Federal Advisory Committee on Market Information:
|A.||We could recommend retaining the current Display Rule requirements.|
|B.||We could recommend increasing or reducing the minimum level of information that must be provided to customers under the Display Rule.|
|C.||We could recommend eliminating the Display Rule, and relying solely on broker-dealers' best execution obligations and customer demand to determine the appropriate level of market information.|
|D.||With respect to the provision of market information beyond the mandatory minimum, we could recommend that (1) it should be left relatively free from regulation or (2) any additional information should be provided in a consolidated format.|
Current Model: Under the Transaction Reporting Rule (Rule 11Aa3-1), each exchange is required to file with the SEC a plan for the dissemination of transaction information for listed equity and Nasdaq securities traded through its facilities, and the NASD is required to file a plan for the dissemination of transaction information for such securities executed by its members otherwise than on an exchange. These plans must address, among other things, the consolidation of information. In addition, every broker-dealer is required to transmit to any exchange of which it is a member or the NASD all information required by that SRO's transaction reporting plan.
Under the Quote Rule (Rule 11Ac1-1), each exchange is required to collect, process, and make available to vendors the best bid, the best offer, and aggregate quotation sizes for each subject security listed or admitted to unlisted trading privileges that is communicated on that exchange. The NASD is required to collect, process, and make available to vendors the best bid, the best offer, and aggregate quotation sizes for each subject security communicated otherwise than on an exchange by any OTC market maker, as well as the identity of that market maker. In addition, every broker-dealer is required to promptly communicate to the applicable exchange or the NASD its best bids, best offers, and quotation sizes for any subject security.
The SROs have fulfilled their obligations under the Transaction Reporting Rule and Quote Rule by implementing the CTA, CQ, and Nasdaq/UTP Plans. Under these Plans, the Plan processors (SIAC for the CTA and CQ Plans and Nasdaq for the Nasdaq/UTP Plan) collect transaction and quotation information from each SRO Plan participant, and then consolidate and disseminate that information to vendors and broker-dealers.
|A.||We could recommend retaining the current model, with SIAC and Nasdaq acting as consolidators of market information pursuant to joint SRO Plans.|
|B.||We could recommend retaining the existing joint SRO Plans, but making the exclusive consolidation function subject to active competitive bidding at the end of each contract term.|
|C.||We could recommend dissolving the joint SRO Plans and having each exchange and the NASD file a separate transaction reporting plan, but retaining an exclusive consolidator of market information that would be selected through competitive bidding.1|
|D.||We could recommend placing the obligation to provide market information to the exclusive consolidator on entities other than, or in addition to, the SROs (e.g., market makers and ECNs).|
|E.||At the same time, we could recommend allowing markets to make available their information separately, subject to the mandatory consolidation requirements of Section I.|
Current Model: Each of the existing joint SRO Plans is governed by an Operating Committee composed of one representative from each SRO participant. In general, a majority vote of the Operating Committee is sufficient to approve actions in accordance with the existing Plans, and a two-thirds vote is needed to adopt fee increases or new fees. Amendments to the Plans and other significant actions, however, generally require a unanimous vote of the Operating Committee.
Of course, each SRO is required by the Exchange Act to assure a fair representation of its members in the selection of its directors and the administration of its affairs, and to have one or more non-industry directors. Under the current model, therefore, these broader constituencies have some degree of indirect influence over the actions of the various SRO Plans.
|A.||We could recommend that the existing composition and voting requirements of the Operating Committees be retained.|
|B.||We could recommend that the composition of the Operating Committees, or other Plan committees, be broadened to include representatives of other constituencies (e.g., vendors, broker-dealers, public investors).|
|C.||We could recommend that the voting requirements of the Operating Committees be modified (e.g., permitting Plans to be amended with a majority or two-thirds vote).|
|D.||Our recommendations on governance should ensure that new market entrants are admitted to the Plans on fair and reasonable terms.|
Current Model: The Exchange Act grants rulemaking authority to the SEC to assure that (1) all SIPs may obtain market information from an exclusive processor of that information on terms that are "fair and reasonable" (Section 11A(c)(1)(C)), and (2) all persons may obtain market information on terms that are "not unreasonably discriminatory" (Section 11A(c)(1)(D)).
The user fees charged by each SRO Plan for its market information typically are negotiated with vendors, broker-dealers, and other users. Because these fees must be filed with the SEC as proposed rule changes, and are subject to public notice and comment procedures, interested parties may submit their views on proposed fees directly to the SEC if negotiations have not led to a mutually satisfactory result.
Under the CTA and CQ Plans, after payment of operating expenses, fee revenues are distributed among the SRO participants in accordance with their proportional share of total transaction volume. Under the Nasdaq/UTP Plan, after payment of operating expenses, revenues are distributed among the SRO participants based on an average of the percentage of total transaction volume and the percentage of total share volume, subject to certain floors and caps.
Of course, our recommendations in this area will apply only to market information that is required to be provided to customers. Fees and revenue allocations for information beyond the mandatory minimum will be determined by market forces, subject only to backstop SEC oversight.
|A.||We could recommend that the existing mechanisms for determining user fees and allocating revenues among the SRO participants be retained.|
|B.||If participation in Plan governance is broadened, we could recommend primary reliance on this governance process to set fees and allocate revenues, with backstop SEC oversight.|
|C.||We could recommend a more precise standard for evaluating the fairness and reasonableness of fees (e.g., a cost-based limit with specifications of appropriate costs) and for distributing market information revenues (e.g., to fund more fully certain SRO functions).|
|D.||We could recommend that each entity providing information to the central processor be permitted to negotiate fees for its market information directly and separately with the exclusive consolidator, subject only to backstop SEC oversight. (Our recommendations should include a discussion of the market power the larger market centers will have, and the ways in which pricing abuses can be avoided.)|
|A.||Administrative Issues We could recommend ways to improve the operational efficiency of the joint SRO Plans to reduce the administrative costs of market data users. For example, we could recommend that the process of administering fee structures be made more efficient by standardizing and streamlining the agreements, policies, billing procedures, and reporting requirements that the various Plans apply to vendors, broker-dealers and subscribers.|
|B.||Technological Issues We could recommend technological improvements to the current system of consolidating and disseminating market information (e.g., ensuring adequate capacity and improving the accuracy and reliability of the market data stream). We also could recommend ways to promote technological innovation.|
|C.||Pilot Programs Some have expressed concern 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. We could make recommendations on whether pilot programs should continue and, if so, whether improvements should be made.|
|1||Dean Seligman views multiple competing consolidators as outside the scope of "improving the existing model" of consolidating and disseminating market information. He expects to discuss this idea in depth at a subsequent meeting.|