[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.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.''
---------------------------------------------------------------------------

    \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.'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \70\ Securities Exchange Act Release No. 11406 (May 7, 1975).
    \71\ NYSE, 1975 Annual Report 16; Amex, 1975 Annual Report 14.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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