March 30, 2000
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
|RE:||Regulation of Market Information Fees and Revenues
Securities Exchange Act Release No. 42208, File No. S7-28-99
Ladies and Gentlemen:
The Software and Information Industry Association's (SIIA) Financial Information Services Division (FISD) is pleased to respond to the SEC's recent concept release on market data fees.
FISD is a unique trade organization that offers a balanced and neutral business forum for exchanges, market data vendors, specialist data providers, money managers, brokerage firms and banks to address and resolve business and technical issues related to the distribution, management, administration and use of financial information. Participants are responsible for their own strategic and commercial interests within FISD. Our role is to act as a neutral facilitator of the discussion and manager of the consensus agenda that emerges as a result.
The organization is governed by a 24-member Executive Committee consisting of eight exchanges, eight vendors and eight user firms. Most of the major participants in the global financial information industry are represented within FISD and many have been involved in the internal debate on the issues raised in the concept release. A complete list of FISD members, as well as the detail of our agenda, is available from our website at www.fisd.net. As a neutral body, FISD exists as a venue for frank and open discussion on a broad array of sensitive market data issues. If we could be of service to the Commission, FISD would be pleased to offer its forum to help facilitate the ongoing discussion on any of the issues outlined in the concept release.
A number of FISD members are commenting independently on the concept release. And while this letter represents the majority view of the FISD membership, it should not be interpreted as the views of any single member. In all circumstances, the specific comments to the Commission of any individual member supersede the points offered by FISD.
FISD members applaud the Commission on a balanced and insightful review of the issues as outlined in the concept release. There has been large scale and often-heated discussion on all of these issues among FISD members on both sides of the Atlantic. While our diversity has made it difficult for us to achieve consensus on many of the specific areas where the Commission is seeking comment, the FISD Executive Committee has been able to coalesce around the following areas:
Fee Regulation Should Not Be Addressed in Isolation
The issues raised in the release are clearly important and appropriate, but come at a time when the market data industry is at a critical transition point in its development. Given the rapid change now occurring in market structure and with Internet redistribution of market data, it may be premature for the Commission to establish today a permanent and new framework for the regulation of market data fees. However, this ongoing change also makes it imperative that the Commission continue to focus attention on market data and evolve the approach via a process incorporating broad industry participation.
As the Commission is well aware, the issues covered by the concept release come as the industry is preparing for the regulatory stipulations for T+1 and the infrastructure requirements for straight through processing. In addition, the industry is bracing for decimalization in the U.S. including the capacity management issues related to the anticipated increases in market data traffic, continued global exchange consolidation, and the assimilation of ECNs and alternative trading systems. In the context of the concept release, all of these issues need to be evaluated in terms of the continued expansion of Internet redistribution and the ongoing restructure of the marketplace both in the U.S. and abroad.
In light of these issues, rather than setting detailed new rules, FISD instead urges the Commission to set broad objectives for the market data industry in terms of access to quality market data services by investors and market participants and monitor the attainment of those goals. This is particularly true given the fact that the Commission's current regulatory and oversight model is functional and will continue to function in the immediate future. As is pointed out in the Release, the SEC will continue to have oversight over the markets and market data fees, even with the probability of demutualization. As evidence, we point to the recent per-quote and non-professional fee reductions implemented by the NYSE and Nasdaq as clear indications of the SROs' responsiveness to market changes and the presence of the Commission's oversight.
Cost-Based Model for Rate Regulation
FISD agrees that cost is a very useful and valuable benchmark for evaluating the fairness and reasonableness of the fees of an exclusive securities information processor, but suggests it should not be used as the primary determinant of market data fees. FISD members are concerned that a single oriented focus on cost-based fee models would encourage exchanges to adopt inefficient, "cost-plus" approaches, discourage innovation by the exchanges, and absorb substantial resources across the industry, as all parties are ensnared in endless wrangling over the appropriate allocations of costs to market data.
Our primary concern is that the business environment will be undermined by never-ending battles of the definition of cost as well as ongoing debate over the formulas for allocation. Even after carefully studying the potential guideline outlined in the Release, FISD is concerned that the categories of market data cost will continue to be subject to significant amounts of interpretation and will require ongoing vigilance and specialized auditing capabilities.
FISD members are also concerned about the potentially negative effect of revenue caps and cost-based limits on exchange innovation. We are particularly concerned that once an exchange reaches its revenue limit, there will be no additional incentive for them to experiment with new service concepts, distribution relationships, or pricing structures. Without a commercial motivation, an exchange will have no incentive to take risks or to reform or abolish costly and outdated approaches. One of the drawbacks to cost-based fee regulation could be to entrench established practices and divert attention from the more fundamental reforms we believe will be needed, for the mutual benefit of industry participants and private investors.
Fair Competition in the Demutualized World
As SROs demutualize, they may become competitors in the information business. In this new environment, exchange requirements for pre-authorization of new vendor market data systems can put the exchange in a privileged position of knowing what new applications are being proposed. FISD recommends consideration of procedures to ensure that the central role of the exchanges in reviewing and approving new market data proposals are not incompatible with their new direction as demutualized commercial organizations.
Market Data Administration
The Commission accurately notes that there are opportunities for standardization and simplification of administrative policies and procedures for market data. The FISD shares this perspective. In recent years, the FISD has coordinated activities and facilitated forums that have streamlined market data administration throughout the industry. Currently, the FISD agenda includes initiatives geared toward the realization of significant business process automation efficiencies and productivity gains in the areas of market data administration, agreements, billing, reporting, and exchange contractual policies. FISD members are continuing to work on identifying mutually beneficial approaches that will reduce paper, standardize and simplify contractual administration, and lessen barriers to product innovation.
A key part of that work involves a very active and cooperative dialogue on the business structures, contractual obligations and administrative requirements related to external redistribution via the Internet. All FISD members -- exchanges, vendors and user firms alike -- are intimately aware of the importance of business model flexibility, lowering barriers to competition and the requirement for new approaches to meet the ongoing challenges associated with the rapidly evolving Internet business environment.
FISD strongly supports the Commission's "preferred choice" of consensus among SROs, the securities industry, and information users for resolving market data issues. We do not believe that there is, at present, a need for direct Commission involvement in the area of market data administration or external redistribution. The FISD's recent accomplishments and the relevancy of its current agenda demonstrates the value of broad industry cooperation in this arena. Of course, we would welcome the opportunity to brief the Commission in detail on current FISD initiatives and invite Commission staff to attend FISD forums and working groups.
One area where the Commission's involvement may be beneficial is related to attempts by exchanges, tape plans, and vendors to standardize their market data administration policies. Good faith efforts by these organizations to reduce the industry's administrative burden through cooperation and the standardization of contracts, policies, and procedures could be viewed as anti-competitive. Alternatively, these organizations may be hesitant to work together in the first place due to anti-trust concerns. In this event, or perhaps to preempt this event, the Commission may want to consider providing these organizations with limited exemptions allowing them to cooperate and standardize their approaches to market data administration for the benefit of investors and the securities industry.
FISD views time delineated pilot programs as an essential vehicle to enable exchanges, vendors and user firms to experiment with new pricing and packaging concepts. Pilot programs however, shouldn't be used to get around the regulatory review process or multiply to the point where they undermine the goal of uniformity and administrative simplicity.
Vendors, banks and brokerage firms manage market data on a global basis and Commission recommendations related to the U.S. equity markets are likely to be considered for emulation around the world. And while FISD appreciates the limited context of the concept release (i.e. U.S. equity and options markets), we encourage the Commission to set a clear global precedent for other regulators by adopting general approaches which would benefit market data sources, data vendors, banks and brokerage firms who manage market data on a global basis. This would help ensure that the US private investor has the broadest possible access to information from global markets, not just those operating directly under SEC supervision.
FISD is grateful for the opportunity to respond to the Commission's concept release on market data issues. Our main points of consensus can be summarized as follows:
FISD stands ready to provide the Commission with more detail on our activities and on the issues outlined in this letter. Thank you again for the opportunity to respond. Please don't hesitate to contact us if we can be of additional service.