it is highly regulated. So wouldn't
we be better in this instance in having this regulated
structure where if there's a pricing issue and a cross-subsidy
issue, that the regulator ought to be doing this so that we
maintain the national market system as fair and open structure?
If there is a problem, if there has been market
disintermediation and shift to more discount brokerage and an
uneven pricing structure, shouldn't that be the purview of the
regulator and, say, your pricing structure is messed up?
Mr. Callcott. That is certainly a possible result of the
system we have now. We have identified what we think are some
problems with that system in terms of pricing and innovation,
both of which are skewed by having that kind of monopoly, but I
certainly do agree that as the markets move more toward a for-
profit competitive structure on their market side, there is a
real problem with them keeping the traditional regulatory
responsibilities that they have had since the 1975 Act
amendments, and indeed, since the 1934 Act was first passed in
the Roosevelt Administration.
Mr. Bentsen. Well, I would agree with that aspect and that
is why I wonder if we are not, I mean, I guess the feeling is
nobody comes up here and offers anything for free. Any
agreement would probably mean give us something in return and
giving something in return might upset what is otherwise a
pretty efficient model and which could, where you might
otherwise find a remedy to your concern.
Mr. Callcott. And my only suggestion would be that it is
already happening. I mean, Nasdaq is going to for-profit
status. We are a shareholder in Nasdaq. New York announced that
they were and then they withdrew that.
Mr. Bentsen. But they are not, to my knowledge, and you are
much more knowledgeable on this than I am, but to my knowledge,
they are not trying to become a broker dealer or anything along
those lines, are they? They are just trying to create a for-
profit model of their exchange, which will still be a regulated
entity.
Mr. Callcott. Well, in the Pacific Exchange context, you
know, Archipelago, which is now basically a broker dealer, is
basically becoming an exchange. Island has also filed to become
an exchange. So I think the distinction between brokerages and
exchanges is, in fact, currently breaking down.
Mr. Bentsen. This is my last point, but the difference
would seem to me that the 1975 Act doesn't necessarily
recognize Island or any other as this sort of standard bearer
exchange, nor does the marketplace at this point in time. Now
maybe the marketplace will ultimately, but I don't think the
1975 Act does, where there are sanctioned exchanges and there
are market created exchanges, which sophisticated investors, at
least, do know the difference of, but it is a topic that is
obviously going to take some time to figure out.
Thank you, Mr. Chairman.
Chairman Baker. Thank you Mr. Bentsen.
Mr. Shays.
Mr. Shays. Mr. Chairman, you know, when a southerner speaks
like a southerner, I have no problem, but when he speaks as a
southerner like a auctioneer, I do have a problem, and I just
want to say, Mr. Bentsen, I always enjoy being in this
subcommittee. I learn so much from the questions you ask, as
well as from the Chairman, and I appreciate it a lot.
I tell people being a legislator is like going to school, a
large university. The only scary thing is I ultimately have to
vote on these things.
My sense, as I have been listening to the questions and the
responses, is that the bottom line is that Schwab, which is a
member of the New York Stock Exchange and a voting member and,
in fact, has a CEO on the board, does have impact. And then I
say, well, it is only $10 per client, but you have got a lot of
clients, so that $10 adds up. So the bottom line is you just
want to pay less and I understand that.
And what I am also hearing is that it is really take it or
leave it. I mean you, in a sense, have a vote on the board and
the scary thing could be they could double it and you still
have to pay the fee. Is that accurate?
Mr. Callcott. Yes. Obviously we could complain to the SEC,
which we have done on occasion.
Mr. Shays. And the SEC could respond and that is where you
have to go, but it is a little scary, because ultimately the
market forces at work is an arbitrary price, and you are part
of that system.
From the standpoint of listening to the exchanges, I am
struck by the fact that this has been the way it has been, and
it is a source of income, and it is a threat, obviously, to
your operation, and you would have to do some shifting if you
had to charge less.
So it strikes me that some of this is somewhat of a
political battle. It is also one where the SEC and you all are
going to basically charge about as much as you can charge
without getting Congress mad and the SEC mad that they
ultimately step in. You shook your head, Mr. Bernard. I am
happy to hear your response.
Mr. Bernard. Yes. I just want to remind you, at least for
70 years, we have charged essentially the same amount as a
percentage, 17 percent.
Mr. Shays. That is not comforting to me honestly, because
the world is different.
Mr. Bernard. But the point is, it is the users charging
themselves. As Rick testified earlier, there is a lot of
reasons why we don't want to charge too much for market data,
because it is the magnet that brings in the orders in the first
place.
Mr. Shays. Monopolists have a monopolistic price and they
can charge that price and in a sense, you do have a monopoly
here.
Mr. Bernard. I am not agreeing with that entirely since I
have a lot of competitors. The answer is that situation has
been true for 70 years and we haven't done it. There must be
something else going on here, and that something else is the
decision by the users, the payers of these fees, that that is
all they want to pay through market data fees, and they want to
get the rest of it done through listings.
If I may make one other point, we should understand what we
are talking about here. If the nonpro and the pro quote fees
are 17 percent of the market data fees and the market data fees
are 17 percent of the overall NYSE revenue, then we are talking
about something like less than four percent of the NYSE revenue
and we are talking about something like $30 million a year from
all broker dealers. I am not sure this Congress should be
spending so much on this topic.
Mr. Shays. Fair enough.
Mr. Ketchum, you are not a mutual anymore, so how do your
customers in a sense get to impact and determine the price they
pay?
Mr. Ketchum. It is a good question, Congressman, and I
should clarify at this point, because while we look forward to
the day that the SEC approves exchange registration, that day
has not occurred yet. The NASD, which is a mutual, still has
majority voting rights with respect to their position in
ownership of Nasdaq, but beyond that, we remain a creature of
statute, today, as an affiliate of the NASD, in the future as
an exchange, as Rich indicated earlier under Section 6. That
statute requires us to have a board that reflects our
constituents. It will require us to have a board that reflects
both participants in the market as well as investors in the
marketplace, as well as our issuers listing on our marketplace.
So those requirements don't disappear and indeed we, as the
New York Stock Exchange, are now required to have a board that
has a majority not affiliated with a broker dealer. So it has
to be people that are either issuers or direct investor
representatives.
Mr. Shays. The analogy, and I will end on this, but the
analogy is that of the telephone company, the breakup of AT&T.
It can no longer own the Baby Bells and the Baby Bells have to
open up their markets and so on. I mean, if that were the
analogy, then I would want to jump in big time, because I think
that was important to do, the break up, but I don't see why
that analogy fits. Can someone tell me how, so I don't see it
fitting. Why do some of you seem to think that fits.
Mr. Ketchum. Well, I have to personally say I don't see how
it fits as well. I guess one interesting thing to note is that
with respect to the entities that profit most with respect to
market information, it is starting off with no markets, it is
the information vendors that retail that information out. And
probably indirectly the broker dealers use that information to
encourage transactions through their customers.
The second piece is about the only piece of analogy vis-a-
vis AT&T that I can see fitting is the SEC has made a decision
to make it much easier for electronic trading systems such as
Island to become exchanges and to choose if they would rather
be an exchange, become in the business of collecting data and
disseminating it, among other things, and providing executions
in that way rather than being in the business of a broker. So
that Congress, always in its wisdom, has never placed a quota
on the number of exchanges that may exist in the United States,
and now the SEC has made it much easier for different for-
profit models to become exchanges.
Mr. Shays. Anybody else want to respond?
Mr. Smith. If I can comment on that. To the extent that
Island can become an exchange, while that certainly will help
in competition for transaction services, I don't know that it
will have any effect on the price of market data. If Island
were to become an exchange, we then become part of the
consortium that sets the prices that everyone pays, including
Schwab, when they go to purchase consolidated quotation data.
At the end of the day, I think it is important for this
subcommittee to really think about the vendor display rule,
because everything we talk about it, and it is not a very sexy
rule, but it actually is a very important rule, because it
distorts the market and creates everything we are talking about
today, because it forces every market participant to purchase
this one set of information. And what you need to ask yourself
is, certainly the consolidated data is very important, it is
critical to investors and I certainly believe they should have
it, but the real question is should that be the only data
investors get, and we, certainly at Island, believe that
investors should get as much information as possible, and by
limiting them only to consolidated information, what you are
actually doing is limiting the amount of information they can
get.
Mr. Shays. Thank you. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Shays. I always enjoy your
participation. I just want to make an attempt at sort of a
wrap-up here.
Obviously, we need from all sides more information. It
would not be my intention to take any significant action on any
front until we certainly have receipt of the Seligman Committee
recommendations, but I think it important or fair to say that
this is a concern I believe is appropriate for our subcommittee
to understand and examine. The nature of the participation in
the markets has been dramatically democratized because of
technology, and therein is the Congress's responsibility to
ensure that market participation is based on the best
information possible, fairly distributed without prejudice to
anyone.
To that end, it has been stated that the SROs are creatures
of statute, which is exactly my point of beginning, that
because you are privileged by creation of statute, there comes
with that specific duties and obligations one must discharge.
One element of that responsibility is a fair and reasonable
pricing of distribution of data.
Unfortunately, I don't feel that we can determine today,
based on what I now know, that the charge is fair and
reasonable, although it is apparent that from a historic
perspective, it hasn't vacillated dramatically, at least in the
New York Exchange's examples, but it doesn't necessarily relate
to the provision of the information as a condition of your
statutory authority.
I think the point that Schwab makes that it does not pass
on level 2 information to all customers as an economic decision
is unfortunate. When someone gets delayed tape information, and
makes investment decisions on that information alone, I have
great discomfort in feeling that that is the way large numbers
of unsophisticated investors are making their decisions.
At the same time when that occurs, I think there is a
larger economic concern that is warranted by this and that is,
that level of investment activity based on untimely information
does, in fact, lead to additional market volatility. That is
not good public policy.
For these reasons, I feel it is important for us to engage
the new chair of the SEC, assuming confirmation finally occurs
this week, to assist us in better understanding this issue. I
invite the participants here today and others who may have
interest to forward additional information for us to review
through our summer recess. I can't wait to get on the beach
with an explanation of how Section 11A and other provisions of
the Act affect our judgment on this matter, but I am just
anxious to get there.
But we will return this fall, hopefully, better informed
with the assistance of the Chairman of the SEC and any other
appropriate agency, to help us understand the functions of the
exchanges in relation to this important public policy matter.
Beyond that, I wish to thank you for your patience and
endurance. No one would have dreamed that a hearing on market
data would have held us here until 4:45. I am sure you can't
believe it either. Thank you for your courtesy. Hearing
adjourned.
[Whereupon, the hearing was adjourned.]
A P P E N D I X
July 26, 2001
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