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




                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND 

                                 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

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


                    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
MIKE FERGUSON, New Jersey                 BERNARD SANDERS, Vermont

             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 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
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

                            C O N T E N T S

Hearing held on:
    July 26, 2001................................................     1
    July 26, 2001................................................    45

                        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


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



                        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 
    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' 
    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 
    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.


    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 
    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 
    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.


    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 
    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.


    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 
    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 
    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 
    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.


    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.


    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 
    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 
    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.
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    Mr. Shays. Monopolists have a monopolistic price and they 
can charge that price and in a sense, you do have a monopoly 
    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 
    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 
    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 
    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 
    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 
    [Whereupon, the hearing was adjourned.]

                            A P P E N D I X

                            July 26, 2001