Federal Advisory Committee on Market Information:
Agenda for April 12, 2001 Meeting
I. Progress Report on Subcommittee
II. Presentation by CTA/CQ Plan Administrator
Tom Haley (NYSE)
III. Presentation by Nasdaq/UTP Plan Administrator
Tom Davin (Nasdaq)
IV. Presentation on FISD Market Data Policy Database
Michael Atkin (SIIA/FISD)
We will resume the discussion of ways to improve the current market data model that we began at our March 1 meeting. Our focus will be on the fourth and fifth items on the March 1 agenda - How User Fees are Determined and Revenues Allocated Among Plan Participants and Ancillary Matters. That portion of the March 1 agenda is replicated beginning on the next page, and supplemented by some additional discussion topics and questions.
VI. Public Comments
VII. Summary and Next Steps
IV. How User Fees are Determined and Revenues Allocated Among Plan Participants
At the March 1 meeting, the Committee began a discussion of the fourth agenda item. Members were asked whether SEC oversight of market data fees should remain as it is today - general oversight based on the Section 11A statutory "fair and reasonable" and "not unreasonably discriminatory" standards - or whether a more precise standard, such as the cost-based standard outlined in the SEC's December 1999 Concept Release, should be used. While some members were intrigued by a cost-based approach to market data fees, almost all believed such a standard would be difficult to implement in practice. There was near unanimity that, to the extent a cost-based approach led to something akin to SEC ratemaking, that would be a bad thing. Since the meeting, the SEC has distributed a memorandum that outlines the cost-based approach described in its December 1999 Concept Release. We have received no alternative suggestions for a more precise standard from members.
Some members felt additional information on how market data fees currently are determined would aid the discussion (e.g., how market data is priced, how fees are allocated among different participants, the extent to which fee arrangements vary among similarly-situated users, whether any pilot programs currently are in use). Several thought that adding more transparency, or "sunshine," to the price-setting process might resolve many of the present concerns about market data pricing.
The discussion at the April 12 meeting will begin with Item IV.E. below.
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.)
E. We could recommend more transparency, or "sunshine," with respect to the fee setting process, so that market forces can more effectively act as a check on pricing power of market centers.
1. Should each Plan administrator be required to file with the SEC, or otherwise make public, all of its market data contracts?
2. Should each Plan administrator be required to file with the SEC, or otherwise make public, a statement of the costs incurred by the Plan processor in performing that function?
3. Should each Plan administrator be required to file with the SEC, or otherwise make public, more detailed information about the revenues generated by market data fee arrangements, in addition to their fee schedules, such as the revenues produced by each type of fee and the revenues distributed back to each SRO participant?
4. Should the pricing information publicly disclosed by the Plan administrators be audited?
5. Should each Plan administrator be required to file with the SEC, or otherwise make publicly available, a description of the basis for its pricing decisions (e.g., to recover x% of operating costs, rationale for different pricing plans)?
F. We could recommend that SROs offer their data on a strictly non-discriminatory basis - in effect, "most favored nation" pricing - as a way to mitigate perceived pricing abuses.
1. How should "most favored nation" pricing be defined? If it means that all similarly-situated subscribers are offered the same market data prices, what does "similarly situated" mean?
2. Should distinctions be permitted based on usage rates? If so, what might be some acceptable classifications?
3. Should distinctions be permitted based on the class of subscriber (e.g., small firm broker-dealer, large market maker, online broker, vendor)? If so, what might be some acceptable classifications?
4. Should SROs be permitted to distinguish among subscribers based on whether the subscriber competes with the SRO for order flow?
5. How does concept of "enterprise fee" pricing (which in effect caps the amount an entity pays each month for market data) fit with the concept of non-discriminatory pricing? If these concepts can be reconciled, would enterprise fee pricing be desirable?
G. 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.
Both the CTA/CQ Plan and the Nasdaq/UTP Plan allow the Plan administrators to implement pilots programs without SEC notification or approval. The pilots must be of limited duration, geography, and scope, but these terms are not defined. The Plan administrators note that one benefit of pilot programs is the ability to test a new data service to determine its viability, prior to undergoing the administrative process associated with its formal implementation.
1. Should Plan administrators continue to be able to test fee arrangements through "pilot" programs?
2. If so, should the Plan administrators have some flexibility to implement pilots without any form of public notification?
3. If not, what form of public notification should the Plan administrators be required to make? Is it sufficient to merely notify the SEC prior to the commencement of a pilot or should the pilots be published for public notice and comment?
4. Should pilot programs be limited in duration (e.g., one year)? If so, at the end of that time period, should the Plan administrators be allowed to renew the pilot?
5. Should the Plan administrators be required to offer a pilot to all similarly-situated subscribers?
VIII. Ancillary Matters
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.
1. If greater standardization is desirable, how should it be achieved?
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.
1. Should the SROs, the SEC, or some other entity set the minimum technological and data quality standards for the consolidator(s)?
2. What is the process by which the standards would be set?