SEC Advisory Committee on Market Information
October 10, 2000 Summary Meeting
SEC Chairman Arthur Levitt made introductory remarks that touched upon the reasons for the formation of the Advisory Committee on Market Information ("Committee") and the scope of the Committee's work.
Dean Joel Seligman, Chairman of the Committee ("Chairman"), then discussed the agenda for the meeting. The Chairman stated that, following background presentations, the focus of the meeting would be on the general questions of the merits of transparency and whether market information should be consolidated. The more specific issues dealt with in the SEC's December 1999 Concept Release, such as the market data fee structure, pilot programs and governance, would be dealt with at future meetings.
The Chairman then turned to Annette L. Nazareth, Director of the SEC's Division of Market Regulation, for a background presentation on the current legal framework for market information. Ms. Nazareth discussed the concepts of transparency and consolidated information and how they came to be fundamental elements of our national market system. She also described the origins of the existing model for consolidating and disseminating market information.
Following Ms. Nazareth's remarks, there were presentations describing the operations of the CTA/CQ Plans, the Nasdaq/UTP Plan, and the OPRA Plan. Robert Britz, Group Executive Vice President of the NYSE, began with the CTA/CQ Plan. Mr. Britz noted at the outset of his presentation that the NYSE questions the need for organizations like CTA going forward and that, last April, its Board of Directors authorized the NYSE to withdraw from the CTA. Subject to regulatory approval, the NYSE does not intend to be part of the CTA going forward. The NYSE does believe, however, that the CTA has performed extraordinarily well in fulfilling its mission to make real-time market data pervasive. Mr. Britz then provided an overview of how market information is collected and disseminated under the CTA and CQ Plans. At the conclusion of the presentation, Mr. Britz noted that the NYSE believes the CTA/CQ Plans are unnecessary today because of technological developments - it is now feasible to eliminate the "single-source monopoly" joint market information plans.
Richard Ketchum, President and Chief Operating Officer of the NASD, then gave an overview of the Nasdaq/UTP Plan, and noted particularly the differences between the Nasdaq/UTP Plan and the CTA/CQ Plans (e.g., the revenue distribution provisions and the fact that Nasdaq is the plan processor). After the overview, Mr. Ketchum discussed current issues facing the Nasdaq/UTP Plan, including how Nasdaq's Supermontage proposal will interact with the Nasdaq/UTP Plan. Turning to the matters to be addressed by the Committee - with respect to transparency, Mr. Ketchum noted that greater access to market information over and above the NBBO is critically necessary, particularly in a decimalized environment. No restrictions should be placed on markets that wish to provide transparency greater than the mandated minimum. With respect to consolidation, Nasdaq believes that a means of providing consolidated information is critically necessary and, unlike the NYSE, they do not understand how this can be accomplished without an operating plan. While there is conceptual appeal to permitting each market to sell its own data, such an approach would permit each market to extract its "pound of flesh" from vendors, who are required to disseminate the data. And ultimately this could dramatically increase the cost of market data to investors.
Edward Joyce, President and Chief Operating Officer of the CBOE, then identified the unique aspects of the OPRA Plan and options market data. The most significant difference between options data and equities data is the volume of options data - 70% of options data in North America is options data - and the related capacity issues. With respect to the topics for discussion, CBOE completely supports the concept of transparency. Mr. Joyce noted that a central processor of market information would be critical to create an effective linkage in the options markets. He also pointed out that today there really is no consolidated NBBO being disseminated by OPRA - consolidation is done at the exchange or vendor level. Consolidation is an issue OPRA needs examine. While they are open-minded in the long-term, in the short-term they believe consolidation is absolutely necessary to support the type of transparency the options markets need.
The Chairman then asked each of the other Committee members for their views on transparency and consolidation. There was universal support among Committee members for transparency as a critical market objective. Market information should be available to all on a fair, reasonable, and non-discriminatory basis. Most members pointed out, however, that the real issue is how transparency is defined. There was a variety of views on whether the current level of transparency presently is adequate (e.g., for equities, the BBO with size and last sale reports), particularly with the advent of decimalization and automation in the markets. Most believe that a deeper transparency will be necessary in a decimalized world, but a few noted that investors (particularly large ones) must retain the option not to display some of their trading interest. Some supported the notion of a bimodal system, with a "mandatory minimum" level of transparency that would be supplemented with additional information provided on a voluntary competitive basis. (A few appeared to doubt whether any mandatory transparency was necessary.) Some members pointed out that, as the volume of market data increases, mechanisms will need to be developed to sort useful from non-useful information, and that different users will find different levels of information relevant. Finally, a few members stressed the importance of linkages, and noted that the concept of transparency has little value if investors cannot access the trading interest displayed.
With respect to consolidation, there was a wide range of views. Members discussed both ways to improve the current system of consolidating information through a single centralized processor in accordance with the national market system plans, as well as alternative models, including opening up the consolidation function to competition. There was general agreement on the importance of consolidated information, particularly as the volume of individual market data increases. As to the means of consolidating and disseminating market information, most members did not have firm pre-existing views and looked forward to more in-depth discussions. Several members suggested that consolidation might be achieved through multiple competing consolidators. If the single-consolidator model is retained, some suggested opening up this function to competitive bidding. Others cautioned that, on balance, the current model has worked quite well, and should not be discarded without first carefully considering whether it can be improved.
In concluding the meeting, the Chairman suggested that the next meeting focus on possible alternative models for consolidating and disseminating market information. Ultimately, the Committee will recommend either that the current model should be replaced or that it should be retained and improved. The Committee might even give recommendations in the alternative. As a first step, however, the proposals for alternative models should be thoroughly vetted. The Chairman will request that detailed written proposals be submitted, and circulated to all Committee members, in advance of the next meeting. To simplify the discussion, the Chairman suggested that the next meeting focus solely on the equities markets.
A full transcript of the meeting is attached to this summary. Approximately 40 members of the public attended the meeting. The written submissions by Messrs. Britz, Ketchum, and Joyce with respect to the CTA/CQ, Nasdaq/UTP, and OPRA Plans, respectively, also are attached.