[Federal Register Volume 64, Number 242 (Friday, December 17, 1999)]
[Proposed Rules]
[Pages 70613-70644]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32471]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-42208; File No. S7-28-99]
Regulation of Market Information Fees and Revenues
AGENCY: Securities and Exchange Commission.
ACTION: Concept release; request for comments.
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SUMMARY: The Securities and Exchange Commission is reviewing the
arrangements currently in place for disseminating market information to
the public. It particularly is focusing on the fees charged for market
information and the role of revenues derived from such fees in funding
the operation and regulation of the markets. To further its review, the
Commission is inviting public comment on these matters. This release
describes the current arrangements for disseminating market information
and provides tables setting forth the fees, revenues, and expenses of
the self-regulatory organizations and the joint plans they have formed
to disseminate market information; discusses the relevant statutory
standards that govern market information fees and revenues; analyzes
the financial structures of the self-regulatory organizations and the
cost of market information; and identifies a number of issues on which
the Commission specifically is requesting comment. Following receipt of
the public's comments and completion of its review, the Commission
intends to take further action to assure that market information
arrangements properly reflect changes that have occurred in the
securities industry and remain consistent with statutory standards.
DATES: Comments are due on or before March 31, 2000.
ADDRESSES: Interested persons should submit three copies of their
written data, views, and opinions to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW, Washington,
DC 20549-0609. Comments also may be submitted electronically at the
following E-mail address: [email protected]. All comment letters
should refer to File No. S7-28-99. Comments submitted by E-mail should
include this file number in the subject line. Comment letters received
will be available for public inspection and copying in the Commission's
Public Reference Room, 450 Fifth Street, NW, Washington, DC 20549.
Electronically submitted comment letters will be posted on the
Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Daniel M. Gray at (202) 942-4164,
Mignon McLemore at (202) 942-0169, or Anitra T. Cassas at (202) 942-
0089, Division of Market Regulation, Securities and Exchange
Commission, 450 Fifth Street, NW, Washington, DC 20549-1001.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Joint SRO Arrangements for Disseminating Market Information
A. Overview
1. Network A
2. Network B
3. Nasdaq System
4. OPRA System
B. Governance
C. Collection and Processing of Information
D. Financial Matters
E. Fee Structures
F. Commission Oversight
III. Exchange Act Standards Governing Market Information Fees and
Revenues
A. Legal Status of Market Information Prior to 1975
1. Exchange Control of Market Information
2. Initiation of a Central Market Structure
B. The 1975 Amendments
C. Commission's Review of Market Information Fees
1. OPRA Order
2. Instinet Order
IV. SRO Financial Structures and the Cost of Market Information
A. Exchange Act Functions of the SROs
B. SRO Financial Structures
1. Sources of Funding
2. Internal Cost Structures
C. The Cost of Market Information
1. Categories of Market Information Costs
2. Allocation of Common Costs
V. Requests for Comment
A. Flexible, Cost-Based Approach to Market Information Fees and
Revenues
1. Cost-Based Limit on Market Information Revenues
2. Fairness and Reasonableness of Specific Fees
a. Professional Subscriber Fees
b. Retail Investor Fees
c. Fee Discounts
B. Distribution of Network Revenues and SRO Funding
1. Direct Funding of Market Regulation Costs
2. Compensating SROs in Accordance with the Value of Their
Market Information
3. SRO Rebates to Members
C. Plan and SRO Disclosure
D. Plan Governance, Administration, and Oversight
VI. Conclusion
Appendix
Tables 1-4: Subscriber Fees
Tables 5-8: Network Revenues, Expenses, and Distributions
Tables 9-17: SRO Revenues and Expenses
I. Introduction
The Securities and Exchange Commission (``Commission'') is
reviewing the arrangements for disseminating ``market information''--
information concerning quotations for and transactions in equity
securities and options that are actively traded in the U.S. markets. It
is focusing particularly on the fees charged for market information and
on the role of revenues derived from such fees in funding the self-
regulatory organizations that are a national securities exchange or a
national securities association (collectively, ``SROs'').\1\ Based on
its
[[Page 70614]]
review thus far, the Commission believes that changes may be warranted
in these areas. Because the potential changes raise complex factual and
policy issues and could have far-reaching effects on the SROs and the
securities markets, the Commission has decided to invite public comment
before taking further action. This release is intended to assist the
public in formulating comments by setting forth the relevant factual
and legal context for market information issues in sections II through
IV and the Appendix, and by identifying a variety of specific issues in
section V on which the Commission is particularly interested in
receiving comments.
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\1\ Currently, the national securities exchanges are the
American Stock Exchange LLC (``Amex''), the Boston Stock Exchange,
Incorporated (``BSE''), the Chicago Board Options Exchange,
Incorporated (``CBOE''), the Chicago Stock Exchange, Incorporated
(``CHX''), the Cincinnati Stock Exchange (``CSE''), the New York
Stock Exchange, Inc. (``NYSE''), the Pacific Exchange, Inc.
(``PCX''), and the Philadelphia Stock Exchange, Inc. (``Phlx''). The
national securities association is the National Association of
Securities Dealers, Inc. (``NASD'').
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All participants in the U.S. markets have access to a consolidated,
real-time stream of market information for any of the thousands of
equity securities and options that are actively traded. The information
for each security is ``consolidated'' in that it is continually
collected from the various market centers that trade the security and
then disseminated in a single stream of information. It is ``real-
time'' in that there is very little delay between the time that a
quotation is made or a transaction is effected and the time that this
information is made available to investors and any others who use the
information. This consolidated, real-time stream of market information
has been an essential element in the success of the U.S. securities
markets. It is the principal tool for enhancing the transparency of the
buying and selling interest in a security, for addressing the
fragmentation of buying and selling interest among different market
centers, and for facilitating the best execution of customers' orders
by their broker-dealers.
Broad public access to consolidated market information was not the
fortuitous result of private market forces, but of planning and
concerted effort by the Congress, the Commission, the SROs, and the
securities industry as a whole. Prior to the 1970's, the various SROs
had acted individually in deciding who would be entitled to receive
their market information and on what terms. In the early 1970's, the
Commission took the initial steps toward creating a central market
system in which investors would have access to information from all
markets. Congress adopted this fundamental policy determination when it
enacted the Securities Acts Amendments of 1975 (``1975
Amendments'').\2\ In particular, it authorized the Commission to
facilitate the creation of a national market system for securities, the
heart of which was to be communications systems that would disseminate
consolidated market information. Using this authority, the Commission
adopted a number of rules pursuant to which the SROs act jointly in
disseminating market information. Under this regulatory framework, the
SROs have developed and funded the systems that have been so successful
in disseminating a highly-reliable, real-time stream of consolidated
market information throughout the United States and the world.
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\2\ Pub. L. 94-29, 89 Stat. 97 (1975).
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The Commission believes that the statutory framework and objectives
established by Congress for the national market system in 1975 continue
to be just as relevant today. A number of developments in the
securities industry, however, led the Commission to initiate its review
of the arrangements currently in place for disseminating market
information. Each of these developments is attributable, in large part,
to improved technology for communicating and organizing information.
First, new technology has greatly expanded the opportunity for
retail investors to obtain access to real-time market information
through ``on-line'' accounts with their broker-dealers. Not
surprisingly, the demand by retail investors for this high-quality
information has grown exponentially in the last five years. Revenues
derived from fees applicable to retail investors have grown from $3.7
million in 1994 to $38.9 million in 1998, and now represent
approximately 9% of total market information revenues.\3\ Notably,
revenues derived from fees applicable to professional subscribers also
grew very substantially in the last five years, from $231.1 million in
1994 to $351.1 million in 1998, and still account for approximately 85%
of total market information revenues. In addition, most of the fees
applicable to retail investors have been reduced in recent months by
50% to 80%. Nevertheless, the Commission remains concerned that retail
investor fees have not properly kept pace with changing technology and
increased demand.
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\3\ The fees applicable to professional subscribers and retail
investors, as well as the revenues derived from such fees for 1994
and 1998, are set forth in Tables 1-8 in the Appendix. The fee
structures are described in section II.E below.
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One of the most important functions that the Commission can perform
for retail investors is to ensure that they have access to the
information they need to protect and further their own interests.
Communications technology now has progressed to the point that broad
access to real-time market information should be an affordable option
for most retail investors, as it long has been for professional
investors. This information could greatly expand the ability of retail
investors to monitor and control their own securities transactions,
including the quality of execution of their transactions by broker-
dealers. The Commission intends to assure that market information fees
applicable to retail investors do not restrict their access to market
information, in terms of both number of subscribers and quality of
service. In addition, such fees must not be unreasonably discriminatory
when compared with the fees charged to professional users of market
information. Comment is requested on these issues in section V below.
The second development prompting the Commission's review of market
information arrangements is the changing structure of the securities
industry, particularly the growth of alternative trading systems
(``ATSs'') that compete with markets operated by the SROs.\4\ Some of
these ATSs, which are operated by for-profit entities, have applied for
registration or indicated an interest in registering as exchanges and
thereby becoming SROs themselves. Moreover, existing SROs are exploring
the possibility of converting from membership organizations to for-
profit corporations as one means to compete more effectively. Thus, the
current structure of industry self-regulation, which largely has been
in place since the securities laws originally were enacted in the
1930's, may be about to change in fundamental ways.
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\4\ See Securities Exchange Act Release No. 40760 (Dec. 8,
1998), 63 FR 70844 (``ATS Release'').
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These potential changes in the structure of industry self-
regulation raise a number of difficult policy issues, some of which
relate directly to the arrangements for disseminating market
information. The creation of for-profit SROs may require closer
monitoring of the SROs' fees and financial structures, including their
funding and use of resources. For example, the value of a market's
information is dependent on the quality of the market's operation and
regulation. Information is worthless if it is cut off during a systems
outage
[[Page 70615]]
(particularly during a volatile, high-volume trading day when reliable
access to market information is most critical), tainted by fraud or
manipulation, or simply fails to reflect accurately the buying and
selling interest in a security. Consequently, there is a direct
connection between the value of a market's information and the
resources allocated to operating and regulating that market.
The Commission is committed to ensuring that the U.S. securities
markets continue to be operated and regulated in accordance with the
high standards mandated by Congress in the Securities Exchange Act of
1934 (``Exchange Act'').\5\ It is the SROs--the organizations that have
registered under sections 6 and 15A of the Act--that are charged with
the front-line responsibilities for operating and regulating the
primary U.S. markets. To meet these responsibilities, the SROs
historically have relied on market information fees as one of their
important sources of funding. In 1998, for example, the SROs
collectively had total revenues of $1.97 billion and total operating
expenses of $1.68 billion.\6\ Market information revenues represented
21% ($410.6 million) of the SROs' total revenues. This percentage has
remained remarkably steady over the last five years, despite the rapid
growth in market information revenues. In other words, the growth in
market information revenues has simply kept pace with the growth of
other SRO revenues during the prolonged expansion in trading volume of
the last five years.\7\ The SROs are no more, but also no less,
dependent on market information revenues today than they were in 1994.
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\5\ 15 U.S.C. 78a-78mm.
\6\ Itemized revenues and expenses for the SROs in 1994 and 1998
are set forth in Tables 9-17 in the Appendix.
\7\ While SRO revenues and costs have grown rapidly during the
expansion in trading volume, they still have been outpaced by the
growth in revenues, costs, and profits of the securities industry as
a whole. See section IV.B below.
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The Commission believes that the revenues derived from market
information fees continue to be an appropriate part of SRO funding. It
is concerned, however, that the current arrangements for setting fees
and distributing revenues may need to be revised, particularly in light
of the potential changes in the structure of industry self-regulation.
Section V requests comment on a number of matters being considered by
the Commission. These include (1) a conceptual approach to evaluating
the fairness and reasonableness of fees that, among other things, could
establish a link between the cost of market information and the total
amount of market information revenues, (2) a conceptual approach to
distributing market information revenues to the SROs that could provide
for more direct funding of SRO functions that enhance the integrity and
reliability of market information, (3) greater public disclosure
concerning fees, revenues, and the SROs' use of revenues, and (4)
broader industry and public participation in the process of setting and
administering fees. After receiving the public's comments and
completing its review, the Commission intends to take further action to
assure that the arrangements for disseminating market information
continue to reflect the objectives set forth in the Exchange Act.
II. Joint SRO Arrangements for Disseminating Market Information
Public discussion about the dissemination of market information
often has been framed in terms of the question: ``Who owns market
information?'' \8\ This question presumes, however, that essentially
state law concepts of ownership prevail in this area. In fact, market
information, at least since 1975, has been subject to comprehensive
regulation under the Exchange Act, particularly the national market
system requirements of Section 11A.\9\ To implement the national market
system, the Commission has required the SROs to act jointly pursuant to
various national market system plans in disseminating consolidated
market information.
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\8\ See, e.g., Susan B. Garland, ``Whose Info Is It, Anyway?'',
Business Week, Sept. 13, 1999, at 114, 118; Diana B. Henriques,
``Who Holds the Deed to Stock Data?'', N.Y. Times, Mar. 28, 1999, at
7.
\9\ See section III.A below for a discussion of the SROs' legal
rights with respect to market information prior to implementation of
the national market system in the mid-1970's.
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These plans govern all aspects of the arrangements for
disseminating market information. Among other things, they require the
individual SROs to funnel market information to a central processor,
which then consolidates the information into a single stream for
dissemination to the public. In this way, the public is assured of
access to a highly reliable source of information that is fully
consolidated from all the various market centers that trade a
particular security. The plans also govern two of the most important
rights of ownership of the information--the fees that can be charged
and the distribution of revenues derived from those fees. As a
consequence, no single market can be said to fully ``own'' the stream
of consolidated information that is made available to the public.
Although markets and others may assert a proprietary interest in the
information that they contribute to this stream, the practical effect
of comprehensive federal regulation of market information is that
proprietary interests in this information are subordinated to the
Exchange Act's objectives for a national market system.\10\
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\10\ The Exchange Act's national market system objectives are
discussed in section III.B below.
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A. Overview
The arrangements currently in place for disseminating market
information are the product of a variety of different national market
system plans that operate in accordance with a variety of different
Exchange Act rules. The arrangements are most usefully organized,
particularly from the standpoint of their fees, revenues, and expenses,
according to the four networks or systems that the SROs have developed
to disseminate market information for four different categories of
securities: (1) Network A--securities listed on the NYSE; (2) Network
B--securities listed on Amex or the regional exchanges; (3) Nasdaq
System--securities qualified for inclusion in the Nasdaq Stock Market,
Inc. (``Nasdaq'') and certain other securities traded in the over-the-
counter (``OTC'') market; and (4) OPRA System--exchange-listed options.
For simplicity's sake, the two networks and two systems will
hereinafter be referred to collectively as the ``Networks.''
The collection and dissemination of market information by the
Networks are addressed primarily by four Exchange Act rules. Rule
11Aa3-1 \11\ governs the dissemination of transaction reports and last
sale information in national market system securities (equity
securities listed on a national securities exchange or included in the
National Market tier of Nasdaq).\12\ In general, this rule requires an
SRO to file a transaction reporting plan for such securities, and it
requires an SRO's members to transmit the information required by the
plans to the SRO. Rule 11Ac1-1 \13\ governs the dissemination of
quotations in national market system securities and additional Nasdaq
System securities. In general, it requires an SRO to establish
procedures for making available its members'
[[Page 70616]]
quotations to information vendors, and it requires the SRO's members to
communicate quotation information in compliance with the procedures.
Rule 11Ac1-2 \14\ governs the display of transaction reports and
quotation information in national market system securities and
additional Nasdaq System securities. In general, it requires all
information vendors, if they provide broker-dealers with any market
information for a security, to provide a consolidated display of
information for the security from all reporting market centers.
Finally, Rule 11Aa3-2 \15\ sets forth the procedures for the filing and
Commission approval of national market system plans and plan
amendments.
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\11\ 17 CFR 240.11Aa3-1.
\12\ A ``national market system security'' is defined in Rule
11Aa2-1, 17 CFR 11Aa2-1, as any ``reported security'' as defined in
Rule 11Aa3-1. Currently, reported securities under Rule 11Aa3-1 are
equity securities that are listed on a national securities exchange
or that are included in the National Market tier of Nasdaq.
\13\ 17 CFR 240.11Ac1-1.
\14\ 17 CFR 240.11Ac1-2.
\15\ 17 CFR 240.11Aa3-2.
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The respective plans, participants, administrators, and information
processors associated with each of the four Networks are set forth
below.
1. Network A
Network A is operated pursuant to the Consolidated Tape Association
Plan (``CTA Plan'') and the Consolidated Quotation Plan (``CQ Plan). It
disseminates market information for any common stock, long-term
warrant, or preferred stock admitted to dealings on the NYSE.\16\ All
of the SROs are participants in the CTA Plan and CQ Plan. The
Consolidated Tape Association (``CTA'') is a committee made up of one
representative of each of the participants. It administers the CTA Plan
and is registered as a securities information processor (``SIP'') under
Section 11A(b) of the Exchange Act.\17\ The administrator of Network
A's day-to-day operations is the NYSE, and its information processor is
the Securities Industry Automation Corporation (``SIAC'').\18\
Amendments to the CTA Plan and the CQ Plan are subject to Commission
review under Rule 11Aa3-2.
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\16\ CTA Plan, Sections I(p) and VII(a)(i).
\17\ The CQ Plan is administered by an Operating Committee that
is substantially the same as the CTA.
\18\ SIAC is jointly owned by the NYSE and Amex and is a
registered SIP under Section 11A(b).
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2. Network B
Network B also is operated pursuant to the CTA Plan and the CQ
Plan. It disseminates market information for any common stock, long-
term warrant, or preferred stock admitted to dealings on the Amex or
the regional exchanges, but not also admitted to dealings on the NYSE
or included in the Nasdaq market.\19\ Its day-to-day administrator is
Amex, and its information processor is SIAC. Although they are operated
pursuant to the same plans, Network B and Network A are treated
separately with respect to most of their financial matters and fee
structures.\20\
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\19\ CTA Plan, Sections I(q) and VII(a).
\20\ See, e.g., CTA Plan, Section XII(a) (``Except as otherwise
indicated, each income, expense and cost item, and each formula
therefor described in this Section XII, applies separately to each
of the two CTA networks and its respective Participants.'').
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3. Nasdaq System
The Nasdaq System disseminates real-time market information for
securities included in the two tiers of the Nasdaq market--the National
Market (``NNM'') and the SmallCap Market (``SCM'') \21\--as well as
certain other securities traded in the over-the-counter (``OTC'')
market.\22\ Information for NNM securities is collected and
disseminated pursuant to the NASD's rules and the Joint Self-Regulatory
Plan Governing the Collection, Consolidation, and Dissemination of
Quotation and Transaction Information for Exchange-listed Nasdaq/
National Market System Securities and for Nasdaq/National Market System
Securities Traded on an Unlisted Trading Privilege Basis (``Nasdaq/UTP
Plan''). The participants in the Nasdaq/UTP Plan are Amex, CHX, NASD,
and Phlx. The BSE is a limited participant.\23\ The Nasdaq/UTP Plan
provides for an operating committee composed of one representative for
each participant. Market information for SCM and other securities
traded in the OTC market is collected and disseminated pursuant to the
NASD's rules. The day-to-day administrator and information processor
for the Nasdaq System is Nasdaq. Nasdaq is a registered SIP under
section 11A(b). Amendments to the Nasdaq/UTP Plan are subject to
Commission review under Rule 11Aa3-2. Amendments to the NASD's rules
(including changes in market information fees relating to all Nasdaq
System securities) are subject to Commission review under Section 19(b)
of the Exchange Act.
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\21\ See NASD Rule 4200(a)(27).
\22\ See, e.g., NASD Rule 7010(a).
\23\ A ``limited participant'' is a national securities exchange
whose participation in the Nasdaq/UTP Plan is restricted to
reporting market information.
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4. OPRA System
The OPRA System is operated pursuant to the Plan for Reporting of
Consolidated Options Last Sale Reports and Quotation Information
(``OPRA Plan''). It disseminates market information for series of
options contracts traded in a securities market maintained by a party
to the OPRA Plan.\24\ The parties to the OPRA Plan are Amex, CBOE,
NYSE,\25\ PCX, and Phlx. The OPRA System is administered by the Options
Price Reporting Authority (``OPRA''), a committee made up of one
representative from each of the parties to the OPRA Plan. OPRA is a
registered SIP under section 11A(b). CBOE provides administrative
services for the OPRA Plan, and SIAC provides processing services.
Amendments to the OPRA Plan are subject to Commission review under Rule
11Aa3-2. Although the OPRA Plan has been approved as a national market
system plan under Rule 11Aa3-2, it has not been approved by the
Commission pursuant to Rule 11Aa3-1, which requires SROs to file a
transaction reporting plan for certain equity securities. OPRA System
securities therefore are not ``reported securities'' and are not
subject to Rules 11Aa3-1, 11Ac1-1, 11Ac1-2, or 11Ac1-4. Nevertheless,
the OPRA Plan itself imposes a variety of requirements on its
participants and vendors of its information. For example, Section
VII(b) of the OPRA Plan provides that vendor agreements must contain
standards requiring the non-discriminatory dissemination of information
from all markets and that vendors' equipment must be capable of
displaying all information regardless of the market in which a
transaction or quotation took place.
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\24\ OPRA Plan, Section III(a).
\25\ The NYSE no longer trades listed options.
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B. Governance
The CTA Plan, CQ Plan, Nasdaq/UTP Plan, and OPRA Plan
(collectively, the ``Plans'') incorporate rules for governing their
affairs that are quite similar. Each is administered by a committee
composed of one representative from each of their respective
participants. A majority vote of representatives generally is
sufficient to approve Plan actions. Amendments to the Plans, however,
must be executed by each participant, except that fee increases or new
fees can be adopted by a 2/3 vote.\26\ Each of the Plans provides for
the delegation of its operational functions to individuals, entities,
or committees.\27\ Finally, each of the Plans provides for the
admission of new participants.
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\26\ See, e.g., CQ Plan, Sections IV(c) and IX(b)(iii); Nasdaq/
UTP Plan, Section IV.C.2.
\27\ See, e.g., CTA Plan, Section IV(a) (``CTA will be primarily
a policy-making body as distinguished from one engaged in operations
of any kind. CTA, directly or by delegating its functions to
individuals, committees established by it from time to time, or
others, will administer this CTA Plan and will have the power and
exercise the authority conferred upon it by this CTA Plan as
described herein.'').
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[[Page 70617]]
C. Collection and Processing of Information
The Plans require participants to collect and promptly report
market information to the Plan processors. The processors are
responsible for receiving the information from the participants,
consolidating the information, and then disseminating it in accordance
with the Plans. The CQ Plan and the Nasdaq/UTP Plan provide for the
dissemination of a consolidated best bid and offer that identifies the
market centers that published these quotes.\28\ The OPRA Plan (the only
other Plan that disseminates quotation information) does not provide
for dissemination of a consolidated best bid and offer.
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\28\ CQ Plan, Sections I(b) and VI(c); Nasdaq/UTP Plan, Section
VI.C.I.
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With the expansion in trading volume of recent years, the amount of
information handled by the Plan processors has expanded dramatically.
For example, in 1994, SIAC processed 73 million transaction reports and
115 million quotations for Network A and Network B. In 1998, these
figures increased to 190 million transaction reports and 444 million
quotations, for an increase, respectively, of 160% and 268%. By
comparison, the total revenues of Network A and Network B increased by
only 51% between 1994 and 1998.\29\ Similarly, in 1994 the trading
volume in Nasdaq securities was 74 billion shares. In 1998, the trading
volume was 202 billion shares, for an increase of 173%.
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\29\ The total revenues for Network A and Network B were $161.3
million in 1994 and $243.0 million in 1998. See Tables 5 and 7 in
the Appendix. A fuller comparison of the growth in market data
revenues and expenses compared to other securities industry
benchmarks is provided in section IV.B.2 below.
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D. Financial Matters
The Plans have adopted rules governing their financial matters that
are similar to one another.\30\ All revenues derived from fees charged
for a Network's market information are included in a single pool. The
Network's operating expenses (amounts incurred by the Network's
administrator and processor in performing their Network functions) are
paid directly out of the Network's revenues. A Network's operating
expenses do not, however, include any of the costs incurred by the
individual SROs in reporting their information to the Network
processors.\31\ After deduction of operating expenses, each Network's
revenues generally are distributed to its participants in accordance
with their proportional share of the total transaction volume for the
Network.\32\ Finally, each of the Plans also requires that its
participants annually be provided with audited statements of its
financial affairs.\33\ The revenues, expenses, and distributions for
each of the Networks are set forth in Tables 5-8 in the Appendix.
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\30\ The OPRA Plan is somewhat different from the others in that
it provides for three separate ``accounting centers''--basic, index
options, and foreign currency options--for the allocation of
revenues and expenses. OPRA Plan, Section VIII(a).
\31\ See, e.g., CTA Plan, Section XII(c)(v) (``Except as
otherwise provided in this Section XII(c), each Participant and each
other reporting party shall be responsible for paying the full cost
and expense (without any reimbursement or sharing) incurred by it in
collecting and reporting to the Processor in New York City last sale
price information relating to Eligible Securities or associated with
its market surveillance function.''); OPRA Plan, Section VIII(a)(ii)
(``Each party shall be responsible for paying the full cost incurred
by it in collecting and reporting to the Processor last sale reports
and quotation information related to eligible securities for
dissemination through the OPRA System.'').
\32\ See CTA Plan, Section XII(a); CQ Plan, Section IX(a); OPRA
Plan, Section XIII(b). The Nasdaq/UTP Plan distribution formula is a
little different from the other plans in that it is based on an
average of the percentage of total transaction volume and the
percentage of total share volume. The Nasdaq/UTP Plan also provides
for certain minimum payments to new participants. See Nasdaq/UTP
Plan, Exhibit A. Thus far, CHX is the only non-NASD participant in
the Nasdaq/UTP Plan to receive a distribution.
\33\ CTA Plan, Section XII(a)(v); CQ Plan, Section IX(a)(v);
Nasdaq/UTP Plan, Section XIV(C); OPRA Plan, Section VIII(a)(v).
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E. Fee Structures
The Plans and NASD rules establish the terms and conditions under
which market information is disseminated by the Networks. In general,
they require that market information be disseminated only to those
persons that have been approved by their respective administrators and
entered into the appropriate agreements.\34\ These persons can be
divided into two major categories--vendors and subscribers.\35\ Vendors
are in the business of distributing information to others. As a general
matter, they accept the stream of information made available by the
Network processors and, in turn, disseminate the information to their
customers, often providing enhanced information services as well.
Subscribers receive information for their own use, typically from
vendors and broker-dealers.
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\34\ A detailed discussion of the process for obtaining market
information from the Networks, including the applicable forms and
their terms and conditions, is provided in a report on market data
pricing commissioned by the Securities Industry Association. Arthur
Andersen LLP, Report on Market Data Pricing 8-15 (June 1999)
(``Andersen Report'').
\35\ See, e.g., CTA Plan, Section IX(a) (specifying a
``Consolidated Vendor Form'' and a ``Consolidated Subscriber
Form'').
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The various fee structures that have been established by the
Networks \36\ for the dissemination of market information reflect this
vendor/subscriber dichotomy. Vendors contract directly with the
Networks for the right to receive information and distribute it to
their customers (e.g., broker-dealers and institutional investors).
Vendors pay a variety of access and administrative fees to the
Networks.\37\ Subscribers may contract directly with the Networks for
receipt of market information, but generally obtain access to
information through a vendor, which passes the subscriber fees on to
the Network. Broker-dealers that both use information internally and
distribute it to others (e.g., their brokerage customers) act as both
vendors and subscribers.
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\36\ Fees are set separately for each of the four Networks.
\37\ See Andersen Report, note 34 above, at Exhibit 4 (listing
the various fees and charges imposed on vendors and subscribers).
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Each of the Networks receives the great majority of its revenues
through subscriber fees. The most significant subscriber fees fall into
two categories--monthly and per-query. Monthly fees entitle the
subscriber to an unlimited amount of real-time market information
during the month. They are charged to professional subscribers on a
per-device basis and to nonprofessional subscribers on a per-customer
basis. The nonprofessional subscriber fees are much less than the
professional subscriber fees. In general, nonprofessional subscribers
are defined as those who use market information solely for their
personal, non-business use and do not distribute the information to
others. Under the per-query fee structures, subscribers are required to
pay an amount for each request for a packet of real-time market
information.\38\ Although the per-query fee structure is available to
professional subscribers, it was developed by the Networks in recent
years primarily for retail investors who want to obtain real-time
information through their personal computers.\39\ Recently, Nasdaq,
Network A, and Network B have substantially reduced their
nonprofessional subscriber and per-
[[Page 70618]]
query fees.\40\ In addition, for Network A and Network B the amount of
per-query fees for a subscriber is capped each month at the amount of
the monthly nonprofessional subscriber fee.\41\
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\38\ A packet generally includes a variety of information
relating to a single security (e.g., last sale price, best bid, best
offer, and volume).
\39\ See, e.g., Securities Exchange Act Release No. 35393
(February 17, 1995), 60 FR 10625 (NASD's purpose in establishing a
per-query fee structure was ``to provide retail customers with a
cost-effective alternative to calling their brokers for current
market information'').
\40\ Securities Exchange Act Release No. 42138 (Nov. 15, 1999),
64 FR 63350 (Network B fee reduction); Securities Exchange Act
Release No. 41977 (Oct. 5, 1999), 64 FR 55503 (Network A fee
reduction); Securities Exchange Act Release No. 41499 (June 9,
1999), 64 FR 32910 (Nasdaq System fee reduction).
\41\ For Network A, per-query fees are capped at the $1 monthly
fee that applies to the first 250,000 nonprofessional customers of a
vendor.
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The monthly professional, monthly nonprofessional, and per-query
subscriber fees for each Network, as they currently exist and as they
existed at the end of 1998 and 1994, are set forth in Tables 1-4 in the
Appendix. The revenues derived from these subscriber fees for each
Network in 1998 and 1994 are included in Tables 5-8 in the Appendix.
Under both the monthly and per-query fee structures, the Networks
require vendors and subscribers to disclose a substantial amount of
information about their business operations and use of market
information, including the requirement that they monitor and report the
number of devices, customers, and queries for which they must pay fees.
There are substantial administrative costs associated with this process
for vendors and subscribers, as well as the Networks.\42\ The burdens
imposed on vendors and subscribers by these fee structures are
increased by the necessity to account separately to each Network,
particularly when the relevant policies and procedures vary from
Network to Network. Comment is requested in section V below on ways to
reduce the cost of administering fee structures.
---------------------------------------------------------------------------
\42\ The administrative burdens associated with the monthly and
per-query fee structures are discussed at length in the Andersen
Report, note 34 above.
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Finally, the Networks have experimented with an ``enterprise'' fee
structure under which an entity would pay a set amount each month for
the market information services that it receives from a Network. For
example, the OPRA System established an enterprise rate in 1997 that is
based primarily on the number of registered representatives associated
with a particular firm.\43\ In addition, Network A recently established
an enterprise arrangement that caps at $500,000 the amount a registered
broker-dealer is required to pay in a month for the use of market
information by its employees and by its brokerage-account
customers.\44\
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\42\ See Securities Exchange Act Release No. 38204 (Jan. 24,
1997), 62 FR 4553.
\44\ See Securities Exchange Act Release No. 41977, note 40
above.
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F. Commission Oversight
Rule 11Aa3-2 establishes the procedures that govern amendments to
each of the Plans. In addition, section 19(b) and Rule 19b-4 thereunder
govern proposed rule changes by the NASD that relate to the Nasdaq
System. In general, all amendments to the Plans and NASD rules must be
filed with the Commission, published for public comment, and approved
by the Commission. Under Rule 11Ac3-2(c)(3)(i), however, the Plans may
submit their proposed fees as effective on filing (notice of the filing
is still published for public comment). Within 60 days after filing,
the Commission may abrogate the proposal and require that it be refiled
for Commission approval. The NASD, in contrast, generally has submitted
for Commission approval the proposed fees paid by non-members for
Nasdaq System market information, rather than as effective on filing
under Section 19(b)(3)(A)(ii). Under either of these procedures, fee
changes are subject to Commission review.
The CTA Plan, CQ Plan, and NASD Rules contain provisions that
authorize ``pilot programs'' that have not been filed for Commission
review. For example, Section IX(e) of the CTA Plan provides as follows:
(A) CTA network's administrator, on behalf of the CTA network's
Participants, may enter into arrangements of limited duration,
geography, and scope with vendors and other persons for pilot test
operations designed to develop, or permit the development of, new
last sale price information services and uses under terms and
conditions other than those specified in Sections IX(a) and XII * *
* Any such arrangement shall afford the CTA network's Participants
an opportunity to receive market research obtained from the pilot
test operations and/or to participate in the pilot test operations.
The CTA network's administrator shall promptly report to CTA the
commencement of each such arrangement and, upon its conclusion, any
market research obtained from the pilot test operations.\45\
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\45\ Section VII(e) of the CQ Plan contains a provision that is
nearly identical to the CTA Plan provision.
---------------------------------------------------------------------------
NASD Rule 7100(b) contains a similar provision:
To facilitate the development of new information services and
uses under appropriate terms and conditions, arrangements of limited
duration, geography and/or scope may be entered into with Broker/
Dealers, Vendors and other persons which may modify or dispense with
some or all of the charges contained in this Rule or the terms and
conditions contained in standard agreements. The arrangements
contemplated will permit the testing and pilot operation of proposed
new information services and uses to evaluate their impact on and to
develop the technical, cost and market research information
necessary to formulate permanent charges, terms and conditions for
filing with and approval by the Commission.
Pursuant to these provisions, Network A, Network B, and the Nasdaq
System have implemented some pilot programs that have lasted for many
years without being filed for Commission approval.\46\ Although the
Networks have used these pilot program provisions to test new fees and
services, the Commission does not believe that the provisions were
intended to be used for such long-running programs. The Commission also
is concerned that the public receive notice of, and an opportunity to
comment on, the fees charged for market information. Comment is
requested in section V below on procedures that would encourage
innovation by the Networks without unduly restricting the opportunity
for public notice and comment.
---------------------------------------------------------------------------
\46\ See, e.g., Securities Exchange Act Release No. 40689 (Nov.
19, 1998), 63 FR 65626 (NASD proposed rule change to make permanent
a pilot program for delivery of market information through automated
voice response services that had been in operation for eleven
years); Securities Exchange Act Release No. 39235 (Oct. 14, 1997),
62 FR 54886 (Network A proposal to include a per-query fee in its
permanent fee schedule; noting that Network A had conducted pilot
programs for per-query fees since 1991).
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III. Exchange Act Standards Governing Market Information Fees and
Revenues
Market information fees are addressed most directly by three
provisions of the Exchange Act, all of which were added to the Act by
the 1975 Amendments. First, section 11A(c)(1)(C) grants rulemaking
authority to the Commission to assure that all SIPs may obtain market
information from an exclusive processor of that information on terms
that are ``fair and reasonable.'' Second, section 11A(c)(1)(D) grants
rulemaking authority to the Commission to assure that all persons may
obtain market information on terms that are ``not unreasonably
discriminatory.'' \47\
[[Page 70619]]
Finally, sections 6(b)(4) and 15A(b)(5) require that the rules of a
national securities exchange or a national securities association
provide for the ``equitable allocation of reasonable dues, fees, and
other charges among its members and issuers and other persons'' using
its facilities.
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\47\ Although the Commission has not yet exercised its
rulemaking authority under section 11A(c)(1)(C) or (D) to specify
the fees that can be charged for market information, these
provisions plainly indicate Congress' intent that an exclusive
processor's fees be ``fair and reasonable'' and ``not unreasonably
discriminatory.'' Consequently, these requirements are applicable to
the Commission's review of fees in the context of a proposed rule
change by an SRO under section 19(b) or a national market system
plan under Rule 11Aa3-2(c), as well as proceedings under section
11A(b)(5) to review a registered SIP's limitation on access to
market information. In each of these contexts, the Commission is
required to determine whether a proposed fee is consistent with the
provisions of the Exchange Act.
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Terms such as ``fair,'' ``reasonable,'' and ``equitable'' often
need standards to guide their application in practice. One standard
commonly used to evaluate the fairness and reasonableness of fees,
particularly those of a monopolistic provider of a service, is the
amount of costs incurred to provide the service.\48\ Some type of cost-
based standard is necessary in the monopoly context because, on the one
hand, it precludes the excessive profits that would result if revenues
were allowed to far outstrip costs, and, on the other hand, it
precludes underfunding of a service if the revenues were held far below
costs (or subsidization of the service by other sources of
revenues).\49\ Congress explicitly adopted a strict cost-of-service
standard in the 1975 Amendments in the context of its decision to
restrict the permissibility of fixed commission rates. Section
6(e)(1)(B) was added to the Exchange Act and precludes approval of an
SRO's proposal for fixed commission rates unless the Commission finds,
among other things, that the proposed rates ``are reasonable in
relation to the costs of providing the service for which the fees are
charged.''
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\48\ See, e.g., MCI Telecommunications Corp. v. FCC, 675 F.2d
408, 410 (D.C. Cir. 1982) (``A basic principle used to ensure that
rates are `just and reasonable' is that rates are determined on the
basis of cost.'') (footnote omitted); James C. Bonbright, et al.,
Principles of Public Utility Rates 109 (2d ed. 1988) (``[O]ne
standard of reasonable rates can fairly be said to outrank all
others in the importance attached to it by experts and public
opinion alike--the standard of costs of service, often qualified by
the stipulation that the relevant cost is necessary, true (i.e.,
private and social) cost or cost reasonably and prudently
incurred.'').
\49\ See Bonbright, note 48 above, at 109 (``Rates found to be
far in excess of cost are at least highly vulnerable to the charge
of unreasonableness. Rates found well below cost are likely to be
tolerated, if at all, only as a necessary and temporary evil. For if
rates are not compensatory, they are not subsidy free.'').
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In section 11A, however, Congress did not require the Commission to
undertake a similar, strictly cost-of-service (or ``ratemaking'')
approach to its review of market information fees in every case. Such
an inflexible standard, although unavoidable in some contexts,\50\ can
entail severe practical difficulties. Instead, Congress, consistent
with its approach to the national market system in general, granted the
Commission some flexibility in evaluating the fairness and
reasonableness of market information fees. Specifically, Congress
articulated general findings and objectives for the national market
system in section 11A and directed the Commission to act accordingly in
overseeing its development. Congress thereby allowed the Commission to
adopt a more flexible approach than ratemaking.\51\
---------------------------------------------------------------------------
\50\ See section III.C below for a discussion of the
Commission's adoption of a strict cost-of-service standard in the
context of a limitation of access proceeding under section 11A(b)(5)
involving the NASD and Institutional Networks Corporation
(``Instinet'').
\51\ In section V.A below, the Commission requests comment on a
flexible, cost-based approach to assessing the fairness and
reasonableness of market information fees.
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In formulating its findings and objectives for the national market
system, Congress was influenced to a great extent by the problems it
perceived in the arrangements for disseminating market information
prior to 1975. Consequently, an understanding of the standards by which
Congress intended the Commission to evaluate market information fees
requires an understanding of, first, the legal status of market
information prior to 1975 and, second, the findings and objectives that
Congress adopted for the establishment of a national market system.
This section will conclude with a discussion of the Commission's review
of market information fees in the years since 1975.
A. Legal Status of Market Information Prior to 1975
Prior to the 1970's, no statute or Commission rule required the
SROs to disseminate market information to the public or to consolidate
their information. Each SRO acted individually and disseminated
information on its own terms. The SROs decided what information to
disseminate, to whom to disseminate the information, and the amount of
fees to charge. The result was that they did not provide consolidated
information to broker-dealers and investors. In addition, the NYSE,
which operated the largest market, severely restricted public access to
market information, particularly its quotations.
During the early 1970's, the Commission initiated a comprehensive
review of the securities markets that ultimately led to significant
changes in market structure, including the arrangements for
disseminating market information. In particular, it articulated the
goal of a central market system. The attainment of that goal eventually
led to the removal of an SRO's right to restrict public access to its
information and to the wide availability of consolidated market
information.
1. Exchange Control of Market Information
The nature of an exchange's interest in its market information was
litigated in a series of Supreme Court cases decided between 1905 and
1926, the so-called ``ticker cases.'' \52\ Central to the Court's
holding in all three cases were the exchanges' agreements with members,
non-members and telegraphic distributors that restricted the
redistribution of market information. Generally, the agreements
required prior exchange approval of any intended recipient of the
information.\53\
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\52\ Board of Trade v. Christie Grain & Stock Co., 198 U.S. 236
(1905); Hunt v. New York Cotton Exchange, 205 U.S. 322 (1907); Moore
v. New York Cotton Exchange, 270 U.S. 593 (1926). Many years have
passed since these cases were decided. They are discussed in this
release not because they necessarily would be decided the same way
today, but to set forth the legal context surrounding the initiation
of the national market system.
\53\ For example, the NYSE generally made last-sale prices
available to members, non-members, and telegraphic distributors
pursuant to this type of agreement. See Letter from Robert W. Haack,
President, NYSE, to William J. Casey, Chairman, SEC, dated May 22,
1972 (``NYSE Letter''). Some of the regional exchanges, however, did
not restrict access to their market information. For example, the
PCX publicized its transactions on a tickertape, which was made
available to the vendors and the press, but imposed no restrictions
on the use or dissemination of the information. See Letter from
Thomas P. Phelan, President, PCX, to Ronald F. Hunt, Secretary, SEC,
dated May 19, 1972.
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The first of the ticker cases to examine the legal status of an
exchange's market information was Board of Trade v. Christie Grain &
Stock Co.\54\ In Christie, the Chicago Board of Trade (``CBOT'') sought
to enjoin the defendants from illegally obtaining and distributing the
CBOT's quotations of prices.\55\ The Supreme Court held that the CBOT
could prevent the grain companies from using the market information.
Justice Holmes, writing for the majority, observed:
---------------------------------------------------------------------------
\54\ 198 U.S. 236 (1905).
\55\ Certain telegraph companies were the only entities
authorized to receive and distribute the CBOT's quotations, pursuant
to an agreement that they not furnish the quotations to ``bucket
shops.'' The defendants did not receive the quotations through these
telegraph companies. 198 U.S. at 245.
(T)he plaintiff's collection of quotations is entitled to the
protections of the law. It stands like a trade secret. The plaintiff
has the right to keep the work which it has done, or paid for doing,
to itself. The fact that others might do similar work, if they
might, does not authorize them to steal the plaintiff's.\56\
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\56\ Id. at 250.
In holding that the CBOT had the right to restrict the
dissemination of its
[[Page 70620]]
quotations, the Court focused on the nature of market information:
``Time is of the essence in matters like this, and it fairly may be
said that, if the contracts with the plaintiff are kept, the
information will not become public property until the plaintiff has
gained its reward. A priority of a few minutes probably is enough.''
\57\
---------------------------------------------------------------------------
\57\ Id. at 251.
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The holding in Christie was reaffirmed two years later in Hunt v.
New York Cotton Exchange.\58\ In upholding an injunction enjoining the
defendant from receiving and using exchange quotations of sales from an
authorized telegraph company, the Court, citing Christie, stated that
``[i]t is established that the quotations are property and are entitled
to the protection of the law'' and that ``the exchange may keep them to
itself or communicate them to others.'' \59\
---------------------------------------------------------------------------
\58\ 205 U.S. 322 (1907).
\59\ Id. at 333, 336.
---------------------------------------------------------------------------
The major exchanges relied on the ticker cases to assert
proprietary rights in their market information and to defend those
rights vigorously. In a letter commenting on Commission proposals to
require dissemination of consolidated market information, Amex stated
its position as follows:
We believe it is questionable whether the SEC has proceeded
properly in proposing these Rules and we have attached, as Appendix
A, a legal opinion which discusses this matter. It is long-standing
and clearly established legally that the Exchange has a proprietary
right in its transaction data and quotation information. It is not
clear from the terms of the proposed Rules whether or to the extent
to which they might impinge on the Exchange's right.\60\
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\60\ Letter from Paul Kolton, President, Amex, to Ronald F.
Hunt, Secretary, SEC, dated May 22, 1972.
The NYSE, which operated the largest market, had exercised its
proprietary right to control its information by placing severe
---------------------------------------------------------------------------
restrictions on public access to its quotations:
It has always been the position of the Exchange that NYSE bid-
asked quotations on a continuous basis are a prerogative of Exchange
membership. Since 1928, when bid-asked quotations were first made
available outside the Exchange, they have always been supplied only
to the offices of members and member organizations pursuant to
written agreements containing the same type of provisions as are
included in last-sale agreements.\61\
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\61\ See NYSE Letter, note 53 above.
In sum, market information, to the extent it was disseminated, was
not consolidated, and the largest market refused to provide public
access to its quotations. It was against this backdrop that the
Commission took the first steps towards creating a central market
system.
2. Initiation of a Central Market Structure
Recognizing that the public needed greater access to higher quality
market information, the Commission focused on two objectives for market
information in a series of statements on the future structure of the
securities markets: Unrestricted public access and consolidated
information. These objectives were embodied in the concept of a central
market system, which the Commission endorsed in a letter transmitting
the Institutional Investor Study Report to Congress in 1971.\62\ In the
letter, the Commission stated that a ``major goal and ideal of the
securities markets and the securities industry has been the creation of
a strong central market system for securities of national importance,
in which all buying and selling interest in these securities could
participate and be represented under a competitive regime.'' \63\ In
February 1972, the Commission issued its Statement on the Future
Structure of the Securities Markets, which emphasized that ``an
essential step toward formation of a central market system is to make
information on prices, volume, and quotes for all securities in all
markets available to all investors'' and that ``(s)uch a communications
system would thus serve to link the now scattered markets for listed
securities.'' \64\
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\62\ SEC, Institutional Investor Study Report, H.R. Doc. No. 92-
64, 92d Cong., 1st Sess. (1971).
\63\ Id. at xxiv.
\64\ Statement of the Securities and Exchange Commission on the
Future Structure of the Securities Markets (February 2, 1972), 37 FR
5286.
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The first steps toward practical implementation of a central market
system were taken in 1972 when the Commission proposed rules to provide
for the consolidated reporting of transactions and quotations.\65\ In
response to these proposals, the NYSE and Amex raised objections to the
Commission's authority under the Exchange Act. For example, the NYSE
made the following assertion with respect to the Commission's authority
to adopt the quotations rule:
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\65\ Securities Exchange Act Release No. 9529 (March 8, 1972),
37 FR 5760 (proposing Rule 17a-14 for quotation dissemination);
Securities Exchange Act Release No. 9530 (March 8, 1972), 37 FR 5761
(proposing Rule 17a-15 for transaction reporting).
To deprive or reduce the valuable property interest of the
Exchange in its quotations is not only beyond the authority of the
SEC under sections 17(a) and 23(a) of the Securities Exchange Act,
but, furthermore, such action would deprive the Exchange of property
in violation of the due process provisions of the Constitution of
the United States.\66\
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\66\ NYSE Letter, note 53 above.
Despite these objections, the Commission was determined to achieve
the goals of public access to consolidated market information. It did
not believe, however, that this objective was incompatible with
allowing the exchanges to charge reasonable fees for such information.
For example, with respect to the transaction reporting rule, the
Commission clarified that the ``imposition by self-regulatory
organizations and vendors of reasonable, uniform charges for
distribution of (transaction reports) in connection with compliance
with the Rule will be permitted.'' \67\ The Commission also emphasized
that it was the SROs who should be primarily responsible for
disseminating consolidated information: ``(B)ecause of their unique
role in the statutory scheme, including their obligation to enforce the
federal securities laws subject to the Commission's review, (the SROs)
are the most appropriate bodies to collect, process and make available
consolidated, real-time quotation data.'' \68\
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\67\ Securities Exchange Act Release No. 9731 (August 14, 1972)
(reproposing the transaction reporting rule).
\68\ Securities Exchange Act Release No. 10969 (August 14,
1974), 39 FR 31920 (reproposing the quotation dissemination rule).
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In early 1975, the Commission sent letters to the national
securities exchanges requesting that they eliminate any rules or
practices that restricted access to or use of any quotation information
disseminated by the exchange. The Commission's request emphasized the
importance of wide public access:
(Q)uotation information is of significant value to the market
place as a whole insofar as a quotation reflects the considered
judgment of a market professional as to various factors affecting
the market, including the current price levels and size of buying
and selling interest. Thus, restrictions on dissemination of that
information detract from the efficiency of the market place in
reflecting all available fundamental and market information
respecting an issuer's securities.\69\
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\69\ Securities Exchange Act Release No. 11288 (March 11, 1975),
40 FR 15015. In making this request, however, the Commission stated
that it did ``not view as a restriction reasonable charges for
providing access to, or permitting use of, quotation information.''
Id. at n. 8.
Just prior to enactment of the 1975 Amendments, the Commission
announced that the exchanges had
[[Page 70621]]
complied with the Commission's request and that, as a consequence,
vendors could disseminate quotation information ``to any subscriber for
any purpose, subject only to compliance with such procedures as
disseminating exchanges have established, or may in the future
establish, to provide for the collection of reasonable exchange charges
for such information.'' \70\ In this regard, revenues derived from
market information fees already were an important source of SRO
funding. In 1975, for example, market information revenues represented
14.7% of the NYSE's total revenues and 28.2% of the Amex's total
revenues.\71\
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\70\ Securities Exchange Act Release No. 11406 (May 7, 1975).
\71\ NYSE, 1975 Annual Report 16; Amex, 1975 Annual Report 14.
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B. The 1975 Amendments
With the enactment of the 1975 Amendments, Congress left no doubt
that the Commission was statutorily authorized to oversee the
establishment of a national market system for securities. Consistent
with the central market approach initiated by the Commission, the two
``paramount objectives'' of the national market system were to be ``the
maintenance of stable and orderly markets'' and ``the centralization of
all buying and selling interest so that each investor will have the
opportunity for the best possible execution of his order, regardless of
where in the system it originates.'' \72\ To achieve these objectives,
Congress recognized that ``communication systems, particularly those
designed to provide automated dissemination of last sale and quotation
information with respect to securities, will form the heart of the
national market system.'' \73\ Rather than attempt to dictate the
specific elements of a national market system, however, Congress chose
to rely on an ``approach designed to provide maximum flexibility to the
Commission and the securities industry in giving specific content to
the general concept of the national market system.'' \74\
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\72\ S. Rep. No. 94-75, 94th Cong., 1st Sess. 7 (1975) (``Senate
Report'').
\73\ H.R. Rep. No. 94-229, 94th Cong., 1st Sess. 93 (1975)
(``Conference Report'').
\74\ Id. at 92.
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Congress implemented this approach by adding section 11A to the
Exchange Act. Section 11A(a) directs the Commission to facilitate the
establishment of a national market system in accordance with specific
congressional findings and objectives. Among these findings were that
new data processing and communications techniques created the
opportunity for more efficient and effective market operations, and
that the linking of all markets through such data processing and
communications facilities would increase the information available to
broker-dealers and investors. The objectives set forth in section
11A(a) to guide the Commission in its oversight of the national market
system were to assure (1) economically efficient execution of
securities transactions, (2) fair competition among broker-dealers,
among exchange markets, and between exchange markets and markets other
than exchange markets, (3) the availability to broker-dealers and
investors of market information, (4) the practicability of brokers
executing investors' orders in the best market, and (5) an opportunity
for investors' orders to be executed without the participation of a
dealer.
Although it intended to rely on competitive forces to the greatest
extent possible to shape the national market system, Congress also
recognized that the Commission would need ample authority to achieve
the goal of providing investors and broker-dealers with a central
source of consolidated market information:
The conferees expect, however, in those situations where
competition may not be sufficient, such as the creation of a
composite quotation system or a consolidated transactional reporting
system, the Commission will use the powers granted to it in this
bill to act promptly and effectively to insure that the essential
mechanisms of an integrated secondary trading system are put in
place as rapidly as possible.\75\
---------------------------------------------------------------------------
\75\ Id.
Accordingly, Congress granted the Commission ``pervasive rulemaking
power to regulate securities communications systems.'' \76\
---------------------------------------------------------------------------
\76\ Id. at 93.
---------------------------------------------------------------------------
Congress was particularly concerned about entities that would be
exclusive processors of market information for the SROs. It noted that
any such processor would be ``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.'' \77\
Section 11A was intended to ``grant the SEC broad powers over any
exclusive processor and impose on that agency a responsibility to
assure the processor's neutrality and the reasonableness of its charges
in practice as well as in concept.'' \78\
---------------------------------------------------------------------------
\77\ Senate Report, note 72 above, at 11.
\78\ Id. at 12.
---------------------------------------------------------------------------
Section 11A(b)(1) requires registration with the Commission of any
SIP that is an exclusive processor. An ``exclusive processor'' is
defined in section 3(a)(22)(B) as any SIP or SRO that, directly or
indirectly, engages on an exclusive basis in collecting, processing, or
distributing the market information of an SRO. If a registered SIP
limits the access of any person to its services, section 11A(b)(5)
provides for Commission review of the limitation. The Commission may
uphold the limitation on access if it is consistent with the Exchange
Act and the rules thereunder and the person subject to the prohibition
or limitation has not been discriminated against unfairly. If the
Commission cannot make this finding or if the prohibition or limitation
imposes any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act, the Commission must
set aside the limitation.
Although an SRO is excluded from the definition of a SIP in section
3(a)(22)(A) and therefore is not required to register under section
11A(b), Congress specifically included within the definition of
``exclusive processor'' in section 3(a)(22)(B) any SRO that acted ``on
its own behalf'' in performing these functions. Moreover, the
legislative history of this section indicates a congressional intention
that SROs acting as exclusive processors be regulated ``in the same
manner and to the same extent'' as SIPs that are registered under
section 11A(b).\79\
---------------------------------------------------------------------------
\79\ Id. at 10.
---------------------------------------------------------------------------
Section 11A(c)(1) specifies the Commission's rulemaking authority
over market information. In addition to assuring that exclusive
processors make their market information available to SIPs on terms
that are ``fair and reasonable'' (subparagraph C) and that all persons
have access to information on terms that are ``not unreasonably
discriminatory'' (subparagraph D), the Commission is directed to
prevent deceptive or fraudulent information (subparagraph A), to assure
the prompt, accurate, reliable, and fair dissemination of market
information and that the form and content of information was fair and
useful (subparagraph B), to assure that all broker-dealers transmitted
orders in a manner consistent with the establishment of a national
market system (subparagraph E), and to assure equal regulation of all
markets and broker-dealers effecting transactions in national market
system securities (subparagraph F).\80\
---------------------------------------------------------------------------
\80\ Congress explicitly defined ``equal regulation'' in the
Exchange Act in terms of the effect of regulation on competition.
Section 3(a)(36) provides that a ``class of persons or markets is
subject to `equal regulation' if no member of the class has a
competitive advantage over any other member thereof resulting from a
disparity in their regulation under this title which the Commission
determines is unfair and not necessary or appropriate in furtherance
of the purposes of this title.'' The legislative history of this
section emphasizes that equal regulation ``is a competitive concept
intended to guide the Commission in its oversight and regulation of
the trading markets and the conduct of the Securities industry.''
Id. at 94.
---------------------------------------------------------------------------
[[Page 70622]]
Finally, Congress addressed the issue of funding for national
market system facilities. Sections 6(b)(4) and 15A(b)(5) require that
the rules of a national securities exchange or national securities
association ``provide for the equitable allocation of reasonable dues,
fees, and other charges among members and issuers and other persons
using'' the exchange's or association's facilities. The legislative
history of this provision indicates Congress' intent that the fees
collected from all persons using an SRO's facilities could
appropriately be directed to funding the ``costs associated with the
development and operation of a national market system.'' \81\
---------------------------------------------------------------------------
\81\ Conference Report, note 73 above, at 92.
---------------------------------------------------------------------------
In summary, Congress granted the Commission broad flexibility in
the 1975 Amendments in determining whether the fees charged by an
exclusive processor for market information are ``fair and reasonable,''
``not unreasonably discriminatory,'' and an ``equitable allocation'' of
reasonable fees among persons who use an SRO's facilities. The most
important objectives for the Commission to consider in evaluating fees
are to assure (1) the wide availability of market information, (2) the
neutrality of fees among markets, vendors, broker-dealers, and users,
(3) the quality of market information--its integrity, reliability, and
accuracy, and (4) fair competition and equal regulation among markets
and broker-dealers.
C. Commission's Review of Market Information Fees
The Commission most often has reviewed market information fees as
proposed rule changes by the NASD under Section 19(b) and by the Plans
under Rule 11Aa3-2(c). In this context, the Commission has relied to a
great extent on the ability of the SROs and Plans to negotiate fees
that are acceptable to SRO members, information vendors, investors, and
other interested parties. This approach was adopted soon after the 1975
Amendments were enacted. For example, the 1978 Commission release
adopting Rule 11Ac1-1, which requires the dissemination of quotations
by SROs, addressed a dispute between the SROs and vendors concerning
fees for quotation information.\82\ The release states that ``[t]he
Commission expects that the vendors and self-regulatory organizations
will resolve these matters satisfactorily without Commission
intervention prior to the effective date of the Rule. However, the
Commission will monitor the progress of these discussions to assure
that compliance with the Rule and the other provisions of the Act are
achieved and will take appropriate action if necessary.'' \83\
---------------------------------------------------------------------------
\82\ Securities Exchange Act Release No. 14415 (January 26,
1978), 43 FR 4342.
\83\ Id.
---------------------------------------------------------------------------
As a means to arrive at fair and reasonable fees, the negotiation
process is buttressed by the public notice and comment procedures that
accompany proposed rule changes. If negotiations do not lead to a
mutually acceptable fee, interested parties know that they will have an
opportunity to submit their views on proposed fees directly to the
Commission. In this regard, it bears noting that no comments were
submitted to the Commission in 1995 when the NASD proposed to establish
a per-query fee of one cent as an alternative to its monthly fee for
nonprofessional subscribers, which was then $4 per month.\84\
Similarly, no comments were submitted to the Commission in 1996 when
OPRA proposed to establish a similar per-query fee of two cents.\85\ It
was not until October 1997, when the CTA proposed to establish a per-
query fee of one cent as a permanent part of its fee schedule,\86\ that
the Commission received comments opposing the amount of these per-query
fees. The negative comments focused attention on the fees applicable to
retail investors, which was one of the important factors that led the
Commission to undertake its comprehensive review of market information
fees. As discussed in section V below, the Commission is considering
whether there are ways to enhance the participation of interested
parties in the fee-setting process.
---------------------------------------------------------------------------
\84\ Securities Exchange Act Release No. 35721 (May 16, 1995),
60 FR 27148.
\85\ Securities Exchange Act Release No. 37686 (September 16,
1996), 61 FR 49801.
\86\ Securities Exchange Act Release No. 39235 (October 14,
1997), 62 FR 54886.
---------------------------------------------------------------------------
In addition to commenting on proposed rule changes, vendors or
subscribers who believe that a fee is high enough to constitute an
unjustifiable limitation of their access to market information may,
under section 11A(b)(5), apply to the Commission to institute
proceedings to review the fee. The Commission has addressed market
information fees in this context on two occasions. The first involved
OPRA and several information vendors; the second involved the NASD and
Institutional Networks Corporation (``Instinet''). These proceedings
are discussed next.
1. OPRA Order
In 1978, the Commission issued an order addressing OPRA's decision
to impose an access fee on information vendors (``OPRA Order'').\87\
OPRA's justification for the proposed fee was to recoup the costs of
developing and operating its new high speed consolidated options
reporting system. The vendors challenged OPRA's statutory authority to
impose an access fee, but the Commission decided that the language of
Sections 11A(b)(3), 11A(b)(5), and 11A(c) ``indicates that a registered
securities information processor is permitted to impose terms of access
on vendors, including access fees.'' The Commission specifically
declined, however, to evaluate the amount of the fee:
\87\ In the Matter of Bunker Ramo Corp., GTE Information
Systems, Inc., and Options Price Reporting Authority, Securities
Exchange Act Release No. 15372 (November 29, 1978).
---------------------------------------------------------------------------
The Commission's determination here is limited solely to a
finding that the Act permits some form of an access fee to be
charged by OPRA, in its capacity as a registered securities
information processor. It does not address whether the costs
incorporated by OPRA into the access fee represent limitations on
access which are permitted under the Act, or whether the level of
the fee charged by OPRA is reasonable.'' \88\
---------------------------------------------------------------------------
\88\ Id.
Thus, the OPRA Order indicates that costs are a relevant factor in
determining the reasonableness of a fee for market information, but
goes no further.
2. Instinet Order
In 1984, the Commission evaluated a market information fee in a
limitation of access proceeding involving the NASD and Instinet. The
Commission issued an order finding that a proposed NASD fee for
quotation information represented an unwarranted denial of access,
primarily because the NASD had failed to submit an adequate cost-based
justification for its proposed fee (``Instinet Order'').\89\ The
Commission repeatedly emphasized, however, that the scope of its
decision was limited to the particular competitive situation presented
in the proceedings.
---------------------------------------------------------------------------
\89\ Securities Exchange Act Release No. 20874 (April 17, 1984),
49 FR 17640.
---------------------------------------------------------------------------
The NASD was not simply charging a fee for a stream of basic market
information and then allowing vendors to provide that information to
subscribers in whatever form they chose. Rather, the NASD also was in
the
[[Page 70623]]
business of providing enhanced information products to its own direct
subscribers. Under these circumstances, the fees that the NASD charged
to vendors could directly and substantially affect the ability of these
vendors to compete in the market for providing enhanced
information.\90\ The Commission found that the requirement of section
11A(b)(5)(B)--that a limitation on access ``not impose any burden on
competition not necessary or appropriate in furtherance of the
purposes'' of the Exchange Act--could be satisfied only if the fee was
strictly limited to the NASD's costs of providing the information to
vendors:
---------------------------------------------------------------------------
\90\ The NASD provided its most basic quotation service, Nasdaq
Level 1 (which included only the best bid and offer), solely through
vendors. In contrast, it provided its enhanced Nasdaq Level 2
service (which included a full montage showing each market maker and
its quotations) directly to subscribers. Instinet also wanted to
participate in the market for providing the full montage to
subscribers. The NASD had proposed to charge Instinet's subscribers
a fee based on the fee it charged its own subscribers, thereby
charging a retail price to a competitor in the wholesale market.
[B]ecause Instinet seeks to distribute certain NASDAQ quotation
information in competition with the NASD, which is an exclusive
processor of that information, the proposed fees must be cost-based
and calculated by allocating the percentage of system use of each
quotation service offered by the NASD (``functional analysis''), to
ensure the neutrality and reasonableness of the NASD's charges to
Instinet and its subscribers.\91\
---------------------------------------------------------------------------
\91\ Id.
The Commission also emphasized, however, that it was the peculiar
competitive context of the proceedings that led to its decision to
require a strict, cost-based justification. It specifically
distinguished fees for services that the NASD did not provide in
---------------------------------------------------------------------------
competition with vendors:
When the Commission approved the current NASDAQ fee schedule, it
was addressing a situation markedly different from the situation in
the current case. * * * In instances such as Level 1 service, the
NASD has no incentive to establish fees that would influence a
subscriber's choice of particular vendors from which to receive the
service; because the NASD does not market the service on a retail
level, it theoretically is immaterial to the NASD from whom
particular subscribers receive the data. In such cases, it well may
be appropriate for the NASD to have a limited amount of flexibility
in determining how to base its fees, although all NASD fees must be
consistent with the Act.\92\
---------------------------------------------------------------------------
\92\ Id. (emphasis added).
The Instinet Order was affirmed in National Assoc. of Securities
Dealers, Inc. v. SEC. \93\ The court agreed with the Commission's
analysis of the competitive context of the NASD's proposed fee: ``Had
the Commission approved NASD's value-of-service fee proposal,
Instinet's subscribers effectively would have been required to pay NASD
retail rates for a wholesale service.'' \94\ Although it recognized
that strict cost allocation was a difficult task, the court affirmed
the Commission's view that a such an approach was necessary given the
NASD's competitive position in relation to Instinet:
---------------------------------------------------------------------------
\93\ 801 F.2d 1415 (D.C. Cir. 1986).
\94\ 801 F.2d at 1419.
Avoidance of cross-subsidization of services is a legitimate,
non-arbitrary reason for requiring difficult cost allocations. * * *
If permitted such a subsidy, NASD would have been given an unfair
competitive edge over Instinet in a market in which NASD already had
the advantage of its former monopoly position. We find these reasons
sufficient to support the Commission's decision to require NASD to
make an admittedly difficult and imprecise cost allocation.\95\
---------------------------------------------------------------------------
\95\ 801 F.2d at 1420-1421.
The practical difficulties of implementing this strict, cost-of-
service approach are demonstrated by the subsequent history of the fee
involved in the Instinet Order (later named the ``NQDS'' fee). In
August 1985, the NASD proposed a revised fee of $79 per month.\96\ The
Commission did not approve this proposal, but instead instituted
proceedings to determine whether it should be disapproved, based
primarily on the question whether the fee included some costs that were
inconsistent with the Instinet Order.\97\ In September 1986, the NASD
proposed another NQDS fee of $50.75 per month.\98\ This proposal was
supported by an extensive and complex ratemaking analysis. It included
a comprehensive allocation of costs to pools consisting of six
resources \99\ and eleven services.\100\ The major categories of costs
were summarized as (1) operational costs, which were allocated to the
six resource pools based on identifiable personnel, equipment, and
physical facilities dedicated to those operations, (2) systems and
product/service development costs, which were allocated to the six
resource cost pools based on the historical or anticipated level of
effort to be devoted to the respective resources, (3) overhead and
general and administrative costs, which were allocated directly to
resource and service cost pools to the extent that a causal
relationship existed between those resources or services and the
incurrence of the affected costs, and (4) residual overhead and general
and administrative costs, which were allocated to resource and service
cost pools based on the total cost input base.
---------------------------------------------------------------------------
\96\ Securities Exchange Act Release No. 22376 (August 30,
1985), 50 FR 36692.
\97\ Securities Exchange Act Release No. 22935 (February 21,
1986), 51 FR 6957.
\98\ Securities Exchange Act Release No. 26119 (September 27,
1988), 53 FR 39002.
\99\ The six resources were (1) network/communications--2400-
baud lines, (2) network/communications--9600-baud lines, (3) UNISYS
processor, (4) Tandem processor, (5) UNISYS data storage, and (6)
Tandem data storage.
\100\ The eleven services were (1) Level 1, (2) Last Sale, (3)
Level 2/3, (4) NQDS, (5) SOES, (6) TARS/MBARS, (7) CAES, (8) CTCI,
(9) Mutual Funds, (10) NASDAQ/NMS Ticker, and (11) ACES.
---------------------------------------------------------------------------
The Commission had not acted on this proposal when the NASD, in
July 1990, proposed yet another NQDS fee of $50 per month.\101\ This
fee, however, included last sale information in addition to quotation
information. The Commission approved the fee in October 1990.\102\
Notably, the Commission did not undertake any cost-based explanation of
the $50 fee, nor did it express any opinion on the extensive cost-of-
service analysis that had been included in the NASD's September 1988
proposal. Instead, it noted that, ``in reviewing the fairness and
reasonableness of the proposal, the Commission finds it significant
that the proposed fee of $50 is the result of negotiations among the
concerned parties after protracted proceedings.'' \103\ The $50 fee
approved for NQDS information in 1990 has remained unchanged up to the
present.
---------------------------------------------------------------------------
\101\ Securities Exchange Act Release No. 28200 (July 12, 1990),
55 FR 29446.
\102\ Securities Exchange Act Release No. 28539 (October 15,
1990), 55 FR 42796.
\103\ Id.
---------------------------------------------------------------------------
IV. SRO Financial Structures and the Cost of Market Information
The financial structures of the individual SROs have not resulted
from the imposition of any single blueprint for what an SRO should be.
Rather, the current structure of each SRO is a result of its particular
history and competitive position. Each SRO is, to a great extent,
unique. For this reason, generalizations about the SROs are as apt to
gloss over important differences as they are to highlight similarities.
Nevertheless, important similarities do exist, particularly between the
two largest SROs--the NYSE and NASD--which perform all of the self-
regulatory functions, have the broadest access to the different sources
of SRO funding, and therefore have the most complex cost structures.
This section first will outline the various Exchange Act functions
performed by the SROs and analyze their financial structures. It then
will discuss the cost of market information in light of this analysis.
[[Page 70624]]
A. Exchange Act Functions of the SROs
Ever since the Exchange Act was enacted in 1934, self-regulation by
the securities industry has been an essential component of its
regulatory scheme for providing fair and orderly markets and protecting
investors. The Exchange Act itself, as well as the Commission's rules
and automation review policies thereunder, impose on the SROs a host of
regulatory and operational responsibilities, including most of the day-
to-day responsibilities for market and broker-dealer oversight. Meeting
these self-regulatory responsibilities requires an enormous expenditure
of expertise and funds, as evidenced in part by the fact that the SROs'
combined total expenses in 1998 were $1.68 billion.\104\
---------------------------------------------------------------------------
\104\ See Tables 9 through 17 in the Appendix.
---------------------------------------------------------------------------
Sparing the federal government much of the burden of securities
regulation was one of the primary reasons that Congress incorporated
industry self-regulation into the Exchange Act. For example, when
Congress amended the Exchange Act in 1938 to extend the self-regulatory
regime to the over-the-counter market, it noted that an approach
relying solely on government regulation ``would involve a pronounced
expansion of the organization of the Securities and Exchange
Commission; the multiplication of branch offices; a large increase in
the expenditure of public funds; an increase in the problem of avoiding
the evils of bureaucracy; and a minute, detailed, and rigid regulation
of business conduct by law.'' \105\
---------------------------------------------------------------------------
\105\ S. Rep. No. 1455, 75th Cong., 3d Sess. 3 (1938).
---------------------------------------------------------------------------
Rather than adopt this purely governmental approach, Congress
determined that it was ``distinctly preferable'' to rely on
``cooperative regulation, in which the task will be largely performed
by representative organizations of investment bankers, dealers, and
brokers, with the Government exercising appropriate supervision in the
public interest, and exercising supplementary powers of direct
regulation.'' \106\ Similarly, the legislative history of the 1975
Amendments noted that a principal reason for adopting a self-regulatory
regime was the ``sheer ineffectiveness of attempting to assure
(regulation) directly through the government on a wide scale.'' \107\
Although the SROs had not always performed their role up to
expectations, Congress believed that the self-regulation generally had
worked well and ``should be preserved and strengthened.'' \108\ In sum,
the fees that enable the SROs to fulfill their self-regulatory
functions play an essential role in the Exchange Act regulatory scheme.
---------------------------------------------------------------------------
\106\ Id. at 4.
\107\ Senate Report, note 72 above, at 22.
\108\ Id. at 23.
---------------------------------------------------------------------------
These functions can be divided into the following four categories:
market operation, market regulation, listing, and member regulation,
which are described briefly below.
1. Market Operation. Each of the SROs is associated with a
particular market that it is responsible for operating in accordance
with the requirements of the Exchange Act. These include, for example,
the requirements in section 6(b)(5) that the rules of a national
securities exchange be designed ``to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade,'' ``to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest.'' To meet
these statutory requirements, the SROs must establish and staff the
physical locations and/or technological systems that are necessary for
a stable and orderly market. In this regard, the Commission has
promulgated two releases establishing automation review policies for
the SROs to meet on a voluntary basis (``ARP Releases'').\109\ Among
other things, the ARP Releases recommend that each SRO produce
estimates of future capacity needs, establish back-up protocols to deal
with system problems, implement quality assurance and stress testing of
its systems, and have in place a process for detecting and controlling
internal and external threats to its systems. Meeting these stringent
requirements is particularly important for the primary markets that
must be able to operate smoothly on even the highest volume trading
days.
---------------------------------------------------------------------------
\109\ Securities Exchange Act Release No. 29185 (May 9, 1991),
56 FR 22490; Securities Exchange Act Release No. 27445 (Nov. 16,
1989), 54 FR 48703.
---------------------------------------------------------------------------
2. Market Regulation. The SROs are responsible for promulgating
rules that govern trading in their markets; establishing the necessary
systems and procedures to monitor such trading; and identifying
instances of suspicious trading, such as potential insider trading,
market manipulation, or any other violations of the Exchange Act, the
rules thereunder, or SRO rules. If an SRO identifies potential
misconduct involving persons or entities that are within its
jurisdiction, the SRO is responsible for conducting a further
investigation and bringing a disciplinary action when appropriate. For
potential misconduct outside its jurisdiction, an SRO is responsible
for making referrals to the Commission or other appropriate agencies
and assisting these agencies in their investigations.
3. Listing. The SROs promulgate and administer listing standards
that govern the securities that may be traded in their markets. For
corporate securities, these rules include minimum financial
qualifications and reporting requirements for their issuers. The SROs
are responsible for monitoring issuers and delisting the securities of
those that fail to meet these minimum requirements. Obtaining a listing
on an SRO market provides corporate issuers with the assurance of a
well-operated and well-regulated trading market for their securities,
as well as enhanced visibility and prestige in the eyes of investors.
An active market for secondary trading in a corporation's securities
benefits not only its shareholders, but also the corporation itself
through enhanced capital-raising capacities. In addition to corporate
securities, the SROs list a variety of derivative securities, such as
equity options and index-based products.
4. Member Regulation. The SROs are responsible for promulgating and
enforcing rules that govern all aspects of their members' securities
business, including their financial condition, operational
capabilities, sales practices, and the qualifications of their
personnel. In fulfilling this function, the SROs conduct examinations
on the premises of their members, monitor financial and other
operational reports, and investigate potential violations of rules and
bring disciplinary proceedings when appropriate. Many broker-dealers
are members of more than one SRO,\110\ and therefore the regulatory
responsibilities for these firms, such as examinations of their
financial and operational condition, have been allocated to a single
SRO in accordance with section 17(d) of the Exchange Act and the rules
thereunder.
---------------------------------------------------------------------------
\110\ Section 15(b)(9) of the Exchange Act requires all broker-
dealers to become members of a national securities association
unless they limit their activities to effecting transactions in
securities solely on a national securities exchange of which they
are a member. As a result, all broker-dealers doing a public
business currently must become members of the NASD, as well as of
the exchanges on which they conduct business.
---------------------------------------------------------------------------
B. SRO Financial Structures
1. Sources of Funding
There are four major categories of services provided by SROs for
which they charge the fees that fund their
[[Page 70625]]
operations. These categories are (1) regulatory fees and assessments,
which are paid by an SRO's members, (2) transaction services fees,
which are paid by anyone who uses an SRO's facilities for executing,
reporting, and clearing transactions, (3) listing fees, which are paid
by corporate issuers, and (4) market information fees, which are paid
by all those who use or distribute the financial information
disseminated by the SROs, including information vendors, broker-
dealers, institutional investors, retail investors, the options and
futures markets, and others.
The amounts and the percentages of total SRO funding provided from
these sources are set forth in the following table:
1998 SRO Sources of Funding
$ millions (% of SRO Total)
----------------------------------------------------------------------------------------------------------------
Regulatory Transaction Listing Market Info Other SRO Total
----------------------------------------------------------------------------------------------------------------
NYSE......................... 100.5 (14) 165.7 (23) 296.0 (41) 111.5 (15) 55.0 (7) $728.7
NASD......................... 234.0 (33) 126.9 (18) 137.3 (20) 152.3 (22) 49.3 (7) 699.8
Amex......................... 17.7 (8) 91.9 (41) 16.3 (7) 82.9 (37) 15.2 (7) 224.0
CBOE......................... 19.7 (15) 84.6 (67) 0.0 (0) 17.5 (14) 4.7 (4) 126.5
PCX.......................... 3.0 (4) 53.8 (71) 2.0 (3) 12.9 (17) 5.3 (7) 77.0
CHX.......................... 0.0 (0) 24.7 (54) 0.0 (0) 20.0 (44) 1.1 (2) 45.8
Phlx......................... 0.0 (0) 30.2 (69) 0.0 (0) 7.1 (16) 6.4 (15) 43.7
BSE.......................... 2.5 (13) 10.4 (57) 0.8 (4) 3.8 (21) 0.9 (5) 18.4
CSE.......................... 0.5 (8) 2.6 (45) 0.0 (0) 2.6 (45) 0.1 (2) 5.8
----------------------------------------------------------------------------------
$ Total................ 377.9 (19) 590.8 (30) 452.4 (23) 410.6 (21) 138.0 (8) 1969.7
----------------------------------------------------------------------------------------------------------------
Individual SROs vary widely in the extent to which they perform
each of the four SRO functions and rely on the four sources of funding.
As a cumulative matter, however, they received 21% ($410.6 million) of
their funding from market information fees in 1998. This percentage has
remained remarkably consistent, despite the rapid growth in market data
revenues in recent years. For example, market information revenues
provided the SROs with 20% ($246.1 million) of their funding in 1994.
In addition, the reliance on market information revenues by two of the
major equity markets--the NYSE and Amex--has remained relatively
consistent ever since the national market system was created in the
1970's.\111\ The major exception is the NASD, which was a relatively
small organization and had no market information revenues in the
1970's. With the expansion of the Nasdaq market, however, the NASD now
is one of the two largest SROs and receives 22% of its funding from
market information revenues.
---------------------------------------------------------------------------
\111\ See, e.g., SEC, 46th Annual Report 110-111 (1980) (setting
forth total revenues and market information revenues (then labeled
``communication revenues'') for each of the SROs from 1975 to 1979).
---------------------------------------------------------------------------
The NYSE historically has operated and regulated one of the largest
and most prestigious markets in the world and has, as well, taken a
leading role in the regulation of its members, which include most of
the largest broker-dealers. Consistent with its broad responsibilities,
the NYSE receives substantial revenues from each of the four sources of
funding. In particular, the NYSE's revenues from listing fees in 1998
($296 million) represented 41% of its total revenues and were more than
double the listing revenues of all the other SROs combined. The NYSE's
substantial responsibilities for regulating its members are reflected
by its more than $100.5 million in revenues from regulatory fees. It
also received $165.7 million from transaction services fees (classified
as ``trading fees'' and ``facility and equipment fees'' in Table 9 in
the Appendix) and $111.5 million from market information fees.
The NASD started from a substantially different position than the
NYSE, but has grown so rapidly in the last decade that its revenues now
are comparable to the NYSE's. The NASD began as a membership
organization for broker-dealers conducting business in the over-the-
counter markets. With the dramatic expansion of the Nasdaq market,
however, the NASD now performs all of the four SRO functions to a large
extent and is funded accordingly. Nevertheless, its origins are
demonstrated by the fact that it received by far the largest amount of
funding in 1998 from regulatory fees ($234.0 million, classified as
``member assessments,'' ``registration and qualification fees,''
``regulatory fees and fines,'' and ``corporate finance fees'' in Table
10 in the Appendix). The prestige of the Nasdaq market is reflected by
the NASD's $137.3 million in issuer listing fees. The NASD also
received a larger amount of revenues from market information fees
($152.3 million) than any of the other SROs, which was bolstered by its
$22.2 million in distributions from Network A and Network B for
transactions in listed securities. Finally, the NASD received $126.9
million in revenues from transaction services fees.
The other SROs differ from the NYSE and NASD in three principal
respects: (1) their markets generate much less trading volume, (2) they
derive only a small portion of their revenues from listing fees, and
(3) they are less involved in member regulation, which results in much
lower revenues derived from regulatory fees. The result is that each of
the SROs other than the NYSE and NASD derives a much higher percentage
of its revenues from a combination of transaction service fees and
market information fees.
2. Internal Cost Structures
The SROs' revenues are derived from discrete categories of fees
that are disclosed separately on their financial statements. Their
internal cost structures, in contrast, are much less transparent.
Generally accepted accounting principles ordinarily do not require an
entity to disclose an internal break-down of its costs according to
business functions.\112\ Consequently, most of the SROs' financial
statements do not disclose the amount of costs that are associated with
their respective functions or that support the various
[[Page 70626]]
services they provide.\113\ The SROs' financial statements do indicate,
however, that a substantial majority of their costs relate to personnel
and technology systems. For example, 74% ($405.6 million) of the NYSE's
total operating expenses in 1998 were classified as ``compensation''
and ``systems and related support.'' Similarly, 79% ($491 million) of
the NASD's total operating expenses in 1998 related to
``compensation,'' ``professional and contract services,'' and
``computer operation and data communications.'' The financial
statements of the other SROs are similar in this respect.
---------------------------------------------------------------------------
\112\ The principal exception is SFAS No. 131, ``Disclosures
About Segments of an Enterprise and Related Information.'' As
discussed further below, the NASD has provided, pursuant to this
accounting standard, the fullest disclosure of its internal cost
structure of all the SROs. The notes to the NASD's 1998 consolidated
financial statements provide disclosure of financial information for
its NASD Regulation and Nasdaq-Amex business segments.
\113\ In section V.C below, the Commission requests comment on
whether the SROs should be required to provide greater disclosure
concerning their internal cost structures.
---------------------------------------------------------------------------
In addition, while SRO total expenses have grown rapidly in recent
years, from $1.05 billion in 1994 to $1.68 billion in 1998 for an
increase of 60%, they have not kept pace with the growth in securities
industry costs in general. For example, the total expenses of the U.S.
securities industry, as represented by NYSE members doing a public
business, grew from $70.2 billion in 1994 to $161.0 billion in 1998,
for an increase of 129%.\114\ Similarly, the percentage growth in the
SROs' market data revenues (67%) and total revenues (64%) since 1994
has not kept pace with the percentage growth in the securities
industry's total revenues (139%).\115\ Finally, the SROs' market
information revenues represent a very small portion of the securities
industry's total expenses--less than one-quarter of one percent in
1998.\116\
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\114\ Securities Industry Association, 1999 Securities Industry
Factbook 43 (1999) (``SIA Factbook''). The Securities Industry
Association estimates that the NYSE members doing a public business
accounted for approximately 72% of the total revenues of all U.S.-
registered broker-dealers. Id. at 27.
\115\ The SROs' market data revenues were $246.1 million in 1994
and $410.6 million in 1998. The SROs' total revenues were $1.20
billion in 1994 and $1.97 billion in 1998. See Tables 9-17 in the
Appendix. The securities industry's total revenues were $71.4
billion in 1994 and $170.8 billion in 1998. SIA Factbook at 42.
\116\ In addition to broker-dealers, other entities, such as
institutional investors and information vendors, provide a portion
of total market information revenues.
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The principal exception to the general unavailability of
information about internal SRO cost structures is the NASD. Thus far,
the NASD is the only SRO that has divided its regulatory and
operational functions into separate subsidiaries, NASD Regulation, Inc.
and Nasdaq.\117\ The respective functions of NASD Regulation and Nasdaq
are specified in the NASD's ``Plan of Allocation and Delegation of
Functions by NASD to Subsidiaries.'' For the most part, all of the
regulatory functions of the NASD, including both market and member
regulation, are delegated to NASD Regulation, while the market
operation and listing functions are allocated to Nasdaq.\118\
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\117\ The NASD did not acquire Amex as a subsidiary until
October 30, 1998. Amex therefore has been treated separately from
the NASD throughout this release.
\118\ Nasdaq has, however, retained some responsibilities for
market surveillance in its MarketWatch group.
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There are four separate sources of NASD financial information for
1998. First, the NASD issued consolidated financial statements for
itself and its subsidiaries, which include NASD Regulation, Nasdaq, and
Amex. (November-December 1998 figures for Amex are included in the
NASD's 1998 consolidated financial statements). Second, Table 10 in the
Appendix sets forth the NASD's revenues and expenses with the Amex
figures excluded. Third, note 11 to the NASD's 1998 consolidated
financial statements provides segment information for NASD Regulation
and Nasdaq-Amex. Finally, the Nasdaq subsidiary is separately
registered as a SIP and has filed an annual amendment to its Form SIP
for 1998 that includes financial statements for Nasdaq individually.
Taken together, these four sources provide a picture of the respective
costs associated with the regulatory and operational functions of an
SRO.
The internal breakdown of the NASD's revenues and expenses in 1998
is as follows:
1998 NASD Segment Information (excluding Amex)
($ millions)
----------------------------------------------------------------------------------------------------------------
NASDR Nasdaq All Other Consolidated
----------------------------------------------------------------------------------------------------------------
Revenues:
Regulatory.................................. 234.0
Transaction................................. .............. 126.9
Listing..................................... .............. 137.3
Market Info................................. .............. 152.3
Other....................................... 23.4 10.0 15.9 ..............
---------------------------------------------------------------
Total Revenues............................ 257.4 426.5 15.9 699.8
===============================================================
Expenses:
Direct Expenses............................. 236.6 264.4 26.0
NASDR Charge................................ .............. 57.3
Transfer Pricing............................ .............. 39.6 .............. ..............
---------------------------------------------------------------
Total Expenses............................ 236.6 361.3 26.0 623.9
===============================================================
Operating Income before taxes................... 20.8 65.2 (10.1) 75.9
----------------------------------------------------------------------------------------------------------------
Nasdaq's revenues are derived primarily from transaction services,
corporate listings, and market information fees, and totaled $426.5
million in 1998. Nasdaq's direct expenses totaled $264.3 million. In
addition to its direct expenses, Nasdaq's expenses included a ``NASD
Regulation Charge'' of $57.3 million and a ``Transfer Pricing'' charge
of $39.3 million. The NASD has represented that the NASD Regulation
Charge is the amount charged to Nasdaq for market regulation and
enforcement services performed by NASD Regulation. Nasdaq's total
expenses in 1998 were $361.3 million, leaving it with $65.2
[[Page 70627]]
million in operating income before taxes.
NASD Regulation's revenues totaled $257.4 million and were derived
primarily from regulatory fees. Its direct expenses totaled $236.6
million and primarily were attributable to the NASD's member regulation
function. NASD Regulation's net operating income before taxes was $20.8
million.
Taken together, the financial statements of the NASD and its
subsidiaries reveal the following information about the costs
associated with the NASD's respective SRO functions in 1998. Member
regulation costs were approximately $236.6 million and were more than
covered by $257.4 million in revenues primarily from regulatory fees.
Costs associated with the other three SRO functions--market operation,
market regulation, and listings--were approximately $361.3 million, of
which at least $57.3 was associated with the market regulation
function. The combined cost of the three functions was more than
covered by $426.5 million in revenues derived almost entirely from
transaction services fees, listing fees, and market information fees.
In percentage terms, the total costs associated with the market
operation, market regulation, and listing functions of Nasdaq were
funded 30% by transaction services revenues, 32% by listings revenues,
35% by market information revenues, and 3% by other revenues.
C. The Cost of Market Information
As noted in section III above, Congress did not include a strict,
cost-of-service standard in Section 11A of the Exchange Act, opting
instead to allow the Commission some flexibility in assessing the
fairness and reasonableness of fees. Nevertheless, the fees charged by
a monopolistic provider of a service (such as the exclusive processors
of market information) need to be tied to some type of cost-based
standard in order to preclude excessive profits if fees are too high or
underfunding or subsidization if fees are too low. The Commission
therefore believes that the total amount of market information revenues
should remain reasonably related to the cost of market information.
This section is intended to provide greater guidance to the SROs, the
securities industry in general, and the public concerning the
categories of costs that should be considered as part of the cost of
market information. With this guidance as a background, the Commission
believes that it will be possible to develop a flexible, cost-based
approach to market information fees and revenues that both furthers the
Exchange Act's national market system objectives and can be implemented
in a reasonably efficient manner. Comment is requested on an outline of
such an approach in section V.A below.
The first step in determining the cost of market information is to
identify, in theory, the categories of costs that are incurred to
generate and disseminate market information. The second step is to
allocate appropriately the amount of the costs included in these
categories, which requires a determination of whether the relevant
categories are ``direct costs'' of market information or ``common
costs.'' Direct costs (also referred to as incremental, separable, or
traceable costs) are incurred only to provide market information and
therefore can be allocated entirely to the cost of market information.
Common costs, in contrast, are incurred for the provision of services
in addition to market information and therefore should be allocated
among each of the various services they support.\119\ Failing to
allocate common costs in this way would improperly inflate the cost of
market information.
---------------------------------------------------------------------------
\119\ See, e.g., Principles of Public Utility Rates, note 48
above, at 118 (``Direct costs are incurred only and entirely for the
provision of a particular service.''); Gordon Shillinglaw,
``Economic Concepts in Cost Accounting,'' in Handbook of Cost
Accounting 4-14 (Sidney Davidson & Roman L. Weil, eds., 1978) (``A
common cost is a cost incurred for the support of two or more cost
objectives, not traceable to any one of them. Accountants refer to
these as indirect costs or, more clearly, as nontraceable costs.'').
---------------------------------------------------------------------------
1. Categories of Market Information Costs
One category of costs directly associated with market information
is Plan costs--the expenses incurred by the various processors and
administrators of the Networks, acting on behalf of the Networks' SRO
participants, to disseminate consolidated information to the public.
The Commission believes that Plan costs should be classified as a
direct cost and that therefore the entire amount of Plan costs should
be allocated to the cost of market information.
Plan costs do not, however, include any of the costs incurred by
the individual SROs in generating market information and providing it
to the Plan processors. The Commission is considering an approach that
would include many of these SRO costs--specifically, the costs of
operating and regulating their markets in accordance with Exchange Act
requirements--as part of the cost of providing market information to
the public. In other words, the information that the SROs provide to
the Plan processors would not be considered as cost-free. Before
quotations and transaction reports can be delivered to the Plan
processors and made available to the public, a market must provide a
mechanism for bringing buying and selling interests together in a fair
and orderly manner. In addition, the SROs must establish, monitor, and
enforce trading rules, as well as otherwise regulate their markets to
prevent fraudulent and manipulative acts or practices. The SROs incur
substantial costs in performing these functions, and they contribute
substantially to the value of the information. Therefore, the
Commission is contemplating including these SRO costs as part of the
cost of market information for the purpose of determining fair and
reasonable fees.
This determination is supported by the language of section 11A of
the Exchange Act, in which Congress recognized the direct connection
between effective regulation of a market and the value of that market's
information. Section 11A(c)(1)(A) grants the Commission rulemaking
authority to prevent the use, distribution, or publication of
fraudulent, deceptive, or manipulative market information. There is
little value in market information that is tainted by fraud, deception,
or manipulation.
Similarly, section 11A(c)(1)(B) grants the Commission rulemaking
authority to assure the prompt, accurate, reliable and fair collection,
processing, distribution, and publication of information with respect
to market information, as well as the fairness and usefulness of the
form and content of market information. None of these goals will be
achieved by a poorly operated market that is prone to systems outages
and delays or that does not provide an effective mechanism for bringing
buying and selling interests together. In neither case will the public
have an accurate picture of the current market for a security.
Moreover, in times of significant price volatility and spikes in
trading volume, it is critically important that the markets,
particularly the major markets operated by the SROs,\120\ remain fair
and orderly and that investors continue to have access to a timely
stream of market information. In Section 11A, Congress recognized this
direct connection between the effective
[[Page 70628]]
operation of a market and the quality of that market's information.
---------------------------------------------------------------------------
\120\ Under Exchange Act Rule 3a1-1(b), 17 CFR 240.3a1-1(b), the
Commission may require an alternative trading system to register as
an exchange if it becomes a major market in any class of securities.
In making its determination, the Commission would consider ``the
objectives of the national market system under Section 11A.''
---------------------------------------------------------------------------
The Commission does not believe, however, that the cost of member
regulation should be considered as part of the cost of market
information. For example, although the financial soundness of broker-
dealers is undoubtedly an essential factor in the overall integrity of
the markets, the connection between this regulatory function and the
quality of market information is much more attenuated than in the case
of market operation and market regulation. Instead, an SRO's member
regulation costs are more directly associated with the regulatory fees
charged to members than with any other source of funding.
Finally, the cost of market information should not include costs
that are directly associated with other SRO services (such as an SRO's
advertising and marketing expenditures to obtain corporate listings).
In sum, the Commission preliminarily believes that the cost of
market information should include, in addition to Plan costs, an
appropriate percentage of the costs incurred by individual SROs in
operating and regulating their markets.\121\ These costs must be borne
by the SROs to meet their Exchange Act responsibilities and therefore
must be funded in one way or another. If all of these costs were
excluded from the cost of market information (and fees were reduced
accordingly), the principal consequence would be to force the SROs to
rely more heavily on their other sources of funding--transaction fees,
listing fees, and regulatory fees. In this regard, it warrants emphasis
that all of these fees are passed on, directly or indirectly, to
investors--the ultimate consumers in the securities industry. The
relevant funding issue, therefore, is not whether investors ultimately
will pay the costs of effective market operation and market regulation,
but how these costs are funded in the first instance and whether the
funding furthers the objectives of the Exchange Act.
---------------------------------------------------------------------------
\121\ Only a percentage of market operation and market
regulation costs should be allocated to the cost of market
information because, as discussed below, these costs also are
associated with listing and transaction services. The costs
therefore are common costs and must be allocated among the three
services--listing, transaction, and market information.
---------------------------------------------------------------------------
The Commission believes that market information fees remain an
appropriate part of SRO funding. When used along with transaction
services fees, listing fees, and regulatory fees, they provide a solid
base of financial support for the SROs. Market information fees serve
an important and unique role because they provide the broadest source
of SRO funding. The fees are paid by all users of market information,
including, for example, options and futures market participants that
otherwise would not contribute (through transaction services fees or
listing fees) to the funding of the particular markets on whose
information they rely.
The Commission recognizes that allowing SROs to receive market
information revenues to recover part of their market operation costs
would provide them with a source of funding not available to other
types of entities that also operate markets, particularly alternative
trading systems that are regulated as broker-dealers under Regulation
ATS. As the Commission noted in the ATS Release, however, alternative
trading systems have a choice between either (1) registering as a
national securities exchange and accepting the many responsibilities
imposed by the Exchange Act on SROs,\122\ or (2) registering as a
broker-dealer and complying with Regulation ATS. The choice between
these two options is complex. The ATS Release compares the many
different benefits and costs associated with becoming an SRO and those
associated with remaining a broker-dealer.\123\ If an alternative
trading system believes that the benefits of becoming an SRO (including
a share in market information revenues) exceed the costs, it still has
the option of registering as an exchange and becoming a participant in
the national market system plans.
---------------------------------------------------------------------------
\122\ National securities exchanges are subject to the
Commission's authority under section 11A(a)(3)(B) to require SROs to
act jointly in furtherance of a national market system for
securities.
\123\ See, e.g., ATS Release, note 4 above, Section IX.A Costs
and Benefits of the Rules and Amendments Regarding Alternative
Trading Systems.
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2. Allocation of Common Costs
Although the costs incurred by the SROs in operating and regulating
their markets could be included in the cost of market information, they
also support other SRO services and therefore are common costs that
must be allocated among these services. In particular, the costs of
market operation and market regulation support the SROs' transaction
and listing services, in addition to market information services.
Transaction services are integrally related to the quality of a
market's operation--a poor market will attract few participants.
Similarly, the quality of a market and its regulatory protections for
investors are among the most important factors influencing a corporate
issuer's decision of where to list its securities. Consequently, the
SROs' costs of market operation and market regulation must be allocated
among the three relevant sources of revenue--listing fees, transaction
services fees, and market information fees.
Finding an appropriate basis for allocating common costs, however,
is an extremely difficult task. As one court has noted in the
ratemaking context, ``(t)he very problem at issue here--allocation of
common costs--arises precisely because there is no purely economic
method of allocation. In this sense no Commission choice among the
various [fully distributed cost] methods could be justified solely on
economic criteria; elements of fairness and other noneconomic values
inevitably enter the analysis of the choice to be made.''\124\
---------------------------------------------------------------------------
\124\ MCI Telecommunications Corp v. FCC, 675 F.2d 408, 415-416
(D.C. Cir. 1982). See also Charles F. Phillips, Jr., The Regulation
of Public Utilities: Theory and Practice 225 (1993) (``Accounting
regulation offers little guidance in developing cost allocation
methods, since common or joint costs cannot generally be identified
with any customer class, specific service or jurisdiction . . . As
Justice Douglas has put it: . . . `Allocation of costs is not a
matter for the slide-rule. It involves judgment on a myriad of
facts. It has no claim to an exact science.' Stated another way, any
cost allocation method involves elements of arbitrariness.'').
---------------------------------------------------------------------------
Allocation of the common costs of market information is not an
exception to this widely-recognized problem. The Commission is not
aware of a purely economic method of allocating the SROs' costs of
market operation and market regulation among the SROs' transaction,
listing, and market information services. The problem of allocation is
exacerbated even further by the fact that an individual SRO often
trades many different securities that are not all included in the same
Network. Thus, not only must the costs of market information for each
SRO be identified and allocated among the SRO's different services, the
market information costs of the individual SROs also must be allocated
among the different Networks.
In sum, any attempt to calculate the precise cost of market
information presents severe practical difficulties. The Commission
believes, however, that it may be possible to develop a more flexible,
cost-based approach that avoids these practical difficulties, yet also
maintains a reasonable connection between the cost of market
information and the total amount of revenues derived from market
information fees. Comment is requested on an outline of such an
approach in section V.A below.
[[Page 70629]]
V. Requests for Comment
As noted in the Introduction, the Commission is considering whether
the arrangements for disseminating market information should be
modified in several respects. Its review thus far particularly has
indicated the importance of adapting market information fees to the
increasing retail investor demand for real-time information and to the
changing structure of the securities industry. Prior to taking
rulemaking or other action, the Commission believes it will be helpful
to provide the public with a full opportunity to comment on issues
relating to market information fees and revenues. This section first
requests comment on the concept of a flexible, cost-based approach to
evaluating the fairness and reasonableness of such fees and revenues.
Comment then is requested on a conceptual approach to distributing the
Networks' revenues to the individual SROs that could reflect more fully
the Exchange Act's national market system objectives. Finally, comment
is requested on a variety of issues relating to SRO and Plan
disclosures and Plan governance, administration, and oversight. These
include whether the Plans and SROs should provide greater public
disclosure concerning their fees, revenues, and costs, and whether
participation in the process of setting and administering fees should
be broadened to include vendors, broker-dealers, and users of market
information.
In formulating comments, the public is encouraged to consider the
four principal objectives relating to market information set forth in
section 11A of the Exchange Act--availability of information,
neutrality of fees, quality of information, and fair competition/equal
regulation.\125\ The role of fees in funding SRO functions also should
be considered. In addition, the Commission encourages commenters to
consider the extent to which proposals are capable of being implemented
in an objective and reasonably efficient manner, particularly given the
other uses to which the Commission's resources could be devoted. In the
ratemaking context, courts have recognized that ``[i]mplementation is
as critical to a policy's success as theoretical design,'' and that it
is justifiable for an agency to consider its limited resources in
formulating a policy.\126\ The Commission's preferred choice for
resolving market information issues will be to rely whenever possible
on consensus among the SROs, the securities industry, and information
users, but to enhance the potential for such a consensus by
establishing more objective standards for setting fees and distributing
revenues, by providing greater public disclosure of relevant
information, and by broadening participation in the fee-setting
process.
---------------------------------------------------------------------------
\125\ See section III.B above.
\126\ MCI Telecommunications Corp., 675 F.2d at 414.
---------------------------------------------------------------------------
A. Flexible, Cost-Based Approach to Market Information Fees and
Revenues
The Commission is considering the concept of a flexible, cost-based
approach for evaluating market information fees and revenues. Rather
than require a strict mathematical calculation of costs in every case,
this approach would rely, when possible,\127\ on more flexible
determinations of costs to determine whether fees are fair and
reasonable. Costs are relevant to an assessment of fees and revenues in
two different contexts. First, the total costs incurred to provide
market information are relevant in assessing whether the total revenues
derived from market information fees are fair and reasonable.
Determining a total amount of revenues for each Network that is fair
and reasonable is the issue addressed in section V.A.1 below. Second,
costs are relevant in determining whether individual fees are fair and
reasonable or unreasonably discriminatory when compared to other fees.
Issues relating to specific fees, particularly the fees applicable to
professional subscribers and retail investors, are discussed in section
V.A.2 below.
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\127\ As indicated by the Instinet Order (discussed in section
III.C above), there may be some circumstances in which a strict,
mathematical calculation of costs will be necessary to assure the
fairness and reasonableness of a fee. The subsequent history of the
Instinet proceedings also indicates, however, the practical
difficulties inherent in such an approach.
---------------------------------------------------------------------------
1. Cost-Based Limit on Market Information Revenues
Since the enactment of the 1975 Amendments, the Commission has
relied primarily on consensus among the SROs and the securities
industry to resolve issues concerning market information fees and
revenues. The Commission believes, however, that recent changes in the
securities markets may require a revised approach that provides greater
guidance to the SROs and the rest of the securities industry.
Particularly with the potential for a significant number of SROs that
are for-profit entities, it appears that closer monitoring of the SROs'
funding and internal allocation of resources will be necessary. The
principal financial objective of membership organizations has been to
recover their operating costs, while their members act as for-profit
entities. The advent of for-profit SROs, who will have the financial
objective of generating profits for their owners, potentially could
result in increased pressure to raise fees and revenues and to cut back
on costs not directly associated with a source of revenues. This is not
to say that for-profit SROs are inherently unable to meet their
Exchange Act responsibilities, but rather that their fees and financial
structures may warrant increased oversight by the Commission.
Accordingly, the Commission is considering whether a cost-based
limit should be established for the total market information revenues
of each Network. In establishing their fee structures, the Networks
would be required to adjust the particular fees charged to different
categories of vendors and subscribers so that they did not generate a
total amount of revenues that would exceed the limit. To implement this
type of conceptual approach, the Networks would, at a minimum, need to
provide sufficient periodic financial disclosures to demonstrate their
compliance with relevant requirements. In section V.C below, comment is
requested on issues relating to financial disclosure. In addition, the
SROs would be required to file a proposed fee change with the
Commission when necessary to maintain compliance with the limit.
Comment is requested on whether there should be specific requirements
relating to the frequency and timing of proposed fee changes. Finally,
the Commission itself could initiate direct action if necessary to
assure that the Networks comply with all relevant requirements.
The Commission requests comment on the following broad outline of a
conceptual approach for setting a cost-based limit on a Network's total
market information revenues. It would involve four steps. First, each
SRO would calculate the amount of its direct market information costs.
These would include, for example, the Plan costs incurred by processors
and administrators of the Networks in performing their Plan
responsibilities and any other costs incurred only and entirely for
providing market information services.
Second, each SRO would calculate a gross common cost pool made up
of the total amount of its costs that are appropriately classified as
contributing substantially to the value of market information. The
principles guiding such a classification are discussed in section IV.C
above. Appropriate categories of costs would include the costs of
market operation and market
[[Page 70630]]
regulation, but would not include the costs of member regulation or
other direct costs of services other than market information. Comment
is requested on whether these categories are sufficiently distinct to
provide the basis for a workable internal cost allocation. Comment also
is requested on specific types of costs that should, and should not, be
classified as substantially contributing to the value of market
information.\128\
---------------------------------------------------------------------------
\128\ For example, public utilities generally are entitled to
earn a ``fair rate of return'' in addition to their allowable
operating costs. See, e.g., Instinet Order, note 89 above, at n. 68
(``Although utility ratemaking proceedings also involve the
calculation of a rate of return for the utility's shareholders and
bond-holders, such a calculation is unnecessary in this proceeding.
The NASD has stated that it `does not build in any rate of return in
its fees' as `(t)here are no shareholders, save the NASD, and no
dividends have ever been paid or are contemplated.' '') (citation
omitted). Comment is requested on whether the cost of market
information should include an allowance to provide a fair rate of
return and, if so, how a fair rate of return should be determined.
---------------------------------------------------------------------------
Third, each SRO would apply a standard allocation percentage to its
gross common cost pool to determine its net common cost pool. A
percentage allocation is necessary to reflect the fact that these costs
are incurred by the SROs not only to provide market information
services, but also to provide listing and transaction services. The
percentage would be the same for all SROs.\129\ It could be derived
from the historical experience of the SROs (on average, the SROs appear
to fund between 30% and 40% of their market operation and market
regulation costs through market information revenues) \130\ or based on
any other rationale that furthers the national market system objectives
of the Exchange Act. Comment is requested on what would be an
appropriate standard allocation percentage.
---------------------------------------------------------------------------
\129\ If different allocation percentages applied to different
SROs, it might result in some Networks being entitled to charge
higher fees in relation to costs than other Networks. SROs that
primarily traded the securities of the favored Network could receive
a higher proportion of their funding from market information fees
than other SROs. Comment is requested on whether this situation
would be consistent with the Exchange Act objective of fair
competition or whether there are appropriate reasons for allocation
percentages to vary from SRO to SRO.
\130\ For example, as noted in section IV.B.2 above, the costs
associated with Nasdaq's market operation, market regulation, and
listing functions in 1998 were funded 30% by transaction services
revenues, 32% by listing revenues, 35% by market information
revenues, and 3% by other revenues. The SROs have not, however,
provided detailed disclosures concerning their internal cost
structures. It therefore has not been possible to make precise
calculations of how they have funded their market operation and
market regulation costs. The 30-40% figures given in the text
necessarily represent a rough estimate.
---------------------------------------------------------------------------
Finally, in the fourth step, it would be necessary for each SRO to
allocate its total cost of market information (direct costs plus the
net common cost pool) to the various Networks whose securities it
trades. This allocation could be done directly (for those costs that
can be associated with a particular Network), with the remainder
allocated based on the proportion of the SRO's total trading volume
represented by a Network's securities. The total amount of the costs
allocated to each Network from the individual SROs would represent a
limit on the amount of revenues that could be generated by each
Network's fees. It bears emphasis here that, under this conceptual
approach, separate rules would govern the distribution of Network
revenues, and therefore an individual SRO would not necessarily recover
the amount of its total cost of market information in distributions
from the Networks.\131\
---------------------------------------------------------------------------
\131\ Currently, for example, revenues are distributed in
accordance with an SRO's proportion of trading volume in a Network's
securities. Comment is requested in section V.B below on whether the
rules for the distribution of Network revenues should be revised to
further more directly national market system objectives.
---------------------------------------------------------------------------
The Commission requests comment on all aspects of the concept of
setting a cost-based limit on market information revenues. It appears
that the conceptual approach outlined above could have three principal
benefits. First, it could provide a much closer and more objective link
between SRO costs and market information revenues than has been
required in the past. Second, it potentially could be implemented in a
more efficient manner than a strict, cost-of-service approach that
required each SRO to establish a basis for allocating its common costs
down to the last dollar. Third, the conceptual approach outlined above
could put all the Networks on a more equal footing in terms of the
proportion of relevant costs funded by market information revenues,
thereby possibly furthering the Exchange Act objective of fair
competition. Comment is requested on the advisability and practicality
of this approach, including whether a single approach is appropriate
for each of the different Networks and for different types of
securities. The Commission also would be interested in suggestions for
any alternative approaches to setting a fair and reasonable limit on
market information revenues.
2. Fairness and Reasonableness of Specific Fees
A Network's fees cannot unreasonably discriminate among markets,
vendors, broker-dealers, and users. To achieve this goal, the
Commission believes that any disparities in fees should be justified by
such legitimate factors as differences in relevant costs or degree of
use. In this regard, it is important to recognize that the basic
information stream (all of the transaction reports and quotations in a
Network's securities) will be the same, and have the same production
costs, no matter how many vendors and subscribers receive the
information. Although there may be differences in a Network's costs of
disseminating information to different categories of vendors and
subscribers (such as the costs of administering a fee structure), it is
vendors and broker-dealers who, for the most part, bear the costs of
receiving the data stream from a Network processor and redisseminating
it to individual subscribers. These redissemination costs incurred by
parties other than the Networks are not appropriately incorporated into
a Network's fee structure.
In addition, individual fees must be evaluated in terms of the
national market system objective to assure the wide availability of
market information. Accordingly, a Network's fees should not be set at
levels that effectively restrict the availability of real-time
information. As a theoretical matter, of course, lower prices always
will result in greater marginal demand for a product. As a practical
matter, however, the relevant Exchange Act question is whether the fees
for particular classes of subscribers, given their economic
circumstances and their need for and use of real-time information, are
at a sufficiently high level that a significant number of users are
deterred from obtaining the information or that the quality of their
information services is reduced.
The various fee structures established by the Networks are
described in section II above, and the amount of revenues derived from
the various fees are set forth in Tables 5-8 in the Appendix. Comment
is requested on the fairness and reasonableness of all of these fees,
which include fees for vendor access and a variety of other
services.\132\ This subsection will discuss the fees that apply to
users of market information and generate 94% of total market
information revenues--the monthly fees applicable to professional
subscribers and the fees applicable to retail investors (which include
both monthly nonprofessional subscriber fees and per-
[[Page 70631]]
query fees). These fees are set forth in Tables 1-4 in the Appendix.
---------------------------------------------------------------------------
\132\ A full description of Network fee structures, including
fees applicable only to vendors, is provided in the Anderson Report,
note 34 above.
---------------------------------------------------------------------------
a. Professional Subscriber Fees
Fees for professional subscribers generally range from $18.50 to
$50 per month.\133\ These fees produced revenues of $351.1 million in
1998, compared to $231.1 million in 1994, for an increase of 52%. The
revenues generated by professional subscriber fees represented
approximately 85% of the total amount of the Networks' revenues in
1998. The fees themselves have remained essentially the same over the
last five years.\134\ It is an increase in the number of professional
subscribers that has produced the increase in revenues. For example,
there were 338,010 Level 1 subscribers and 57,535 NQDS subscribers to
Nasdaq System information in 1998, compared with only 260,500 Level 1
subscribers and 17,000 NQDS subscribers in 1994.\135\ Similarly, there
were 384,661 devices displaying Network A market information in 1998,
compared with only 266,718 in 1994.\136\ Moreover, the expansion in
trading volume in recent years has produced an explosion in the volume
of information disseminated by the Networks. As noted in section II.C
above, for example, SIAC processed 634 million transaction reports and
quotations in 1998 for Networks A and B, compared with only 188 million
in 1994. Thus, monthly fees for professionals have remained steady
despite a substantial increase in the amount of information provided.
---------------------------------------------------------------------------
\133\ Network A, Network B, and OPRA provide a variety of
discounts in these fees depending on the size of the subscriber or
the SRO membership status of the subscriber. These discounts are
addressed in section V.A.2.c below.
\134\ Nasdaq fees for professional subscribers increased $1 per
month in the period from 1994 to 1998. OPRA professional subscriber
fees generally increased from $3 to $4 per month. Network A and
Network B professional subscriber fees were unchanged.
\135\ The numbers of Nasdaq System subscribers are set forth in
Exhibit Q to the annual amendments to Form SIP filed by Nasdaq for
the years 1994 and 1998.
\136\ NYSE, 1998 Fact Book 103.
---------------------------------------------------------------------------
Comment is requested on the fairness and reasonableness of
professional subscriber fees. In this regard, it is important to
consider whether they further the Exchange Act objective of making
market information widely available. Based on an average of 21 trading
days per month and monthly fees ranging from $18.50 to $50, a
professional subscriber generally is charged from approximately $0.90
to $2.40 per trading day for market information. Given the importance
of this information to the livelihood of a professional subscriber,
comment is requested on whether these fees, in practice, limit the
availability of market information.
b. Retail Investor Fees
The revenues from fees applicable to retail investors (which
include monthly fees for nonprofessional subscribers and per-query
fees) have grown exponentially in recent years. In 1994, such revenues
amounted to $3.7 million. In 1998, they amounted to 38.9 million, for
an increase of 951%. Most of this increase is attributable to increased
demand by investors and not to fee increases by the SROs.\137\ In
addition, the nonprofessional subscriber fees for Nasdaq, Network A,
and Network B securities have been substantially reduced in 1999. The
Commission remains concerned, however, that the Networks' fee
structures have not kept pace with advancing technology and increased
demand.
---------------------------------------------------------------------------
\137\ For example, the NASD's per-query fee for Nasdaq System
securities has remained at one cent since 1995. Revenues
attributable to this fee grew from $2.6 million in 1997 to $13.5
million in 1998.
---------------------------------------------------------------------------
The fees currently applicable to retail investors range from $0.50
to $2.50 per month for unlimited access to a particular Network's
information, and the per-query fees range from $0.0025 to $0.02. The
Commission requests comment on whether these fees now are low enough
and structured in such a way that they do not significantly limit the
availability of real-time information to retail investors, both in
terms of the number of subscribers and the quality of information
services. For example, does a monthly fee of $0.50 or $1 per Network
deter a significant number of retail investors from using real-time
market information or preclude broker-dealers from providing enhanced
information services to their retail customers? Thus far, per-query
fees have generated much greater revenues than the monthly fees that
allow unlimited use of information. The fees allowing unlimited use,
however, would appear to provide a greater opportunity for broker-
dealers to provide retail investors with a much improved quality of
service, including potentially the opportunity to obtain dynamically-
updated displays of quotations and transaction reports in a security.
Compared to receiving information based on a single query at a time, a
real-time stream of dynamically-updated information could offer retail
investors a greater ability to control their securities transactions,
including possibly the ability to execute transactions in the market of
their choice (for example, by directing a limit order to a specific
market) or monitoring the quality of execution by their broker-dealers.
Comment is requested on whether the current fee schedules could
inappropriately restrict the information services that broker-dealers
provide to their retail customers.
In addition, comment is requested on whether the fees applicable to
retail investors are unreasonably discriminatory compared to those for
professional subscribers. The monthly fees for nonprofessional
subscribers are significantly less than the monthly fees for
professional subscribers, yet it also appears that retail investors are
unlikely to use real-time market information nearly as much as
professional investors. With the monthly rates, for example, each class
of subscribers theoretically receives the same service--an unlimited
amount of real-time information for a Network's securities.
Professional investors, however, are likely to monitor the stream of
real-time market information for a substantial portion of each trading
day during a month. Assuming an average of 21 trading days in a month
and 6\1/2\ hours per trading day, professional investors may monitor
real-time information for as many as 136 hours in a month. It does not
appear that retail investors are likely to monitor real-time
information for anywhere near as many hours during a month. Comment is
requested on whether the difference in rates between professional and
nonprofessional subscribers adequately reflects this difference in
use.\138\
---------------------------------------------------------------------------
\138\ For example, dividing a monthly professional fee of $20 by
136 hours produces a per-minute rate of approximately \1/4\ cent. At
this rate, a nonprofessional subscriber fee of $2 per month would
cover 800 minutes, or 13\1/3\ hours. Comment is requested on the
number of hours in a month that retail investors, on average, could
be expected to monitor real-time information.
---------------------------------------------------------------------------
A petition to the Commission for rulemaking has asserted, among
other things, that any fee applicable to retail investors for on-line
access to market information constitutes unreasonable discrimination
against on-line investors and their broker-dealers.\139\ The petition
argues that, by comparison, traditional broker-dealers pay the monthly
professional fee and provide market information to their customers by
[[Page 70632]]
personal telephone call without incurring additional fees. The
Commission requests comment on this issue, as well as on any other
issue relating to the effect of market information fee structures on
broker-dealers conducting different types of business. In this regard,
it appears that the degree of use and the quality of the service
provided to customers of an on-line broker-dealer (particularly under a
monthly fee structure providing instant access to unlimited
information) may be superior to the service provided to customers of a
traditional broker-dealer (who must initiate a separate telephone call
and speak personally with an employee of their broker-dealer each time
they want to update their information). Comment is requested on whether
fees for on-line access to market information by retail investors are
warranted by the degree of use and the quality of service provided.
---------------------------------------------------------------------------
\139\ Letter submitted on behalf of Charles Schwab & Co., Inc.,
by Sam Scott Miller, Orrick, Herrington & Sutcliffe, LLP, to
Jonathan G. Katz, Secretary, SEC, dated June 29, 1999. The petition
requests rulemaking on a broad range of issues relating to market
information fees and revenues, including fair and reasonable fees,
non-discriminatory fees, and oversight of CTA practices. A copy of
the petition is available for inspection and copying in the
Commission's Public Reference Room, File No. 4-425.
---------------------------------------------------------------------------
c. Fee Discounts
The fee structures for Network A, Network B, and the OPRA System
include various discounts that are based on the size of the subscribing
firm or on whether the firm is a member of an SRO that is participant
in the particular Network. They include (1) a Network A ``enterprise
arrangement'' that caps the aggregate amount a registered broker-dealer
must pay for most of the information services provided to its employees
and customers at $500,000 per month,\140\ (2) Network A monthly
professional subscriber fees that range from $18.75 per device for
subscribers with more than 10,000 devices to $127.25 for subscribers
with a single device, (3) OPRA monthly professional subscriber fees
that are $6-$10 less per device for members of an SRO that is a
participant in OPRA than for non-members, (4) Network A nonprofessional
subscriber fees that are $1 per month for the first 250,000 subscribers
per vendor, and 50 cents per month for subscribers above 250,000, and
(5) Network A, Network B, and OPRA per-query fees that are reduced
based on the number of quotes distributed by a vendor during a month.
---------------------------------------------------------------------------
\140\ The terms and conditions of the Network A enterprise
arrangement are described in Securities Exchange Act Release No.
41977 (October 5, 1999), 64 FR 55503.
---------------------------------------------------------------------------
The Commission requests comment on whether these discounts are
consistent with the Exchange Act objective that exclusive processors of
information should remain neutral in their treatment of firms and
customers. As noted above, the Commission believes that disparities in
fees should be justified by such legitimate factors as differences in
relevant costs, degree of use, or quality of service. In the past, the
Networks have justified these fee discounts as reflecting differences
in the administrative costs associated with different categories of
subscribers.\141\ The Commission has not, however, required the
Networks to demonstrate that the size of the discounts corresponds with
the size of the relative difference in administrative costs. Comment is
requested on whether the size of these discounts should be strictly
limited to differences in administrative costs.
---------------------------------------------------------------------------
\141\ See, e.g., Securities Exchange Act Release No. 26689
(April 3, 1989), 54 FR 14306 (discounts for subscribers that are
members of OPRA participants explained on the basis of higher
administrative costs for non-member subscribers); Securities
Exchange Act Release No. 24130 (February 20, 1987), 52 FR 6413
(Network A fee structure requiring subscribers with a single device
to pay a monthly device fee that is 6\1/2\ times higher than the fee
for large subscribers ``reflect[s] the fact that total CTA and CQ
Plan administrative costs for any subscriber on an average per
terminal basis decrease as the average number of terminals
increases'').
---------------------------------------------------------------------------
B. Distribution of Network Revenues and SRO Funding
The current rules for distributing Network revenues to the SROs are
described in section II.E above. In general, each of the Networks first
distributes revenues directly to their respective administrators and
processors to cover expenses incurred in performing their Plan
functions. After these Plan costs are funded, the remaining revenues
then are distributed to the SRO participants in a Network in accordance
with a formula based on each SRO's percentage of trading volume in the
Network's securities. For ease of reference, the initial distribution
to cover specific costs will be referred to as the ``Direct
Distribution,'' while the subsequent distribution of a Network's
remaining revenues will be referred to as the ``Proportional
Distribution.''
The Commission is considering a conceptual approach to distributing
Network revenues that could reflect more fully and directly the
objectives of the Exchange Act. Specifically, comment is requested on
(1) whether certain individual SRO costs that most directly enhance the
integrity of market information (principally, the cost of market
regulation) should be funded as part of the Direct Distribution in
addition to Plan costs, and (2) whether the formula for making the
Proportional Distribution should be revised to compensate the SROs more
in accordance with the value of the information they contribute to the
stream of consolidated information. Finally, comment is requested on
whether the SROs should be permitted to rebate market information
revenues to their members.
1. Direct Funding of Market Regulation Costs
The Commission requests comment on whether a portion of market
information revenues should be earmarked in the Direct Distribution to
fund, in addition to Plan costs, SRO costs that directly enhance the
integrity and reliability of market information. These could include
primarily the costs incurred by the SROs in performing their market
regulation function (as opposed to member regulation). Market
regulation by the SROs helps assure that the information on which
investors rely is not tainted by fraud or manipulation and that market
participants comply with trading rules designed to enhance the
efficiency and fairness of the SROs' markets. Although the benefits of
market regulation extend directly to all those who use an SRO's
information, the function does not appear to be as directly associated
with a specific source of revenues as are other SRO functions. The
Commission is concerned that competitive pressures among markets could
lead to cutbacks in the substantial expenditures necessary to maintain
full funding for this critically important Exchange Act responsibility.
Comment is requested on whether allocating market information
revenues directly to fund specified market oversight and information
integrity and reliability costs would further Exchange Act
objectives.\142\ The potential benefits of such an allocation appear to
be two-fold. First, it could help ensure that this vital SRO function
is fully funded, thereby helping to prevent the publication of
fraudulent, deceptive, or manipulative market information, section
11A(c)(1)(A), and to assure the prompt, accurate, reliable, and fair
publication of market information, section 11A(c)(1)(B). Second, the
funding would be shared among all users of market information, rather
than
[[Page 70633]]
falling on the particular SRO that incurs the particular costs. To the
extent that market regulation costs benefit the market for a security
as a whole, the objectives of fair competition, equal regulation, and
an equitable allocation of SRO costs might be furthered.
---------------------------------------------------------------------------
\142\ Comment also is requested on whether any other categories
of SRO costs that directly enhance the integrity and reliability of
market information should be funded in the Direct Distribution. For
example, technology systems with sufficient capacity and reliability
to handle the highest-volume trading days help assure that the
stream of consolidated information is not subject to unexpected
interruptions. Comment is requested on whether some portion of
technology costs that directly relate to the integrity and
reliability of information (such as costs incurred to comply with
the policies set forth in the Commission's ARP Releases) should be
funded in the Direct Distribution.
---------------------------------------------------------------------------
Comment is requested on the advisability and practicality of
pursuing this type of approach. In particular, would identification of
the cost of market regulation be a reasonably objective task that could
be accomplished without excessive accounting and auditing costs? Are
there pragmatic methods that could simplify this task while still
achieving the goal of adequately funding appropriate costs? Finally,
comment is requested on whether direct funding would create an
inappropriate incentive for the SROs to increase these costs beyond
reasonable levels.
2. Compensating SROs in Accordance with the Value of Their Market
Information
Comment also is requested on whether the formula for making the
Proportional Distribution should be revised to reflect more directly
the value that each SRO's information contributes to the stream of
consolidated information made available to the public. In particular,
does the current practice of allocating revenues based solely on an
SRO's proportion of transaction volume adequately further the Exchange
Act objectives of maintaining the quality of market information and
encouraging fair competition?
As discussed in section III.A above, one of the fundamental policy
decisions made by Congress and the Commission in the mid-1970's was to
require all the SROs to make their market information, particularly
their quotations, available to the public. It is important to recognize
that the basis for this policy determination was not to prevent the
SROs from charging reasonable fees for their information. Rather,
Congress and the Commission determined that the information was too
important to investors and too affected with the public interest to
allow the SROs to restrict its availability. Although the SROs are no
longer allowed to act individually in setting fees or otherwise
capitalizing on the value of their information, the Commission believes
that they should be encouraged to generate high-quality market
information that enhances the value of the stream of consolidated
information made available to the public. Comment is requested on
whether the formula for the Proportional Distribution should be revised
to reflect this objective.
Under current practice, for example, the Proportional Distribution
is based solely on transaction volume. It therefore does not attempt to
reward markets for the value of their quotations, except insofar as an
SRO's percentage of transaction volume is a surrogate for the value of
its quotations. Comment is requested on whether, in fact, transaction
volume accurately reflects the value of an SRO's quotations, or whether
some other basis should be found for distributing a portion of Network
revenues based directly on the value of quotations. For example, is it
possible to devise a pragmatic formula or algorithm (or a combination
of different formulas or algorithms) that would reward markets that
provide ``price discovery'' to which other market participants look to
set their own prices? Similarly, is there a way to reward markets that
are the first to publish quotations at the best prices and in the
largest sizes? Finally, assuming a formula could be found to assess the
value of quotations in an individual security, how should the results
be aggregated for all of the securities that are included in a Network?
For example, should there be an adjustment to account for differences
in trading volume or is it more appropriate for each security to be
given equal weight regardless of trading volume?
It bears emphasis that a formula or algorithm that merely produced
appropriate results retrospectively based on historical data would not
be satisfactory. Instead, it must be capable of producing appropriate
results prospectively when market participants will have the
opportunity to adjust their behavior in response to the formula. In
other words, a value-oriented distribution would need to be resistant
to being ``gamed'' and to avoid awarding markets a share of market
information revenues when they have not in fact enhanced the value of
the stream of consolidated information.
3. SRO Rebates to Members
Some of the SROs have established programs that in effect award
rebates of market information revenues to their members.\143\ In
general, these rebates are given to the members responsible for
effecting the transactions that resulted in a Network's revenues being
distributed to the SRO. The Commission requests comment on whether such
rebates are consistent with the Exchange Act objective of fair
competition. In addition, do rebate programs constitute an equitable
allocation of an SRO's charges among its members when only selected
members receive a rebate based on their transaction volume in a
particular type of security? At least thus far, the rebate programs
have been established solely for securities in which the SRO granting
the rebate does not operate the primary market. Comment is requested on
whether changing the rules for distribution of Network revenues as
discussed above (to fund information integrity and reliability costs
directly and to reward the SROs that provide the highest quality market
information) would address the extent to which rebates could constitute
unfair competition. Moreover, do rebate programs indicate that market
information revenues exceed self-regulatory funding requirements?
---------------------------------------------------------------------------
\143\ See, e.g., Securities Exchange Act Release No. 41238 (Mar.
31, 1999), 64 FR 17204 (CSE grants members a 50% pro rata
transaction credit of Network B revenues); Securities Exchange Act
Release No. 41174 (Mar. 16, 1999), 64 FR 14034 (NASD establishes
pilot program to provide a transaction credit to members that trade
listed securities in the over-the-counter market); Securities
Exchange Act Release No. 40591 (Oct. 22, 1998), 63 FR 58078 (BSE
establishes revenue-sharing program for members that is based, in
part, on Network A and Network B revenues); Securities Exchange Act
Release No. 38237 (Feb. 4, 1997), 62 FR 6592 (CHX establishes
transaction credit for specialists based on a percentage of Network
A and Network B revenues).
---------------------------------------------------------------------------
C. Plan and SRO Disclosure
Each of the Plans requires that audited financial statements be
prepared for a Network's operations, primarily to allow its
participants to verify that the financial provisions of the Plans have
been satisfied. Currently, the Plans are not required to file publicly-
available financial statements with the Commission.\144\ In this
regard, the Commission proposed Rule 11Ab2-2 in 1975, which would have
required registered SIPs to file an annual amendment to their Form SIP
that included financial statements. The rule was never adopted. The
Commission requests comment on whether the Plans should be required to
make annual filings for the Networks that would be available to the
public. These filings could include (1) a complete listing of all their
fees, and (2) the number of users participating in each of their
different fee programs, and (3) audited financial statements setting
forth their revenues (including an itemized listing of revenues
attributable to their different fees), expenses, and distributions.
---------------------------------------------------------------------------
\144\ The Plans regularly have provided financial statements to
the Commission's staff. The financial statements have shown total
revenues, expenses, and distributions, but have not itemized the
amount of revenues attributable to different fees.
---------------------------------------------------------------------------
[[Page 70634]]
In contrast with the Plans, the SROs currently are required to file
publicly-available financial statements with the Commission as part of
the annual amendments to Form 1 for the national securities exchanges
(Rule 6a-2(b)(1)), or to Form X-15AJ-2 for the national securities
association (Rule 15Aj-1(c)(2)). These financial statements, however,
provide little information concerning the SROs' internal cost
structures. Comment is requested on whether the SROs should be required
to provide greater disclosure of their financial condition, including
disclosure of the costs associated with the performance of their
various SRO functions. The Commission notes that, at the very least,
the SROs will need to provide financial disclosures that are sufficient
to support whatever approaches ultimately are adopted for the
evaluation of fees and distribution of revenues.
D. Plan Governance, Administration, and Oversight
Each of the Plans has adopted essentially the same governance
structure. All important operational decisions are to be made by a
committee composed of one representative of each of the Plan's
participants (``Operating Committee''). In addition, each Plan has
designated one of its participants to administer its day-to-day
affairs. Some of the Plans also have established committees to address
particular aspects of their operations (for example, a technical
committee to address technology issues).
None of the Plans provides for broader securities industry or
public participation in the governance of its operations. The
Commission is concerned that the Plans should be responsive (in a
timely manner) to the concerns of vendors, broker-dealers, and
investors in disseminating consolidated market information to the
public. It also recognizes that the Plans operate substantial
enterprises and must have governance structures that permit them to
operate these enterprises effectively. Comment is requested on whether
these governance structures should be broadened to include such parties
as vendors, broker-dealers, and investors. If participation in the
governance of the Plans were broadened, a variety of issues would need
to be addressed. Should non-SRO parties be included on the Operating
Committee? Should additional committees with broad participation be
established to address the particular issues of most direct concern to
parties that are not SROs (for example, a committee for establishing or
reviewing fee structures)? What should be the mechanism for selecting
non-SRO representatives to a committee? In what capacity should such
representatives be allowed to participate (for example, voting or non-
voting)? If given the power to vote, what should be the relative
proportion of voting weight between the SRO and non-SRO
representatives? Finally, comment is requested on whether, as an
alternative to formal participation in Plan governance, the creation of
an industry advisory committee on market information arrangements would
constitute a more efficient and flexible vehicle to convey a broad
range of views to the Plans and to the Commission.
With respect to the administration of fee structures, there appears
to be considerable potential for making this process more efficient by
standardizing and streamlining the agreements, policies, and reporting
requirements that apply to vendors, broker-dealers, and
subscribers.\145\ Many of these operational issues require detailed
attention and are perhaps best addressed in the context of improved
Plan governance rather than by direct Commission action. Nevertheless,
the existence of four Networks, each with its own fee structures and
requirements, inherently limits the extent to which any Network, acting
alone, could substantially reduce the cumulative administrative costs
incurred by vendors, broker-dealers, and subscribers. Comment is
requested on whether the Plans should establish industry-wide standards
for administering their fee structures and, if so, the most appropriate
means for the Plans to act jointly in developing such standards.
---------------------------------------------------------------------------
\145\ The burdens and costs currently associated with
administering the Networks' fee structures are described at length
in the Andersen Report, note 34 above.
---------------------------------------------------------------------------
Finally, the Commission is concerned that the Plans have used their
``pilot program'' provisions to implement fee structures for periods of
time beyond that which the provisions originally were intended to
cover.\146\ Comment is requested on the advisability and usefulness of
pilot programs. Should they be eliminated entirely or should the Plans
have some flexibility to experiment with innovative services and fee
structures without first going through the process of a Commission
filing and public comment? If pilot programs should continue in some
form, comment is requested on whether they should be limited to a
specified time period (for example, one year), after which the program
could not be continued unless it was filed with the Commission.
Finally, comment is requested on whether the terms and conditions of
all pilot programs should be made available to the public in some
fashion prior to initiation of the program.
---------------------------------------------------------------------------
\146\ The pilot program provisions are set forth in section II.F
above.
---------------------------------------------------------------------------
VI. Conclusion
The Commission invites public comment on all of the foregoing
matters, as well as on any other matters relating to the arrangements
for disseminating market information that commenters believe the
Commission should consider in concluding its review and formulating
proposals.
By the Commission.
Dated: December 9, 1999.
Jonathan G. Katz,
Secretary.
Appendix--Tables 1-4: Subscriber Fees
Tables 1 through 4 set forth the Plans' principal fees for
subscribers to market information services as they currently exist and
as they existed at the end of 1998 and 1994. In addition to these
subscriber fees, the Plans have a variety of other fees that apply to
information vendors and others.
Table 1.--Network A Subscriber Fees
----------------------------------------------------------------------------------------------------------------
Current 1998 1994
----------------------------------------------------------------------------------------------------------------
Professional (monthly per
device):
No. of devices:
1........................ $127.25 Unchanged Unchanged.
2........................ 79.50
[[Page 70635]]
3........................ 58.25
4........................ 53.00
5........................ 47.75
6 to 9................... 39.75
10 to 19................. 31.75
20 to 29................. 30.25
30 to 99................. 27.50
100 to 249............... 26.50
250 to 749............... 23.75
750 to 4999.............. 20.75
5000 to 9999............. 19.75
10,000 and up............ 18.75
Nonprofessional (monthly per .............. $5.25 $4.25.
subscriber).
1 to 250,000 subscribers per 1.00 n/a n/a.
vendor.
250,001 subscribers and up... .50 n/a n/a.
Per Query (processed by vendor .............. .01 .005.
per month).
1 to 20,000,000.............. .0075 n/a n/a.
20,000,001 to 40,000,000..... .005 n/a n/a.
40,000,001 and up............ .0025 n/a n/a.
----------------------------------------------------------------------------------------------------------------
Table 2.--Nasdaq System Subscriber Fees
----------------------------------------------------------------------------------------------------------------
Current 1998 1994
----------------------------------------------------------------------------------------------------------------
Level 1/Last Sale (monthly per $20.00 $20.00 $19.00.
device).
NQDS (monthly per device)........ 50.00 Unchanged Unchanged.
Nonprofessional (monthly per 2.00 4.00 4.00.
person).
Per Query........................ .005 .01 .015.
----------------------------------------------------------------------------------------------------------------
Table 3.--Network B Subscriber Fees
----------------------------------------------------------------------------------------------------------------
Current 1998 1994
----------------------------------------------------------------------------------------------------------------
Professional (monthly per device)
Members:
Last Sale................ $13.60 Unchanged Unchanged.
Bid-Ask.................. 13.65 Unchanged Unchanged.
Non-Members:
Last Sale................ 14.60 Unchanged Unchanged.
Bid-Ask.................. 15.60 Unchanged Unchanged.
Nonprofessional (monthly per 1.00 3.25 3.25.
person).
Per Query (processed by vendor
per month):
1 to 20,000,000.............. .0075 n/a n/a.
20,000,001 to 40,000,000..... .005 n/a n/a.
40,000,001 and up............ .0025 n/a n/a.
Per Query (per user, per month):
1 to 50 Quotes............... n/a .50 n/a.
51 to 250 Quotes............. n/a 3.25 n/a.
More than 251 Quotes......... n/a 35.00 n/a.
----------------------------------------------------------------------------------------------------------------
Table 4.--OPRA System Subscriber Fees*
----------------------------------------------------------------------------------------------------------------
Current 1998 1994
-----------------------------------------------------------------------------
Member Non- Member Member Non- Member Member Non- Member
----------------------------------------------------------------------------------------------------------------
Professional (monthly per device):
No. of devices:
1 to 9.................... $16.00 $26.00 $15.00 $24.00 $21.00-55.0 $22.00-55.0
0 0
10 to 29.................. 16.00 22.00 15.00 20.00 12.00 13.00
30 to 99.................. 13.00 22.00 12.00 20.00 9.00 10.00
100 to 749................ 13.00 15.50 12.00 14.50 9.00 10.00
750 or more............... 10.00 15.50 9.40 14.50 7.00 8.00
-----------------------------------------------------------------------------
Nonprofessional (monthly per
person).......................... 2.50
2.00
2.00
[[Page 70636]]
Per Query (tiered by volume)...... .02 to .01
.02 to .01
.02
----------------------------------------------------------------------------------------------------------------
* The fees are applicable to the OPRA System's basic service (equity options and index options). It charges
separately for information on foreign currency options.
Tables 5-8: Network Revenues, Expenses, and Distributions
Tables 5 through 8 set forth the Networks' revenues, expenses, and
distributions to their participant SROs in 1998 and 1994. As discussed
in section II above, the four Networks are responsible for receiving
market information from the their SRO participants, consolidating the
information, and distributing it to vendors, broker-dealers, and other
subscribers. The Networks' administrators and processors perform most
of these functions, and their costs are defined in the Plans as
``operating expenses'' that may be deducted from Network revenues prior
to any distribution to participants. The following costs are not
included in the Networks' operating expenses: (1) the costs incurred by
the SROs in collecting their market information and reporting it to the
Network processors, and (2) the costs associated with the SROs' market
surveillance function.
Table 5.--Network A Revenues, Expenses, and Distributions
------------------------------------------------------------------------
For the years ended December 31 1998 1994
------------------------------------------------------------------------
Revenues:
Professional Subscribers...... $112,444,000 $79,519,000
Nonprofessional Subscribers... 6,040,000 825,000
Per Query..................... 8,236,000 276,000
Cable TV...................... 1,917,000 0
Access Fees................... 9,682,000 4,133,000
Program Application Fees...... 2,634,000 1,608,000
Ticker Communications Fees.... 2,776,000 2,231,000
Other......................... 0 369,000
-------------------------------------
Total Revenues.............. 143,729,000 88,961,000
=====================================
Expenses:
Data Processing............... 5,997,000 5,457,000
Ticker Network................ 2,444,000 1,709,000
NYSE Allocated Support Costs.. 8,697,000 5,304,000
Other......................... 1,360,000 326,000
-------------------------------------
Total Operating Expenses.... 18,498,000 12,796,000
=====================================
Income before Taxes............... 125,231,000 76,165,000
Provision for Taxes............... (36,000) (863,000)
-------------------------------------
Net Income Available for 125,195,000 75,302,000
Distribution.....................
-------------------------------------
Distributions:
NYSE.......................... 93,223,000 54,594,000
NASD.......................... 13,209,000 6,902,000
CHX........................... 6,898,000 4,153,000
PCX........................... 4,531,000 3,788,000
BSE........................... 3,390,000 1,748,000
CSE........................... 2,279,000 2,311,000
Phlx.......................... 1,664,000 1,806,000
CBOE.......................... 1,000 0
------------------------------------------------------------------------
Table 6.--NASDAQ System Revenues, Expenses, and Distributions
------------------------------------------------------------------------
For the years ended December 31 1998 1994
------------------------------------------------------------------------
Revenues:
Level 1/Last Sale $86,713,000 $52,953,000
(Professional)...............
NQDS.......................... 21,155,000 6,611,000
Nonprofessional Subscriber.... 4,445,000 770,000
Per Query..................... 13,473,000 517,000
Voice Response................ 1,956,000 592,000
Cable TV...................... 241,000 0
Other......................... 517,000 603,000
-------------------------------------
Total Revenues.............. 128,500,000 62,046,000
-------------------------------------
[[Page 70637]]
Distributions:
NASD Retention................ 128,088,000 61,946,000
CHX........................... 412,000 100,000
------------------------------------------------------------------------
Table 7.--Network B Revenues, Expenses, and Distributions
------------------------------------------------------------------------
For the years ended December 31 1998 1994
------------------------------------------------------------------------
Revenues:
Professional Subscriber....... $91,576,000 $68,677,000
Nonprofessional Subscriber.... 1,625,000 416,000
Pilots (including per query).. 2,316,000 279,000
Tickers....................... 2,009,000 2,154,000
Computer Program Charges...... 746,000 557,000
Indirect Access Charges....... 853,000 116,000
Other......................... 123,000 152,000
-------------------------------------
Total Revenues.............. 99,248,000 72,351,000
=====================================
Expenses:
Data Processing Services...... 579,000 895,000
Ticker Network Expenses....... 663,000 433,000
Amex Allocated Support Costs.. 3,771,000 2,852,000
-------------------------------------
Total Expenses.............. 5,013,000 4,180,000
=====================================
Net Income Available for 94,235,000 68,171,000
Distribution.....................
-------------------------------------
Distributions:
Amex.......................... 67,090,000 56,460,000
CHX........................... 12,722,000 4,507,000
NASD.......................... 9,020,000 2,783,000
PCX........................... 2,855,000 2,164,000
BSE........................... 782,000 1,264,000
Phlx.......................... 528,000 881,000
CSE........................... 236,000 112,000
CBOE.......................... 85,000 0
DIAMONDS...................... 917,000 0
------------------------------------------------------------------------
Table 8.--OPRA System Revenues, Expenses, and Distributions
------------------------------------------------------------------------
For the years ended December 31 1998 1994
------------------------------------------------------------------------
Revenues:
Professional Subscriber....... $39,251,000 $23,333,000
Nonprofessional Subscriber.... 774,000 219,000
Vendor Fees................... 1,452,000 1,655,000
Other (including per-query)... 2,031,000 360,000
Interest...................... 148,000 56,000
-------------------------------------
Total Revenues.............. 43,656,000 25,623,000
=====================================
Expenses:
Administrative and Operating 1,557,000 1,044,000
Expenses.....................
Processing Costs.............. 3,324,000 1,772,000
-------------------------------------
Total Expenses.............. 4,881,000 2,816,000
=====================================
Net Income Available for 38,775,000 22,807,000
Distribution.....................
-------------------------------------
Distributions:
CBOE.......................... 18,582,000 12,818,000
Amex.......................... 9,889,000 4,960,000
Phlx.......................... 4,939,000 2,448,000
PCX........................... 5,365,000 2,392,000
NYSE.......................... 0 189,000
------------------------------------------------------------------------
Tables 9-17: SRO Revenues and Expenses
Tables 9 through 17 set forth for 1998 and 1994 the SROs' revenues
(including their distributions from the Networks), expenses, and an
analysis of their sources of revenues (each source of revenues is
represented as a percentage of
[[Page 70638]]
total revenues). The figures are derived primarily from the SROs'
audited financial statements and their accompanying notes, which should
be referred to for a complete and fair presentation of their financial
condition. The following tables are provided for convenience of
comparison.
Table 9.--NYSE Consolidated Revenues and Expenses
------------------------------------------------------------------------
For the years ended December 31 1998 1994
------------------------------------------------------------------------
Revenues:
Market Information Revenues:
Network A:
Distribution.......... $93,223,000 $54,594,000
Allocated Support 8,697,000 5,304,000
Costs................
OPRA System Distribution.. 0 189,000
Others....................
Other..................... 9,573,000 7,976,000
-------------------------------------
Total Market Information 111,493,000 68,063,000
Revenues...................
=====================================
Listing Fees...................... 296,022,000 180,561,000
Trading Fees...................... 123,795,000 92,080,000
Regulatory Fees 93,116,000 50,512,000
Facility and Equipment Fees....... 41,865,000 33,643,000
Membership Fees................... 7,361,000 6,125,000
Investment and Other Income....... 55,022,000 21,295,000
-------------------------------------
Total Revenues.............. 728,674,000 452,279,000
=====================================
Expenses:
Compensation.................. 204,711,000 152,194,000
Systems and Related Support... 201,913,000 140,049,000
General and Administrative.... 51,703,000 22,613,000
Depreciation and Amortization. 37,947,000 21,732,000
Professional Services......... 29,607,000 13,473,000
Occupancy..................... 24,071,000 22,079,000
-------------------------------------
Total Expenses 549,952,000 372,140,000
=====================================
Income before Taxes............... 178,722,000 80,139,000
------------------------------------------------------------------------
Analysis of Sources of Revenues
(percent of total revenues)
------------------------------------------------------------------------
Market Information................ 15.3 15.0
Listing Fees...................... 40.6 39.9
Trading Fees...................... 17.0 20.4
Regulatory Fees................... 12.8 11.2
Facility and Equipment Fees....... 5.7 7.4
Membership Fees................... 1.0 1.4
Investment and Other Income....... 7.6 4.7
------------------------------------------------------------------------
Table 10.--NASD Consolidated Revenues and Expenses (Excluding Amex
Subsidiary)
------------------------------------------------------------------------
For years ended December 31 1998 1994
------------------------------------------------------------------------
Revenues:
Market Information Revenues:
Nasdaq System Retention... $128,088,000 $61,946,000
Network A Distribution.... 13,209,000 6,902,000
Network B Distribution.... 9,020,000 2,783,000
Other..................... 1,937,000 2,798,000
-------------------------------------
Total Market Information 152,254,000 74,429,000
Revenues...................
=====================================
Issuer Services................... 137,344,000 79,219,000
Transaction Services.............. 126,913,000 60,653,000
Member Assessments................ 91,313,000 44,152,000
Registration and Qualification 78,662,000 45,761,000
Fees.............................
Regulatory Fees and Fines......... 47,880,000 18,406,000
Interest and Other................ 27,871,000 25,988,000
Arbitration Fees.................. 21,427,000 7,592,000
Corporate Finance Fees............ 16,143,000 15,787,000
-------------------------------------
Total Revenues.............. 699,807,000 371,987,000
=====================================
[[Page 70639]]
Expenses:
Compensation.................. 271,608,000 132,444,000
Professional and Contract 154,311,000 67,142,000
Services.....................
Computer Operation and Data 65,101,000 31,355,000
Communications...............
Depreciation and Amortization. 60,573,000 20,380,000
Occupancy..................... 24,092,000 19,840,000
Publications, Supplies, and 23,352,000 10,996,000
Postage......................
Travel, Meetings, and Training 22,907,000 16,121,000
Other......................... 22,586,000 13,598,000
Systems Technology Migration.. 0 29,053,000
Intercompany (Amex)........... (20,632,000) 0
-------------------------------------
Total Expenses.............. 623,898,000 340,929,000
=====================================
Income before Provision for 75,909,000 31,058,000
Income Taxes.................
------------------------------------------------------------------------
Analysis of Sources of Revenues
(percent of total revenues)
------------------------------------------------------------------------
Market Information................ 21.8 20.0
Issuer Services................... 19.6 21.3
Transaction Services.............. 18.1 16.3
Member Assessments................ 13.0 11.9
Registration and Qualification 11.2 12.3
Fees.............................
Regulatory Fees and Fines......... 6.8 4.9
Interest and Other................ 4.0 7.0
Arbitration Fees.................. 3.1 2.0
Corporate Finance Fees............ 2.3 4.2
------------------------------------------------------------------------
Table 11.--Amex Consolidated Revenues and Expenses
(Includes two-month period after acquisition by NASD on October 30,
1998)
------------------------------------------------------------------------
For the years ended December 31 1998 1994
------------------------------------------------------------------------
Revenues:
Market Information Revenues:
Network B:
Distribution.......... $67,090,000 $56,460,000
Allocated Support 3,771,000 2,852,000
Costs................
OPRA System Distribution.. 9,889,000 4,960,000
Other......................... 2,160,000 1,993,000
-------------------------------------
Total Market Information 82,910,000 66,265,000
Revenues...................
=====================================
Trading Fees...................... 91,937,000 45,107,000
Members' Dues and Regulatory Fines 17,679,000 2,875,000
and Fees.........................
Listing Fees...................... 16,265,000 15,151,000
Investment and other income....... 15,257,000 14,157,000
-------------------------------------
Total Revenues.............. 224,048,000 143,555,000
=====================================
Expenses:
Compensation and benefits..... 65,484,000 57,708,000
Systems and Related Support 45,638,000 29,231,000
Costs........................
Professional Services......... 23,636,000 4,498,000
Facilities Costs.............. 11,186,000 9,648,000
Depreciation and amortization. 9,225,000 9,205,000
General Administrative and 26,003,000 18,833,000
Other Expenses...............
Intercompany (after NASD 20,632,000 0
acquisition).................
-------------------------------------
Total Expenses.............. 201,804,000 129,123,000
=====================================
Income before Income Taxes........ 22,244,000 14,432,000
------------------------------------------------------------------------
Analysis of Sources of Revenues
(percent of total revenues)
------------------------------------------------------------------------
Market Information................ 37.0 46.2
Trading Fees...................... 41.0 31.4
Members' Dues and Regulatory Fines 7.9 2.0
and Fees.........................
Listing Fees...................... 7.3 10.6
[[Page 70640]]
Investment and other income....... 6.8 9.7
------------------------------------------------------------------------
Table 12.--CBOE Consolidated Revenues and Expenses
------------------------------------------------------------------------
For the years ended June 30 1998 1994
------------------------------------------------------------------------
Revenues:
Total Market Information $17,538,000 $11,052,000
Revenues *...................
Transaction Fees.............. 84,639,000 68,205,000
Other Member Fees............. 19,703,000 14,272,000
Interest...................... 1,133,000 1,059,000
Equity in Income of CSE....... 515,000 1,078,000
Other......................... 3,012,000 1,997,000
-------------------------------------
Total Revenues.............. 126,540,000 97,663,000
=====================================
Expenses:
Employee Costs................ 57,395,000 41,974,000
Outside Services.............. 14,948,000 7,173,000
Facilities Cost............... 3,887,000 3,663,000
Communications................ 726,000 830,000
Data Processing............... 8,400,000 6,028,000
Travel and Promotional 15,585,000 5,071,000
Expenses.....................
Depreciation and Amortization. 16,571,000 6,997,000
Other......................... 8,733,000 4,360,000
-------------------------------------
Total Expenses.............. 126,245,000 76,096,000
=====================================
Income before Income Taxes........ 295,000 21,567,000
------------------------------------------------------------------------
Analysis of Sources of Revenues
(percent of total revenues)
------------------------------------------------------------------------
Market Information................ 13.9 11.3
Transaction Fees.................. 66.9 69.8
Other Member Fees................. 15.6 14.6
Interest.......................... 0.9 1.1
Equity in Income of CSE........... 0.4 1.1
Other............................. 2.4 2.0
------------------------------------------------------------------------
* The CBOE's reporting period ends on June 30. This reporting period
renders inapplicable the CBOE distributions listed on Tables 5, 7, and
8 for the years ended December 31, 1998 and 1994.
Table 13.--PCX Consolidated Revenues and Expenses
------------------------------------------------------------------------
For the years ended December 31 1998 1994
------------------------------------------------------------------------
Revenues:
Market Information Revenues:
Network A Distribution.... $4,531,000 $3,788,000
Network B Distribution.... 2,855,000 2,164,000
OPRA System Distribution.. 5,365,000 2,392,000
Other..................... 191,000 78,000
-------------------------------------
Total Market Information 12,942,000 8,422,000
Revenues...................
=====================================
Transaction and Service Charges... 53,782,000 30,450,000
Peripheral Equipment and Market 1,900,000 1,919,000
Data Fees........................
Listing Fees...................... 1,986,000 2,014,000
Member and Participant Dues....... 1,659,000 1,825,000
Interest Income................... 1,580,000 681,000
Regulatory and Registration Fees.. 1,294,000 687,000
Other............................. 1,840,000 801,000
-------------------------------------
Total Revenues.............. 76,983,000 46,799,000
=====================================
Expenses:
Compensation and Other 33,878,000 19,662,000
Employee Costs...............
Facilities.................... 8,959,000 6,776,000
Equipment..................... 8,497,000 6,433,000
[[Page 70641]]
Communications................ 5,604,000 3,453,000
Professional Services......... 5,764,000 730,000
Travel Expenses............... 1,854,000 0
Outside Data Processing 951,000 1,073,000
Services.....................
Expenditures Relating to New 4,150,000 0
Facilities Project...........
Financing Costs............... 0 453,000
General and Administrative 6,328,000 3,409,000
Expenses.....................
-------------------------------------
Total Expenses.............. 75,985,000 41,989,000
=====================================
Income before Income Taxes........ 998,000 4,810,000
------------------------------------------------------------------------
Analysis of Sources of Revenues
(percent of total revenues)
------------------------------------------------------------------------
Market Information................ 16.8 18.0
Transaction and Service Charges... 70.0 65.1
Peripheral Equipment and Market 2.5 4.1
Data Fees........................
Listing Fees...................... 2.6 4.3
Member and Participant Dues....... 2.2 3.9
Interest Income................... 2.1 1.5
Regulatory and Registration Fees.. 1.7 1.5
Other............................. 2.4 1.7
------------------------------------------------------------------------
Table 14.--CHX Consolidated Revenues and Expenses
------------------------------------------------------------------------
For the years ended December 31 1998 1994
------------------------------------------------------------------------
Revenues:
Market Information Revenues:
Network A Distribution.... $6,898,000 $4,153,000
Network B Distribution.... 12,722,000 4,507,000
Nasdaq System Distribution 412,000 100,000
-------------------------------------
Total Market Information 20,032,000 8,760,000
Revenues...................
=====================================
Operations........................ 24,709,000 20,204,000
Interest.......................... 1,111,000 689,000
-------------------------------------
Total Revenues.............. 45,852,000 29,653,000
=====================================
Expenses:
Employee Compensation and 15,022,000 13,693,000
Benefits.....................
Systems and Related Support... 4,444,000 3,494,000
Rent, Maintenance and 4,166,000 4,226,000
Utilities....................
Professional and Other........ 7,365,000 2,031,000
General and Administrative.... 3,859,000 2,374,000
Depreciation and Amortization. 3,887,000 3,758,000
Other......................... 0 701,000
-------------------------------------
Total Expenses.............. 38,743,000 30,277,000
=====================================
Income before Income Taxes........ 7,109,000 (624,000)
------------------------------------------------------------------------
Analysis of Sources of Revenues
(percent of total revenues)
------------------------------------------------------------------------
Market Information................ 43.7 29.5
Operations........................ 53.9 68.1
Interest.......................... 2.4 2.3
------------------------------------------------------------------------
Table 15.--Phlx Consolidated Revenues and Expenses
------------------------------------------------------------------------
For years ended December 31 1998 1994
------------------------------------------------------------------------
Revenues:
Market Information Revenues:
Network A Distribution.... $1,664,000 $1,806,000
Network B Distribution.... 528,000 881,000
[[Page 70642]]
OPRA System Distribution.. 4,939,000 2,448,000
-------------------------------------
Total Market Information 7,131,000 5,135,000
Revenues...................
=====================================
Transaction Fees.................. 22,556,000 14,426,000
Depository........................ 0 10,613,000
Clearing and Settlement........... 5,950,000 4,165,000
Floor Charges..................... 1,595,000 1,732,000
Dividend and Interest Income...... 1,287,000 1,700,000
Other............................. 5,159,000 2,865,000
-------------------------------------
Total Revenues.............. 43,678,000 40,636,000
=====================================
Expenses:
Staffing Costs................ 22,114,000 23,213,000
Data Processing and 4,041,000 4,540,000
Communication Costs..........
Occupancy Costs............... 2,817,000 3,337,000
Professional Services......... 2,783,000 494,000
Other......................... 7,427,000 9,975,000
-------------------------------------
Total Expenses.............. 39,182,000 41,559,000
=====================================
Income from Continuing Operations 4,496,000 (923,000)
before Income Taxes..............
------------------------------------------------------------------------
Analysis of Sources of Revenues
(percent of total revenues)
------------------------------------------------------------------------
Market Information................ 16.3 12.6
Transaction Fees.................. 51.6 35.5
Depository........................ 0.0 26.1
Clearing and Settlement........... 13.6 10.2
Floor Charges..................... 3.7 4.3
Dividend and Interest Income...... 2.9 4.2
Other............................. 11.8 7.1
------------------------------------------------------------------------
Table 16.--BSE Consolidated Revenues and Expenses
------------------------------------------------------------------------
For years ended September 30 1998 1994
------------------------------------------------------------------------
Revenues:
Market Information Revenues:
Network A Distribution*... $3,029,000 $1,712,000
Network B Distribution*... 783,000 1,301,000
-------------------------------------
Total Market Information 3,812,000 3,013,000
Revenues...................
=====================================
Transaction Charges 10,438,000 7,588,000
Members' Dues and Fees............ 2,451,000 2,418,000
Listing Fees...................... 825,000 1,187,000
Interest.......................... 743,000 390,000
Other............................. 97,000 305,000
-------------------------------------
Total Revenues.............. 18,366,000 14,901,000
=====================================
Expenses:
Employee Costs................ 7,799,000 6,387,000
Data Processing............... 1,098,000 1,049,000
Occupancy Costs............... 1,524,000 1,530,000
Telecommunications............ 1,411,000 1,132,000
Clearing Fees and Related 465,000 327,000
Costs........................
Professional Services......... 2,001,000 678,000
Depreciation and Amortization. 941,000 900,000
Office and Other Related 548,000 489,000
Expenses.....................
Interest...................... 63,000 82,000
Maintenance and Repairs....... 624,000 553,000
Other......................... 1,129,000 728,000
-------------------------------------
Total Expenses.............. 17,603,000 13,855,000
=====================================
[[Page 70643]]
Income before Taxes 763,000 1,046,000
------------------------------------------------------------------------
Analysis of Sources of Revenues
(percent of total revenues)
------------------------------------------------------------------------
Market Information................ 20.8 20.2
Transaction Charges............... 56.8 50.9
Members' Dues and Fees............ 13.3 16.2
Listing Fees...................... 4.5 8.0
Interest.......................... 4.0 2.6
Other............................. 0.5 2.0
------------------------------------------------------------------------
* The BSE's reporting period ends on September 30. This reporting period
renders inapplicable the BSE distributions listed on Tables 5 and 7
for the years ended December 31, 1998 and 1994.
Table 17.--CSE Revenues and Expenses.
------------------------------------------------------------------------
For the year ended June 30 1998 1994*
------------------------------------------------------------------------
Revenues:
Market Information Revenues:
Network A Distribution*....... $2,450,000 $970,000
Network B Distribution*....... 173,000 20,000
-------------------------------------
Total Market Information 2,623,000 990,000
Revenues...................
=====================================
Transaction Fees.................. 2,607,000 2,072,000
Members' Dues and Fees............ 451,000 92,000
Service Fees...................... 136,000 428,000
-------------------------------------
Total Operating Revenues.... 5,817,000 3,582,000
=====================================
Expenses:
Computer and Other Costs of 2,605,000 997,000
Services.....................
Salaries, Wages and Employee 1,766,000 675,000
Benefits.....................
Professional Services......... 116,000 165,000
Communications................ 140,000 110,000
Occupancy..................... 351,000 76,000
Travel and Promotional........ 146,000 0
Other......................... 323,000 152,000
-------------------------------------
Total Operating Expenses.... 5,447,000 2,175,000
=====================================
Operating Income.................. 370,000 1,407,000
Non-Operating Income--Net......... 694,000 20,000
Income before Provision for Income 1,064,000 1,427,000
Taxes............................
------------------------------------------------------------------------
Analysis of Sources of Revenues
(percent of total revenues)
------------------------------------------------------------------------
Market Information................ 45.1 27.6
Transaction Fees.................. 44.8 57.8
Members' Dues and Fees............ 7.8 2.6
Service Fees...................... 2.3 11.9
------------------------------------------------------------------------
*Due to a change in reporting period, 1994 information is for the six-
month period ending June 30, 1994. In addition, the June 30 reporting
period renders inapplicable the CSE distributions listed on Tables 5
and 7 for the years ended December 31, 1998 and 1994.
[[Page 70644]]
[FR Doc. 99-32471 Filed 12-16-99; 8:45 am]
BILLING CODE 8010-01-U