Federal Advisory Committee on Market Information:
Datek Online Holdings Corp.
an Alternative Model
To: Dean Joel Seligman, Washington University School of Law, and Members
of The SEC Advisory Committee on Market Information
CC: Annette Nazareth, SEC Division of Market Regulation
Re: Submission on behalf of Datek Online Holdings Corp.
By: Edward J. Nicoll, Chairman & CEO
Date: December 5,
I. Executive Summary:
The methodology for disseminating market data has emerged as one of the most
important issues facing our nation's equities markets. Datek Online Holdings,
through its subsidiaries The Island ECN, Inc. and Datek Online Brokerage
Services, has been at the forefront of empowering investors by providing its
customers with unprecedented levels of real-time market data. With the sweeping
changes in our securities markets as well as the dramatic advancements in
technology, we now have an opportunity to comprehensively address the issue of
market data and further empower investors.
In light of this opportunity, Datek recommends an enhancement to the existing
regulatory framework governing market data by permitting the creation of
multiple securities information processors. By introducing competition and
innovation to the market data regulatory framework rather than relying on a
single monopoly processor, the Commission can best address its concerns
regarding the availability of market data to investors. Under the Datek
proposal, self-regulatory organizations ("SROs") would continue to be required
to provide market data to one or more securities information processors ("SIPs")
on a non-discriminatory basis. In turn, securities information processors or
data vendors would be responsible for consolidating market data from the various
The following outline, organized in the order of the seven discussion points
included in Dean Seligman's outline of suggested topics, describes the Datek
proposal in greater detail.
II. Consolidators of Market Data
2.1 SRO Consolidators. We propose that SROs, either singly or
in combination, be required to provide market data (both last sale and quotation
information) to all securities information processors on a non-discriminatory
basis pursuant to an effective transaction reporting plan. SROs would continue
to devise their own rules, subject to the customary SEC oversight, governing the
collection of quotation and transaction information in its marketplace.
2.2 Competing SIPs. The elimination of the current convention of
exclusive SIP charged with consolidating market data from the various SROs is
consistent with the House Conference Report to the 1975 amendments that
states §11A does "not constitute a mandate for a single securities information
processor at any stage in the processing of quotation or transactional data but
merely recognized that where a self regulatory organization or organizations
utilize an exclusive processor, that processor takes on the characteristics of a
public utility and should be regulated accordingly." H.R.Conf.Rep. No. 94-229 at
2.3 Registration of SIPs. The 1975 amendments provide for SEC
registration of exclusive SIPs but not for a non-exclusive SIP unless the SEC
"finds that the registration...is necessary or appropriate in the public
interest..." §11A(b)(1). To provide the market place and the SEC with the
assurance that SIPs perform their role in a manner that will secure the
objectives of the Exchange Act, all SIPs should be subject to notice filings
with the SEC upon the commencement of market data consolidation or
2.4 SEC Filing Elements for SIPs. An SEC notice filing process for
SIPs might reasonably include at least the following elements:
(a) SIPs shall disclose: (i) the identity, past business experience, and
disciplinary history, if any, of its officers; (ii) the form of the business and
the identity of the firm's owners; and (iii) the facts relating to the existence
of any ownership or other affiliation between the SIP and any SRO, market center
or broker-dealer ("BD").
(b) SIPs shall be permitted to offer market information services on
unregulated terms and conditions.
(c) SIPs shall file with the SEC certain minimum descriptive elements of upon
the commencement of any SIP service plan or amendment thereto. Such filings must
include, for example, a description that would address the statutory
requirements (i) that the form and content of the disseminated data is not
"deceptive," §11A(c)(1)(A); and (ii) that its publication exhibits "fairness and
usefulness of the form and content of such information," §11A(c)(1)(B).
III. Acquisition of Market Information by Consolidators
3.1 SRO-SIPs. The SRO practice of obtaining all quotation and
transaction data from their market participants in their role as market
regulator in accordance with its own rules and subject to the customary SEC
oversight would continue.
3.2 Data Acquisition from SRO-SIPs. An SRO's exclusive ability to
obtain quotation and transaction data from its market participants via the use
of its regulatory role necessitates that the terms whereby any SRO-SIP transmits
the data to a competing SIP shall be on "fair and reasonable terms." Section
11A(c)(1)(C) establishes this standard for the acquisition of data by SIPs from
any "exclusive processor of such information."
3.3 Creation of Consolidated Data. Competing, independent SIPs
would have the option of either consolidating market data from all SROs or only
consolidating data from certain SROs and market centers. The necessity of
including any one markets' data in the consolidated quote will thus be
determined by the value of the data rather than any regulatory necessity. All
SIPs shall be required to make adequate disclosures to their direct customers
and investors concerning the data that has been both included and excluded
(see section 5.2 infra).
3.4 Modification or Supplementation of SRO-SIP Data. SRO-SIPs shall
forfeit the protection of the current convention that has afforded them
extensive approval power over how data vendors disseminate modified or
supplemented SRO-provided data.
3.5 Deregulated Contracts for non SRO-SIPS. Terms of pricing and cost
recovery would not be specified and would be left to the market place and
3.5.1 At a minimum, non-SRO generators of quotation and transaction
data (i.e. market makers, specialists and ECNs) may provide their market data
directly to a requesting SIP (in addition to complying with its governing SRO
reporting requirements) on any terms that it may reasonably determine. The terms
of such dissemination contracts shall not be unreasonably discriminatory (see
section 4.2 infra).
3.5.2 Through the creation of a "market" for market data, the sources
of market information will be compensated on the basis of the value of their
information. For example, markets providing faster and more informative
quotation information may realize a greater value from such data than a market
merely disseminating auto-quotes.
3.5.3 In a competitive environment SIPs might employ the strategies
that have fostered competition between market centers. For example, a SIP could
offer to pay based upon the number of quotes that establish a new inside market
for a security. Similarly, SIPs might offer graduated pricing for quotations,
paying more for quotes that have greater volume and less for quotes that merely
add a small size increment at existing displayed quotation levels.
IV. Market Information Dissemination by Consolidators
4.1 There must be broad dissemination to brokers and investors,
§11A(a)(1)(C)(iii), of market information.
4.2 Data must be available on "terms which are not unreasonably
4.3 Minimum standards would not be set by regulation since market
participants would be obligated to provide investors with the timely and
accurate market information solely from competitive forces.
4.4 Since the Commission will no longer specify the minimum standards
governing the contents of information disseminated by SIPs, a wider selection of
market information at a spectrum of price points, dependent on the richness of
the formatting and added value features, will flow from a competitive SIP
V. Innovative Data Display Formats Shall be Encouraged
5.1 Market-based Standards. The most efficient means of
establishing data formatting standards is market acceptance. Any
regulation-based standards setting approach necessarily poses a barrier to the
operation of market innovation and the emergence of new technologies.
5.2 Disclosure-based Model. SEC rules for SIPs shall prevent the
dissemination of quotation and transaction data that is "fraudulent, deceptive"
or misleading, §11A(c)(1)(A). Hence, the SEC should prescribe through a
disclosure rule that data product features be accurately described and not
5.3 Permit Unconsolidated Data. We intentionally omit any
requirement that a SIP consolidate all market quotations provided that the
nature and content of the data is fairly identified. Market centers shall be
permitted to disseminate properly identified, unconsolidated market information
on quotations and transactions within their own market
5.4 Invitation to Innovation. As our markets confront decimalized
trading, the integration of world markets and derivative markets for options and
futures, data vendors shall be free to create and offer innovative products to
VI. Benefits of a Competitive SIP Model
6.1 The Goal of the National Market Act Amendments. "New data
processing and communications techniques create the opportunity for more
efficient and effective market operations," §11A(a)(1)(B). Under a
competitive, partially deregulated SIP model the Exchange Act goal can be
6.1.1 Today, multiple vendors already compete to deliver such
efficient trading platforms that integrate data delivery, order entry, order
management and smart routing by enhancing the basic output of the monopoly
6.1.2 Nasdaq is developing SuperMontage to enter the market for
enhanced data services by increasing the depth of market information they
currently supply to investors. Similarly, the NYSE is seeking to develop its
market data dissemination mechanism that also provides more depth of market
information than currently provided. Thus, regulations are no longer necessary
to require markets to provide market data to investors.
6.2 Reduce Current Harmful Effects. The current exclusive SIP model
perpetuates conflicts of interest by permitting certain market centers to use
their SIP status to their competitive advantage. A substantial benefit of a
partially deregulated, competitive solution will be the introduction of market
forces to reduce the anti-competitive, institutional advantages that SROs
presently have the opportunity to exploit, to the detriment of would-be non-SRO
6.3 Spur Market Efficiency. Multiple processors will bring
efficiencies to the process of collecting, consolidating and disseminating
information by the operation of competition.
6.4 Foster Distributed Marketplace Architecture. The imperative today
is distributed information networks and the avoidance of single points of
failure. Competition among SIPs would create a market that had a more
distributed architecture, greater distributed capacity, and a minimized exposure
to a single point of failure.
VII. Investor Benefits from a Competitive SIP Market
7.1 All integrative displays of marketplace activity are a platform
for trading, hedging and risk control decisions. There is a robust market for
such decision tools that extends beyond institutions to sophisticated
7.2 By introducing competition to the market data business and
removing regulatory strictures dating from an era where the costs of data
consolidation and display favored a monopoly utility solution, market data will
be available at lower prices.
7.3 In order to ensure that the benefits of full inter-market
competition flow to investors the SEC should replace the NYSE trade-through rule
with a disclosure rule (as it has recently approved a trade-through disclosure
rule in the context of OPRA, see "Firm Quote and Trade-Through Disclosure
Rules for Options," SEC Release No. 34-43591; File No. S7-17-00, November 17,
2000). At present the NYSE trade-through rule permits a slower market such as
the NYSE to prevent a faster market from competing on the basis of speed of data
and executions. Chairman Levitt has recently expressed his belief that the
equities markets should consider a rule based upon the OPRA trade-through
disclosure rule as "the most flexible and enduring way to promote efficient
connections in our equities markets." See Arthur Levitt, Remarks, SEC
Open Meeting on Market Structure Initiatives
http://www.sec.gov/news/speech/spch392.htm (July 25,
VIII. Enhanced Best Execution Benefits from a Competitive
8.1 The "economically efficient execution of
securities transactions" is an objective of the 1975 amendments,
§11A(a)(1)(C)(i). Achieving this objective at lower cost is the goal of
introducing competition to the consolidation of data.
8.2 A broker's duty of best execution will provide sufficient
incentives for brokers to obtain reliable and accurate market data for itself
and its customers.
8.3 Competition between markets with respect
to market data will enhance competition between markets generally. Fostering
competition between markets will, in turn, enhance the opportunities for BDs to
capture better executions for customers.
8.4 The decimalized trading environment is characterized by
more rapid trading at smaller size increments which necessitates new integrative
displays of marketplace activity as a platform for trading, hedging and risk
8.5 Broker-dealers, driven by the competitive opportunity that exists
in best serving their customers, are rapidly exploiting technology and
delivering "direct access" products that enable customers to select their own
order routing. These same competitive forces will even more vigorously drive the
market for market data if we remove the regulatory strictures dating from an