SEC Advisory Committee on Market Information
December 14, 2000 Meeting
The Advisory Committee on Market Information ("Committee") held its second meeting on December 14, 2000. Dean Joel Seligman, Chairman of the Committee ("Chairman"), began the meeting by discussing several administrative matters, including governance issues, the possible use of subcommittees, and public participation in the Committee's work. Turning to the agenda, he explained that each proponent of an alternative model for consolidating and disseminating market data - the NYSE, Reuters, Schwab, Datek, and Archipelago - would give a brief overview of its written submission, focusing particularly on why its alternative model is better than the existing one. The SEC then would highlight some issues likely to be of concern to it in evaluating any model, and this would be followed by an in-depth discussion of the alternative models. At the conclusion of the meeting, the Committee would be asked whether it should proceed on dual tracks - considering both improvements to the current system and alternative models - or focus solely on improving the current model.
Robert Britz, Group Executive Vice President of the NYSE, stressed that the NYSE is not proposing a new model for the entire securities industry, but merely explaining what might happen when the NYSE withdraws from the CTA. The NYSE recognizes that, in connection with that withdrawal, it has a burden to explain how it will continue to meet its statutory obligations to consolidate and disseminate market data. CTA may or may not continue to exist following the NYSE's withdrawal - that will be a decision for the remaining participants. As to the competing consolidator models the NYSE sketched out in its letter, Mr. Britz noted that the changes likely would be invisible to the consumers of market data, who would continue to receive the same information. In addition, the models introduce competition at the consolidation level - which is a good thing - as well as competition in the pricing of data by market centers.
Mitchell Feuer, representing Reuters, described the heart of their alternative model as one of multiple, competing consolidators. Each broker-dealer would have an obligation to submit transaction and quotation information to at least one consolidator, but would be free to negotiate the most favorable terms available from any consolidator. Consolidators could be required to meet certain minimum standards. Mr. Feuer highlighted two principal features of Reuters' model: (1) the obligation of each consolidator to provide competitors with nondiscriminatory access to data; and (2) the freedom of both broker-dealers submitting data and subscribers receiving data to choose among competing consolidators. These features are intended to ensure that investors continue to receive consolidated data, that there are incentives for innovation and efficiencies in the provision of data, that regulators are freed from rate reviews of monopoly processors, and that investors have greater choice in meeting their information needs.
Carrie Dwyer, General Counsel and Executive Vice President of Charles Schwab, noted that Schwab's proposal sets forth the principles that should govern the development of a new structure for consolidating and distributing market data. These principles are that: competition and market discipline incent innovation and drive efficiency and fair pricing; a level playing field among all market participants, including fair competition and balanced governance, prevent overreaching and undue advantage; and there should be a minimal administrative burden and maximum technological innovation and resilience. Ms. Dwyer pointed out that these themes also were present in the other alternative model submissions.
Edward Nicoll, Chairman and CEO of Datek Online, concurred that there was a lot of agreement across the five models. But, while Datek's market-driven model shares some similarities with the other models, it takes a more radical view with respect to the need to mandate consolidation of data. Datek believes there no longer is a need to mandate, at the level of the consolidator, a consolidated quote (although there may be a need to impose regulatory mandates at other levels of quote dissemination). Competition may very well lead to consolidated data. But, in any event, the market would do a better job at delivering more useful information - a better mix of information and more valuable information - than any specific requirement of the SEC or other regulatory body.
Finally, Gerald Putnam, Chief Executive Officer of Archipelago, began his presentation by noting that Archipelago's model was the most conservative of those presented, in that it provides for a transition period. Mr. Putnam described the guiding principles behind their model: transparent information; neutral control and workable governing structure; effective regulation; open participation; and incentive-driven IT deployment. Under Archipelago's model, the exclusive SIP would be retained to assure the availability of consolidated information, at least until new competitive information aggregators can be relied upon to do this.
The Chairman then turned to Annette L. Nazareth, Director of the SEC's Division of Market Regulation, for an overview of the SEC's key concerns in reviewing the merits of any new model. Ms. Nazareth began by noting that the SEC is obligated under the Exchange Act to facilitate the establishment of a national market system for securities that, among other things, makes quotation and transaction information widely available to broker-dealers and investors. Accordingly, the extent to which a model promotes the transparency of quote and trade information likely would be significant to the SEC. In addition, because complete information must be available in one place to truly maximize the opportunities for best execution and efficient price discovery, the extent to which a model leads to the consolidation of market information likely would be a key SEC consideration. Finally, the SEC would want to be satisfied that any model for disseminating market information is workable. For example, the model should generate market data fees in the ordinary course that are fair and reasonable and not unreasonably discriminatory. And it should produce a market data dissemination system that is technically sound - with information systems that are secure, accurate and reliable, and with sufficient capacity to handle the increasing volume of market data.
After Ms. Nazareth's presentation, the floor was opened up to allow the Committee members to discuss their views of the alternative models. To begin of the discussion, all five presenters were asked to describe the SEC's role in reviewing the reasonableness of fees under their model. Mr. Britz indicated that, in the NYSE's model, the SEC's role would continue precisely as it does today. Ms. Dwyer responded that, while Schwab's model attempted to take the SEC out of this role, if the requirement to provide an NBBO were retained, there would be a role for the SEC in assuring cost-based fees. Mr. Feuer said that the Reuters model tried to get the SEC out of the rate review exercise by relying on market forces to control prices both at the broker-dealer and consolidator levels. Mr. Nicoll indicated that Datek's model also would rely on market forces to effectively set rates. Finally, Mr. Putnam responded that, under Archipelago's model, as competition emerges over time, fair prices will result and the SEC ultimately would be able to cease reviewing market data rates.
A general discussion then ensued about various aspects of the models. While most felt the proposals presented interesting ideas, many members voiced concern that switching to an alternative model might jeopardize the easy accessibility to consolidated information that market participants enjoy today. If consolidated data no longer is readily available, the impact on best execution obligations should be explored. And one should distinguish between requiring consolidated data to be provided (a "push system") and requiring consolidated data to be available (a "pull system"). Several members believe that if consolidated data continues to be mandated, the SEC must continue to play a role in reviewing the fairness and reasonableness of fees in order to prevent unchecked pricing power by individual market centers. Views varied on the ownership of the market data.
The Chairman then asked each member whether the Committee's strategy, from a procedural standpoint, should be to focus on improving the current system before considering new models, or to do both simultaneously. As part of that analysis, members were asked to identify what they viewed as wrong with the existing system. Issues mentioned with the current model included: plan governance; the revenue sharing formula; discomfort about making joint business decisions with competitors; joint plans becoming unnecessary due to technological advancements; the desire to put the processing function out to bid (and, in general, to inject more competition into the market data arena); determining the appropriate level of market data revenues for demutualized SROs; the way the existing system disenfranchises certain market participants; the need for technological improvements; making plan administration more efficient; and the desire to expand data dissemination to include after-hours and foreign market data.
As to process, the views of the Committee members varied, and the Chairman decided that the next meeting, to be held on March 1, would focus solely on ways to improve the existing system. This discussion will include broader issues, however, such as whether there should continue to be some level of consolidated data and whether there should be competitive bidding for the exclusive SIP. Ultimately, the Committee will examine the issue of alternative models in depth. In addition, Ms. Nazareth offered to distribute to the Committee members some questions SEC staff had raised with respect to each of the alternative models, so the members could continue to think about these issues in the interim.
The Chairman will promptly send out a letter with suggested agenda items for the March 1 meeting, and permit members to comment on the agenda. He will take the issue of the creation and timing of subcommittees under advisement for the time being.
A full transcript of the meeting is attached to this summary. Approximately 30 members of the public attended the meeting. The proposals for alternative models submitted by each of the NYSE, Schwab, Reuters, Datek and Archipelago also are attached.