Federal Advisory Committee on Market Information:
Charles Schwab & Co.:
Introduction and Guiding Principles
As we discussed at our last meeting, we do not believe that it is realistic or possible to separate discussions about how to improve the existing model for consolidating and disseminating market information from discussions and ideas about "alternative" market data models. Accordingly, our response to the agenda items necessarily reflects our views and analysis of both.
Any plan for reform must have at its core the following three principles:
1. Reform Must Promote Competition and Innovation.
2. Open Access to, and No Ownership of, Quote and Last Sale Information.
3. Market Data Vending Must Be Separated from Self-Regulatory Functions.
Views on Enumerated Agenda Items
I. Market Information that Vendors and Broker-Dealers Should Be Required To Provide to Customers
Rationale: The current requirements to display the consolidated NBBO with last sale information can serve several functional base-line purposes such as providing one benchmark for order execution, a readily available and recent snapshot of a security's price, and a means to allow investors to value their portfolios. The SEC, in its regulatory discretion, reasonably may determine to continue the consolidated display requirement. If consolidated display remains a regulatory requirement, however, consolidation must be removed from the SROs' monopoly control, as described below under Item II.
Beyond the NBBO and last sale data, there should be no display requirements, and market forces should be left alone to encourage the development and licensing of richer, more sophisticated real-time market data products. Vendors and broker-dealers should be free to produce, purchase, and display whatever additional market data elements they wish. Independent market data subsidiaries or affiliates of SROs should be allowed to compete with market data vendors free from regulation.
II. How Market Information Should Be Consolidated
Rationale: Competition in consolidation is a fundamental building block of any market data reform. Although the joint plans may have made sense in light of the limited technology that was available twenty-five years ago, the joint plans today serve no purpose except to perpetuate the SROs' monopoly control over data required to be displayed by everyone under mandatory regulations.
Any person or entity should be allowed to consolidate. To open consolidation to competition, the SROs must make their individual data streams available to all on an equal basis. Multiple, competing consolidators will assure redundancy and improved consolidation capacity across the market. Although we believe that a cost-based approach to making regulatory-required data would be inherently fair - given that all market participants contribute to its reporting and collection and therefore its value - we understand the SEC's reluctance to engage in "rate-making." On the other hand, the current system of deference to SRO market data fee changes that become effective upon filing is detrimental.
As a substitute for directly regulating the amount of fees, we propose enforcement of two principles: non-discrimination and sunshine, as summarized above. Because everyone gets the same best deal that any one else can get, this will assure that market data vendors and broker-dealers without political clout will not be disadvantaged. The non-discrimination and sunshine requirements would also prohibit so-called "pilot programs" that have long given rise concerns about abuse and "sweetheart" deals.
Moreover, the non-discrimination and sunshine requirements would greatly simply the administration of the market data system. No ongoing reporting to the SRO Plans or "Exhibit As" would be required or allowed, as fees would be enterprise-based without any limitations on distribution channels. This would result in a tremendous cost and time savings for the exchanges, vendors, and broker-dealers. It would also eliminate the competitive disadvantage of having to receive pre-clearance of market data innovations from the SRO Plans.
III. Governance of the Consolidators
Rationale: The focus of reform should be on promoting competition and innovation to serve better our markets and investors. Time should not be spent tinkering at the margins with antiquated institutions ill-equipped to deal with twenty-first century challenges. If SROs choose to compete as consolidators or as more sophisticated market data product vendors, such market data activities should be kept separate from all self-regulatory functions. This is consistent with the evolution of our markets to profit-making, competitive enterprises and the need to assure independent, fair, and focused self-regulatory bodies.
IV. How User Fees Are Determined and Revenues Allocated Among Plan Participants
V. Ancillary Matters
We believe this adequately addresses the issues of administration, technology, and pilot programs that are noted under this agenda item.