March 28, 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:
Telekurs Financial Information Ltd. is pleased to respond to the SEC's recent concept release on market data fees. Telekurs Financial Information Ltd. is part of the Telekurs Group, one of the world's leading providers of payment systems and financial information. Telekurs Financials' main focus is to procure, process and distribute financial information, including real-time market data and corporate actions, from both domestic and international financial markets.
Fee Regulation and Timing of Concept Release
The global market data industry is in the midst of fundamental transformation and at a pivotal point in its development cycle. As the Commission is well aware, the issues covered by the Concept Release come at a time when the industry is gearing up to prepare 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.
And while we clearly agree that the issues outlined by the Concept Release are appropriate and significant, Telekurs Financial is concerned that now is not the time to set up a permanent and artificial framework for the regulation of market data fees.
We would rather see the Commission set broad objectives for the market data industry in terms of access to quality market data services by individual investors -- as well as any specific measurement criteria and timeframes for their completion. We would further encourage the Commission to use its authority to send a signal to the industry on the importance of reducing the administrative and contractual complexities that continue to serve as a barrier to innovation in the highly competitive and marginally profitable Internet world. The threat of continued scrutiny and ongoing regulatory oversight combined with strong leadership in terms of overall objective are powerful agents of change at the Commission's disposal.
This is particularly true given the fact that the Commission's current regulatory and oversight model works well and will continue to work in the 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 demutalization. As evidence, we point to the recent price-per-quote reductions and caps on user firm's liability implemented by both the NYSE and NASDAQ as clear indications of the power of objective signals and indications of direction by the Commission in market data rate mitigation.
In light of these situations, we recommend that the regulation of fees should not be addressed in isolation or in advance of other issues related to market structure. We would prefer to see regulators working together with industry participants to address fees in context of the wider issues, in particular the challenges associated with Internet redistribution.
Market Data Administration
The administrative burdens related to the management and use of market data on the front-end (in terms of contract negotiations, agreements and authorizations) and on the back-end (in terms of tracking, billing, inventory management and reporting) are substantial and costly to all participants in the market data industry. Telekurs Financial believes that significant administrative efficiencies and real cost savings are possible and that there is an important opportunity to use the current discussion to lay the groundwork for electronic commerce and business process automation in the market data industry.
As a general rule, Telekurs Financial believes that exchange contracts should be as simple and uniform as possible. Contract structures should be enforceable, impose a minimum of administrative overhead and structured to promote the widest possible legitimate use of data. There should be uniformity among exchanges in the administration of exchange fees. Around the world, each exchange has different administrative requirements and different fee structures. This complicates the process for both vendors and user firms, is the primary barrier to billing and reporting automation and increases the overall cost of market data administration.
Telekurs Financial has devoted significant resources to market data. Market data administration in general is still largely a labor-intensive process that is complicated by the lack of uniformity in the administration of exchange fees. Business process automation is a classic "win-win" for everyone in this business and we suggest that simplification, transparency, uniformity and automation of market data administration should be viewed as a prerequisite for the ongoing discussion of market data fees. We believe that leadership by the Commission could be a significant and important instrument for moving the industry forward in this direction.
The external redistribution of market data, particularly via the Internet, is clearly one of the most critical commercial issues in the market data industry. One of the more important discussions promoted by the Commission should be about external redistribution, business model flexibility, simplicity of administration for Internet applications and restrictions on the use of market data.
The key point is that Internet redistribution of market data is still a big experiment. We believe that all segments of the market data industry – exchanges, vendors and user firms alike – need a chance to more fully understand how they will respond to a rapidly changing industry environment as well as the impact of new market conditions on product innovation and service delivery. We believe that business model flexibility, lower barriers to competition and entrepreneurial marketing partnerships are needed to promote experimentation. These are the essential tools needed to enable participants to more nimbly respond to the challenge of meeting the commercial requirements and statutory rights of private investors.
We believe that the central role of the exchanges in reviewing and approving new market data usage proposals is increasingly incompatible with their new direction as demutualized commercial organizations. We are concerned that cost-based fee regulation could entrench established practices and would divert attention from the more fundamental reforms we believe will be needed, for the mutual benefit of industry participants and private investors.
Governance Structure and Cost-Based Approach
Telekurs Financial agrees with the Commission that cost is a very useful and valuable benchmark for evaluating market data fee proposals of monopolistic providers. However, it is clearly not the only criterion to be considered. Telekurs Financial is concerned that the single oriented focus on cost-based fee models would enable exchanges to retain an inefficient, "cost-plus" approach and draws attention away from the more important issues of external redistribution, administrative simplicity and business model flexibility.
Telekurs Financial strongly supports the Commission's "preferred choice" of consensus among SROs, the securities industry and information users for resolving market data issues. However, if the Commission determines that a cost-based formula is the appropriate model, we strongly encourage the creation of an independent regulatory utility (including exchanges, vendors and user firms) to evaluate cost structures and approve fee proposals. We fear that without such a structure, 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, Telekurs Financial 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.
The need for industry oversight of the U.S. equity exchange fees could be a temporary requirement pending reform of market structure and the overall approach to market data licensing. Focus on the immediate issues associated with market data fees and contract structures, under a fixed timetable and subject to the oversight of a temporary body with senior industry representation might be a more appropriate project than setting up an artificial framework. This is particularly true in light of the broad structural changes currently affecting the industry.
The Global Precedent
The NYSE, NASDAQ, and OPRA are in a fundamentally different position from all other exchanges (except for certain stock exchanges in China and Canada) in their relationship with market data vendors and users. With these few exceptions, every other exchange has market data contracts which authorize use of data according to rules specified by the exchange. NASDAQ, NYSE and OPRA, as previously stated, have contracts that prohibit use of market data by vendors – except as approved on a case-by-case basis by the exchange. NYSE also maintains severe penalties in its vendor contract for all unauthorized use of data.
This approach does not promote business model flexibility or provide an opportunity for experimentation in the fast-paced world of Internet applications. All new service concepts must be presented in advance as Exhibit updates to the exchange. Any delay in processing these submissions – or determination that a use of data is in a different market data fee category from its competitor – can make an enormous commercial difference.
The US equities exchanges have developed their approach largely as a result of their regulatory environment, and have justified their practices in terms of their regulatory obligations. It may therefore be reasonable to subject these practices to a greater level of regulatory oversight than would be appropriate for other US exchanges or for other exchanges around the world.
It follows that greater regulatory oversight of the U.S. equity markets may be a reasonable response to the unique local circumstances of the U.S equity markets, but should not be seen as a model for other exchanges in the USA or around the world.
On the other hand, the SEC can set a clear global precedent for other regulators by adopting general approaches which would benefit market data sources, data vendors, banks and brokerage firms manage who market data inventory and reporting on a global basis. This would help the industry ensure that the US private investor has the broadest possible access to information from global markets, not just those operating directly under SEC supervision. Simplification, uniformity and automation of market data administration, billing, reporting and other contractual obligations related to the U.S. markets are not isolated domestic issues and need to be evaluated in a global context.
Telekurs Financial thanks you for the opportunity to respond. Please don't hesitate to contact us in the event you require any clarifications.
Telekurs USA Inc
Head of Data Procurement
Telekurs Financial Information Ltd