April 11, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Attention: Mr. Jonathan G. Katz
Re: SEC File No. S7-28-99
Ladies and Gentlemen:
Bloomberg L.P. ("Bloomberg")1 appreciates the opportunity to comment, in response to the request by the Securities and Exchange Commission (the "Commission") in the Concept Release, Securities Exchange Act Release No. 34-42208 (December 9, 1999) (the "Release"), relating to the fees charged for market information and the role such fees play in funding the operation and regulation of the markets. The Release discusses and endorses a cost-based model for regulation of market information fees charged by self-regulatory organizations ("SROs") that are national securities exchanges or national securities associations. The current fee levels and structures permit SROs, through market information fees, to recoup not only their direct costs of gathering and disseminating market information but also their costs of market operation and market regulation. The current fee levels will support the profitability of for-profit SROs.
Through the BLOOMBERG PROFESSIONAL service, Bloomberg provides to its customers a broad range of financial market information, some of which Bloomberg obtains from the SROs. As a data vendor, Bloomberg passes on to its customers the individual subscriber fees charged by the SROs for the receipt of market information. Although it does not itself bear the cost of these subscriber fees, Bloomberg is advocating the reduction of and strict limitation on market information fees on behalf of its clients, who would have lower-cost access to real-time market information if the SROs were not permitted to load their regulatory and operational costs into the rate base.
The Release contains a useful summary of the Commission's rate regulation in this area and a thoughtful analysis of the problems the ratemaking entails. In reviewing the Commission's analysis, however, Bloomberg respectfully suggests that the market information fees charged by the SROs, as exclusive securities information processors, should be strictly limited to the direct costs incurred by the SROs in gathering and disseminating market information. This strict limitation on fees that SROs may charge for market information is necessary both (i) because of the lack of competitive pricing for market information, given the exclusive processors' monopoly power over market information, and (ii) to increase the availability of market information in the marketplace, which would improve price transparency and promote investor protection. The decision whether to establish an exchange should not be based on the ability to subsidize the basic operation of the exchange through artificially high pricing for market data.
It may be that investors pay the costs of SRO membership fees and other costs indirectly through, e.g., the commissions they pay on transactions. Nevertheless, the fact that membership fees and transactional fees are at least to some extent controlled by market discipline offers some protection against the risk that the SROs will exact monopoly rents in setting those fees.
In addition, the Commission should reexamine the basic premise, which underlies the current system of data dissemination, that a monopoly aggregator and data integrator such as the Securities Industry Automation Corporation ("SIAC"), the Options Price Reporting Authority ("OPRA") and Nasdaq, in its performance of those functions, is necessary or useful. If the Commission permits a monopoly in data gathering, which may be necessary as to particular market centers, it should not presume that any monopoly to disseminate the data is needed or useful. Current practices point to the risk that SROs engaging in data aggregating and vending tend to discriminate against other vendors in the information feeds they make available. The Commission should continue to press for greater market transparency and, to achieve that goal, should strive to reduce the costs of market data to the public investor. To do that, the Commission should opt for competitive alternatives to the current monopolies in data dissemination, which today lead to prohibitive costs and technological obstacles to the integration of the data.
What the Congress Intended
When it enacted the Securities Acts Amendments of 1975 (the "1975 Amendments"),2 the Congress emphasized the need for accurate, up-to-the-second market information to guide those who trade in the U.S. securities markets:
In the securities markets, as in most other active markets, it is critical for those who trade to have access to accurate, up-to-the-second information as to the prices at which transactions in particular securities are taking place (i.e., last sale reports) and the prices at which other traders have expressed their willingness to buy or sell (i.e., quotations). For this reason, communications systems designed to provide automated dissemination of last sale and quotation information with respect to securities will form the heart of the national market system.3
At that time, the exchanges and the NASD perceived that the establishment and maintenance of publicly disseminated quotation and last sale data could most efficiently be accomplished by allowing combinations such as SIAC, OPRA and Nasdaq to be the exclusive processors. Even then, however, a generation ago, the Congress was by no means convinced that it was necessary or appropriate to endow the SROs, alone or in combination with one another, with a monopoly on data dissemination. While the Congress recognized that Commission action would be necessary to promote the creation of a composite quotation system and a consolidated last sale tape,4 it carefully avoided endorsing a monopoly approach:
Despite the diversity of views with respect to the practical details of a national market system, all current proposals appear to assume that there will be an exclusive processor or service bureau to which the exchanges and the NASD will transmit data and which in turn will make transactions and quotation information available to vendors of such information. Under the composite tape 'plan' declared effective by the Commission, SIAC would serve as this exclusive processor. The Committee believes that if such a central facility is to be utilized, the importance of the manner of its regulation cannot be overestimated. An exclusive processor of this sort will play a key role in determining how information about transactions in securities will reach the public. Its decisions as to who may report transactions though its facilities and in what manner will influence the extent and nature of competition among market facilities. And its decisions as to who may receive and disseminate the market information which it processes will structure the nature of the competition among vendors of market information.5
While not directing the Commission to turn away from data-processing monopolies, the Congress clearly recognized their dangers. It warned the Commission to regulate the exclusive securities information processors as public utilities and to guard aggressively against all manner of abuse, pointing to the risk of antitrust problems if such regulation were not effectively applied:
The Committee believes that if economics and sound regulation dictate the establishment of an exclusive central processor for the composite tape or any other element of the national market system, provision must be made to insure that this central processor is not under the control or domination of any particular market center. Any exclusive processor is, in effect, a public utility, and thus it must function in a manner which is absolutely neutral with respect to all market centers, all market makers, and all private firms. Although the existence of a monopolistic processing facility does not necessarily raise antitrust problems, serious antitrust questions would be posed if access to this facility and its services were not available on reasonable and nondiscriminatory terms to all in the trade or if its charges were not reasonable. Therefore, in order to foster efficient market development and operation and to provide a first line of defense against anti-competitive practices, Sections 11A(b) and (c)(1) would grant the SEC broad powers over any exclusive processor and impose on that agency a responsibility to assure the processor's neutrality and the reasonableness of its charges in practice as well as in concept.6
The Congress did not further dictate the manner in which the Commission was to use its new authority over exclusive processors, but the Congress evidently envisioned that they would be regulated in the same strict way as public utilities are regulated so as to avoid abuse and undue expense and to increase price transparency. Monopolies obviously were not the Congress's preferred course and it was careful to insist that they be strictly controlled if permitted to exist at all.
A Rigorous Cost-Based Model for Limiting Market Information Fees Is the Correct Short-Term Approach
It is at least as important today as it was when the Congress enacted the 1975 Amendments that exclusive processors' data fees be strictly regulated. Currently, all the SROs are non-profit organizations, but the NASD is currently moving rapidly to privatize Nasdaq. Other privatizations, that is, conversions of the non-profit organizations into business corporations, are planned. A non-profit SRO has ample incentive to try to subsidize its other costs (e.g., costs of market operation, market regulation, market surveillance, member regulation) through market information fees. As the Commission itself recognizes, allocations of costs and capital are "an extremely difficult task,"7 one that will not likely become easier when the SROs become privately held, for-profit corporations. As is the case with private gas and electric companies and other private utility operators, SROs that are operated for profit and that have a monopoly on the dissemination of market information will have an even greater incentive than non-profit SROs to raise fees significantly as a way of generating profit. The boards of directors of business corporations have a fiduciary duty as a matter of state law to act solely in the commercial interests of their shareholders, as the courts in Delaware and other states frequently have held.
That makes it all the more important to apply rigorous ratemaking concepts and procedures, including filings and hearings,8 in determining the costs that can be added to the rate base to determine maximum permitted revenues, rate structure (e.g., questions of the fairness or unfairness of discrimination between and among classes of buyers of the data, such as market professionals and retail investors) and allocation of revenues among entities participating in the gathering and dissemination of market data. For as long as the monopoly is to be perpetuated, moreover, there should be an overall ceiling on the amount of fees charged by SROs as the costs of producing market information are finite given current levels of technology whereas the possible revenues expand exponentially as more and more parties pay the fees to obtain access to market information.
The Commission's approach to data fees should be governed by the congressional mandate, noted above, that entities permitted to operate as exclusive processors should be strictly regulated in the way public utilities are regulated. If the current monopolies are to be perpetuated, the Commission should move more aggressively than it has in the past or than it proposes to do in the Release. The Commission should determine, on the basis of new regulatory standards that it should articulate, the costs that are to be included in the rate base, that is, the permitted costs of gathering and disseminating market information.
The establishment of regulatory standards for determining compliance with the Section 11A standards, as the Commission concedes in the Release, has not been a subject of aggressive or sustained activity by the Commission. While the Commission has had rulemaking power for 25 years to structure its consideration of the level and structure of data fees, it has never exercised its authority, relying instead on the statutory provisions applicable to rulemaking by the exchanges and the National Association of Securities Dealers, Inc. (the "NASD").9 In addition, the Commission in the past has preferred to settle rate disputes by consensus among the combatants rather than to reach its own determination.10
The Commission is understandably reluctant to engage in what it may view as the cumbersome and unwieldy panoply of proceedings, evidentiary hearings and appeals that historically have attended the business of fixing rates, as formerly practiced by agencies such as the Civil Aeronautics Board and the Interstate Commerce Commission and as still practiced by the state public utility regulators.11 The Commission, indeed, has many more pressing and important items on its agenda. Nonetheless, the "fair and reasonable", "not reasonably discriminatory" and "equitable allocation" standards the Congress imposed on the Commission by statute12 are identical in substance to the standards typically imposed on state public utility commissions that laboriously review and pass on the fairness and reasonableness of rates charged to industrial and residential consumers of, e.g., electricity, gas, steam, water, telephone and bus and rail services.13
Only Direct Costs of Gathering and Disseminating Market Information Should be Included in Market Information Fees
The Congress built into Section 11A of the Securities Exchange Act of 1934 (the "Exchange Act") a recognition that SROs, when they act as exclusive securities information processors, enjoy a monopoly the Commission should carefully regulate. As outlined in the Release, the approach the Commission has taken in the past is to recognize that "fair and reasonable", "not reasonably discriminatory" and "equitable allocation" standards require a cost-based justification of the fees. Nonetheless, while the Commission has not allowed the SROs to include advertising, marketing and general member firm regulation to be included in the formula, it has allowed the SROs, as a matter of settled formula and routine, to include the costs attributable to operation, surveillance and regulation of the market itself.
We respectfully submit that the costs of market operation, surveillance and regulation should not be included. We submit that the Commission should change its policy and no longer allow those regulatory and operational costs to be added to the rate base for purposes of determining the fairness and reasonableness of rates.14 Instead, only the direct costs of gathering and disseminating the market data should be allowed. The SROs of course need to support their regulatory and operational activities, but they should do so from other revenue sources. By the same token, allowing the SROs to use data revenues to subsidize their regulatory costs, which are directly passed on to investors, relieves the SROs of the need to exercise the degree of care they otherwise would have to exercise in operating their regulatory systems efficiently.
The Commission's statutory ratemaking responsibility implies a need on the Commission's part to determine which categories of costs should go into the rate base and, within those categories, which costs are reasonable and appropriate and which are not. That in turn implies a need to determine the nature of the service for which the regulated rates are going be charged. The services are, in fact, the provision of data, not the maintenance of fair and orderly markets, not the regulation of exchange members' conduct in the markets and not the cost of maintaining physical facilities, such as exchange floors, on which the markets are conducted.
The categories of costs that are appropriately included in the rate base are those that are directly related to the service in question, the gathering and disseminating of data. The integrity of the market's operations is integral to the entire operation of the SRO's market and is not uniquely relevant to market data. Market surveillance and regulation would have to be conducted as part of an SRO's statutory duties regardless of whether trade data were or were not sold. Indeed, unless the Commission relieved the obligation by rule, Section 19(g)(1) of the Exchange Act would require an SRO to continue enforcing its rules and the Exchange Act if data revenues became unavailable.
More importantly, the other sources of funding available to the SROs for regulation and operations are unrelated to the monopoly the SROs have over data sales and are instead, to some extent at least, susceptible to the forces of competition. Membership fees and transactional fees are not determined without reference to what the other markets are charging, particularly upon the elimination of exchange off-board trading restrictions. It may be that investors pay the costs of membership fees and other costs indirectly through, e.g., the commissions they pay on transactions. Nevertheless, the fact that membership fees and transactional fees are at least to some extent controlled by market discipline offers some protection against the risk that the SROs will exact monopoly rents in setting those fees.
For the Commission to fall back on the argument that market integrity is important, and adds to the value of the market information, does not provide a principled basis for including the costs of market surveillance and operation in the rate base. If the Commission does not draw the line at the costs of data gathering and dissemination, there is no demonstrably correct place to stop and arguments for including all sorts of other extraneous costs become available. For example, advertising for the market's brand and recruitment of new securities listings, if successful, may ensure the continued vitality of a market and thus add to the quantity and market value of the market data emanating from it. Also, inspecting member organizations for compliance with the law and conducting disciplinary proceedings where violations are found helps to ensure the overall level of market conduct and helps to ensure the continued integrity of market participants. While the Commission rejects those arguments as a basis for expanding the rate base, it leaves itself open to the charge of being arbitrary and capricious if it includes some but not other costs that are additive to the basic costs of data gathering and dissemination but not inextricably part of those activities. Indeed, the costs of market surveillance and regulation, however worthy and necessary to the operation of an SRO in compliance with the Exchange Act, have no necessary connection to the data themselves. A corrupt, manipulated market could have very clear and accurate market data, which perhaps would be useful in demonstrating the very degree of market corruption. A market that was presumably fair and free of manipulation might nevertheless have corrupt data, as the NASD has demonstrated in recent days in its market data transmission delays and its submission of duplicate trades on a large scale to the NASD's Automated Confirmation Transaction Service ("ACT"), and thus to the market data tape, that later had to be canceled.
If the categories of permitted cost are limited to those related directly to data gathering and dissemination, the ratemaking process will be greatly simplified. Many of the complex and intractable problems the Commission foresees in allocating costs will be avoided. Once an SRO's costs of gathering and disseminating data are isolated from other costs incurred by the SRO, an allocation burden that the SRO should itself bear in defending its claimed rate base, the Commission should evaluate and make findings of fact as to whether the costs were prudently incurred. The so-called "gold-plated telephone pole problem", that is, the problem that a regulated utility may have incurred excessive costs in providing the regulated service, is one that may inevitably affect ratemaking proceedings. Sorting through the rate filings to root out problems of that type will be less complex if the categories of permitted costs are circumscribed as we suggest.
We respectfully suggest, moreover, that the Commission's argument, aimed at the alternative trading systems, is off-base. The Commission suggested that if alternative trading systems do not like the Commission's formula for passing on data fees they can register as exchanges. That, we submit, is hardly a public policy justification for the current approach, let alone a legally sufficient response to the statutory duties the Congress imposed on the Commission. Indeed, the Commission's argument is aimed principally at preserving the status quo. It protects the SROs themselves, which the Commission is charged with regulating, instead of promoting the public interest or the protection of investors. Indeed, the Commission's stated justification would appear to apply to almost any approach to ratemaking, including a complete abdication of the very responsibility to pass on the reasonableness of rates.15 It apparently is based on the theory that, if the alternative trading systems have discovered that the rates are excessive, they can share in the gravy by joining the club:
The Commission recognizes that allowing SROs to receive market information revenues to recover part of their market operation costs would provide them with a source of funding not available to other types of entities that also operate markets, particularly alternative trading systems that are regulated as broker-dealers under Regulation ATS. As the Commission noted in the ATS Release, however, alternative trading systems have a choice between either (1) registering as a national securities exchange and accepting the many responsibilities imposed by the Exchange Act on SROs, or (2) registering as a broker-dealer and complying with Regulation ATS. The choice between these two options is complex. The ATS Release compares the many different benefits and costs associated with becoming an SRO and those associated with remaining a broker-dealer. If an alternative trading system believes that the benefits of becoming an SRO (including a share in market information revenues) exceed the costs, it still has the option of registering as an exchange and becoming a participant in the national market system plans.16
In portraying the rate issue as largely a competitive issue between SROs and ECNs, the Commission does not correctly view the truly important question, the impact on the investor. As the Commission recognizes, investors ultimately pay the costs levied for market information. The Commission should keep that fact foremost in mind when determining how to evaluate the rates the exclusive securities information processors charge and in considering the underlying question, whether there should continue to be exclusive processors at all.
In their recent pronouncements and proposals, the Commission and the SROs have placed considerable emphasis on best execution and price improvement. The best policeman of those issues, however, is not the government and not the SROs. It is the consumer. If armed with sufficient, timely, readily and inexpensively available market information, consumers will be able to insist that technology be put to work to help them. For example, they will be able to assess the cost, and more effectively weigh the benefits, of brokers' internal-only, automatic execution systems and their primary market-only, order-delivery systems. The Commission should keep its eye on that ball, not on supervising what it perceives, and likely misperceives, as a competitive issue between the SROs and the ECNs over the sharing of artificially high data fees.
Limiting costs to the direct costs described above would permit SROs to recoup the costs they incur in gathering the market information and disseminating it to the market while simultaneously minimizing market information fees, which would increase the amount of market information available to the public and correspondingly promote price transparency in the marketplace. As Chairman Levitt stated in his recent speech at Northwestern University, price transparency is critical in enabling all investors to access the market on an equal footing.17 As a way of promoting price transparency, Chairman Levitt observed that increased pricing information must be available to the entire market on a real-time basis.18
Currently, as the Commission recognizes, the SROs are using fees for market information as a significant means of generating revenue.19 The level of those fees is far beyond the SROs' actual costs of gathering and disseminating the market information. This is antithetical to the goal of promoting a completely transparent price policy, as transparent prices can only occur when the public has ready access to market information, which cannot occur in an environment of artificially high costs for access to market information. Accordingly, for so long as the data monopolies are perpetuated, market information should not be a means of generating revenue for SROs beyond the recovery of direct costs of gathering and disseminating the data.
A Possible Alternative
The best solution to the ratemaking problem would be to limit the category of service for which the regulated rates would be charged. One readily available way to do that would be to require the SROs to gather data concerning quotations entered and transactions executed through use of their facilities, and further to require that the SROs provide those data, at the cost of gathering them, to third parties who would integrate the data pursuant to minimum standards set by the Commission and sell them to the public at competitive prices.
The data-integration and -dissemination functions currently performed by SIAC, OPRA and Nasdaq no longer need to be a monopoly business, if indeed they ever did. Today, Bloomberg and the other data vendors take the data provided by those monopoly aggregators and, in some cases, add analytics and other services to provide integrated informational services to the public. There is no reason, for example, why any number of data aggregators could not distribute composite quotation data and consolidated transaction data in competition with SIAC, OPRA and Nasdaq if they were willing to do so in compliance with standards established by the Commission. Indeed, it is likely that competition among data aggregators would result in a better, more reliable product than is available today from SIAC, OPRA and Nasdaq. It would stand to reason that competition in this sector would have a cleansing effect and would spur innovation and improvement.
According to the SROs monopoly status and regulating the SROs as public utilities may have been a tolerable, even if dubious, solution in 1975 when the Congress enacted the 1975 Amendments. In any event, treating the SROs as monopolies is no longer a good long-term solution to the market-information issue in light of dramatic advances in technology and reductions in communications costs. This is particularly true in the information business. Today, the securities industry is turning more frequently to competing, redundant electronic systems instead of monopolistic, unitary service providers. It is not the case today that the monopolies are still needed to provide market information to the market, as it is much easier for private competing companies that provide market information to maintain duplicative, redundant information systems.
The notion that competition is a better regulator than the government is not a novel concept. The Congress in 1975 pointed to the problems that arise from reliance on regulation rather than competition and quoted with approval sentiments expressed in the 1970 Presidential Economic Report, where it was said:
The American experience with regulation, despite notable achievement, has had its disappointing aspects. Regulation has too often resulted in protection of the status quo. Entry is often blocked, prices are kept from falling, and the industry becomes inflexible and insensitive to new techniques and opportunities for progress. There is no clear safeguard against these dangers, but more reliance on economic incentives and market mechanisms in regulated industries would be a step forward.20
As we noted in our joint comment letter with the Philadelphia Stock Exchange, Inc. in response to the proposal by the NASD concerning the elimination of Nasdaq's Fixed Income Pricing System and the creation of a corporate bond Trading Reporting and Comparison Entry Pricing System,21 finding a competitive alternative to a monopoly would result in a self-regulatory system that does not require as stringent Commission oversight as is the case where a monopoly is to be perpetuated. Such a competitive alternative would naturally be more cost-efficient as companies compete with each other to sell better market information at cheaper prices. An analogue to a non-monopolistic alternative is the NRMSIR system,22 which exists today for reporting information about municipal bonds. Under a NRMSIR-like system, market information would be reported to various for-profit companies who would then disseminate this information to the public.
We note that the New York Stock Exchange has announced that it is considering leaving the Consolidated Tape Association.23 The changes that such a move would presage could be substantial, particularly if the NYSE were allowed to charge whatever it wished for its data. We think the Commission's best response, however, should be to encourage any market center that wishes to withdraw from the CTA to do so and to enter the data business itself, in competition with the current distributors. The business model we envision would have three players, the market centers, a number of data aggregators, and data users/distributors. Their roles would be as follows.
1. Market Centers. The Commission should recognize that the data concerning quotations and transactions do not belong to anyone, not the exchanges, not the broker-dealers that enter the quotations and effect the transactions, and not the investors on whose behalf orders are entered and executed. Instead, the data should be recognized as a public good, in the public domain. The exchanges and Nasdaq should be able to recover, subject to Commission oversight, their costs of aggregating the data but should be required to make the data available to anyone willing to defray those costs. The price charged should not be for the data themselves, which would be regarded as public information, not private information, but should compensate the data-gathering market for the costs of doing the data gathering.
2. Data Aggregators. Today, SIAC, OPRA and Nasdaq in its data-aggregation function all act as data aggregators. The Commission should allow them to continue to do so but should also permit others to function as, or to own, data aggregators. The Commission should require the market centers to make their data available on the same basis and at the same cost to all data aggregators.24 The Commission should establish minimum standards for data aggregation, such as a requirement that the data distributed by an aggregator, which could be regulated under rules adopted by the Commission under Section 11A(b), would have to be appropriately representative of all markets on a consolidated, real-time basis, as is the case with the current composite quotations system and consolidated transaction reporting system operated by SIAC and the options quotation system operated by OPRA. The data aggregators would compete with one another in price and, so long as they met the Commission's minimum standards, could compete with one another in timeliness, accuracy and other service factors. A data aggregator would have to make its aggregated data available to all user/distributors at the same price. It could be affiliated with one or more data user/distributors, but the price and other terms on which the data were sold to its affiliated user/distributors would have to be the same as the terms at which the data were sold to unaffiliated user/distributors.
3. Data Users/Distributors. The data users/distributors, which could be end users of the data, broker-dealers, or financial media companies, would thus receive commoditized data streams at a common price from a given aggregator and would use the data to compete in their respective businesses or investment activities.
We believe that a competitive system such as this would result in a pricing structure that would certainly not be any greater than the pricing of the current monopoly-driven model and would likely be substantially less. Indeed, one would expect the data prices to the public to behave in the way prices for commodity goods usually do, seeking a very low level. The quality of service, we further believe, would improve dramatically. Aggregators in their capacity and distributors in theirs would each be rewarded for building in the needed capacity, reliability and speed that their customers would demand. The CTA would cease to be relevant because there no longer would be monopoly rents to be distributed. Nonetheless, the market centers might wish to enter the data provision business at the aggregator level and the distributor level if they wished to continue to receive revenues from data sales above their costs as data gatherers.
By eliminating the monopoly on the integration and distribution of market data to distributors, the Commission would have both made data available more inexpensively and improved the reliability and quality of the data. In a competitive environment such as that, the Commission's primary focus could be where we believe it would do the most good, on the fairness of data distribution, reliability of data transmission and ease of integration of the data, rather than ratemaking. For example, the current patchwork of different data protocols makes data distribution all the more difficult and costly. The Commission could spur the development of uniform transmission protocols to resolve this problem. In addition, such a system would eliminate the incentives the dominant market centers have today to design and operate data switches that affect receipt and distribution of data to advantage themselves and disadvantage others.
The decision whether to establish an exchange should not be based on the ability to subsidize the basic operation of the exchange through artificially high pricing for market data. Instead, the Commission should look to market data as a public good, one that should be made available on a cost-recovery basis to firms that would compete with one another in aggregating the data and making it available to the public cheaply, quickly and reliably. As the Congress concluded 25 years ago, data transmission systems form the heart of the national market system.25 The Commission should build that perception into its view of market data and should abandon the outmoded, monopoly model of a generation ago and encourage the development of a better, competitively driven system.
If adopted as proposed, the Commission's approach as outlined in the Release would not limit market information fees to a level sufficient to improve price transparency and the access to high quality market information in the marketplace. The approach should be modified to limit the types of costs which SROs can pass on to consumers of market information. The regulatory and operating costs that the Commission's approach contemplates including (costs of market operation and market regulation) should not be included in the calculation of the costs of providing market information. At a minimum, the Commission should limit market information fees to recoupment of SROs' direct costs of gathering and disseminating market information. In addition, given technological developments, the Commission should consider ending the monopoly that the SROs have on market information and permitting competition in gathering and disseminating market information. Competition will inevitably improve the quality and decrease the cost of market information. If the Commission's regulation of the markets is to keep pace with changing economic conditions and technology, we respectfully suggest that the Commission should modify approaches that have become obsolete and should encourage competition, in accordance with the principles set forth above, to replace workaday ratemaking in this important area of market regulation and investor protection.
* * *
We appreciate the opportunity to make our views known to the Commission and the staff and we hope that our letter is helpful. If members of the Commission or the staff believe we may be of further assistance in these matters, please let us know.
Very truly yours,
By: /s/ Lou Eccleston by RDB
cc: Chairman Arthur Levitt, Chairman
The Hon. Isaac C. Hunt, Jr., Commissioner
The Hon. Norman S. Johnson, Commissioner
The Hon. Paul R. Carey, Commissioner
The Hon. Laura S. Unger, Commissioner
Annette L. Nazareth, Esq., Director,
Division of Market Regulation
Robert L. D. Colby, Esq., Deputy Director,
Division of Market Regulation
Belinda Blaine, Esq., Associate Director,
Division of Market Regulation
Richard C. Strasser, Esq., Assistant Director,
Division of Market Regulation
David M. Becker, Esq., General Counsel
1 Bloomberg is engaged in the business of providing its customers with financial market information, news and analytics via its worldwide electronic network (the "BLOOMBERG PROFESSIONALTM service"). Bloomberg also serves its broker-dealer and institutional customers' communications needs and facilitates their transaction of business by offering various additional services, including electronic messaging, non-anonymous offerings, bids wanted and equity order-routing and indications of interest, and linkages to certain exchanges within and outside the United States. Approximately two million text messages and transaction messages involving billions of dollars of securities are sent and received by Bloomberg customers across the BLOOMBERG PROFESSIONAL service every business day. In addition, Bloomberg expects in the future to provide access to additional points of liquidity as customer demand dictates.
2 Pub. L. No. 94-29, 89 Stat. 97 (1975).
3 Securities Acts Amendments of 1975, Report of the Senate Comm. on Banking, Housing and Urban Affairs to Accompany S.249 (the "Senate Report on S.249"), S. Rep. No. 94-75, 94th Cong., 1st Sess. 9 (1975).
4 See, Securities Acts Amendments of 1975, Conference Report to Accompany S.249, Joint Explanatory Statement of the Comm. of Conference, H.R. Rep. No. 94-229, 94th Cong., 1st Sess. 92 (1975).
5 Senate Report on S.249 at 11.
6 Id. at 11-12 [emphasis added].
7 Release in text preceding n. 124.
8 Historically, a number of federal agencies, many of them now defunct, have engaged in formal ratemaking proceedings and their procedures and processes may provide relevant analogies (e.g., the Civil Aeronautics Board and the Interstate Commerce Commission). Even today, state public utility regulators conduct regulate utility rates and the Federal Energy Regulatory Commission conducts ratemaking under the Federal Gas Act and the Federal Power Act. See 42 U.S.C. § 7173.
9 Release in text accompanying n. 47.
10 See discussion of the resolution of the Instinet/Nasdaq controversy in the Release in text accompanying nn. 101-103.
11 In addition to consuming time and governmental resources, regulation of public utility monopolies often has taken its toll on the utility commissions themselves:
In the period of youth or growth, the commission is vigorous, although inexperienced. This leads to aggressive controls with a broad view of public responsibility. New issues are likely to be challenged, the commission staff is likely to be highly dedicated and ambitious, and public support is likely to be very high. Aside from limiting interpretations of courts, the commission is likely to achieve its greatest accomplishments during this phase.
Maturity slowly sets in as public support diminishes and political leadership turns to other problems. Controversy fades, commissions adjust to conflicts between parties, and procedures become more settled. A tendency to regulate by formula and routine becomes pronounced and institutionalized. There is a tendency for the commission to identify itself with the regulated industry as it settles down to the workaday tasks of regulation. Finally, old age comes as the commission assumes the role of protector of the industry it is charged with regulating. Attempts to maintain the status quo and failure to keep pace with changing economic conditions and technology are prevalent. The commission becomes sluggish and falls behind in its work, and its policies become obsolete.
The Interstate Commerce Commission is usually singled out as an example of this life cycle . . . .
Farris and Sampson, Public Utilities: Regulation, Management, and Ownership 165-66 (1973) [footnote omitted].
12 Sections 11A(c)(1)(C), 11A(c)(1)(D), 6(b)(4) and 15A(b)(5) of the Exchange Act.
13 Typically, state public utility laws require the state utility commissions to determine whether the rates charged are "just" (that is, fair, not unreasonably discriminatory and appropriately allocated between and among different classes of consumers) and "reasonable". See, e.g., Mitchie's Annotated Code, Maryland, § 4-102 of the Public Utilities Companies Article (Public Service Commission to set "just and reasonable" rates of public service companies); New York Public Service Law § 72 (McKinney's 2000) (Public Service Commission to fix "just and reasonable" prices, rates and charges for gas and electricity), id., § 79 (steam corporations to charge "just and reasonable" rates for manufactured steam); Code of Virginia (1950) § 56-235.2 (1999 Supp.) (rates of public utilities operating in Commonwealth of Virginia to be "just and reasonable", as determined by State Corporation Commission). Compare, District of Columbia Code (1981) § 43-611 (Public Service Commission power to abrogate rates determined to be "unjust, unreasonable, insufficient, unjustly discriminatory, or preferential . . .").
14 See the Release in text accompanying n. 121:
In sum, the Commission preliminarily believes that the cost of market information should include, in addition to Plan costs, an appropriate percentage of the costs incurred by individual SROs in operating and regulating their markets. These costs must be borne by the SROs to meet their Exchange Act responsibilities and therefore must be funded in one way or another. If all of these costs were excluded from the cost of market information (and fees were reduced accordingly), the principal consequence would be to force the SROs to rely more heavily on their other sources of funding-transaction fees, listing fees, and regulatory fees. In this regard, it warrants emphasis that all of these fees are passed on, directly or indirectly, to investors-the ultimate consumers in the securities industry. The relevant funding issue, therefore, is not whether investors ultimately will pay the costs of effective market operation and market regulation, but how these costs are funded in the first instance and whether the funding furthers the objectives of the Exchange Act [footnote omitted; emphasis in original].
15 The same can be said of the Commission's stated preference for consensus rather than the congressionally mandated required rate regulation:
[T]he Commission has relied to a great extent on the ability of the SROs and Plans to negotiate fees that are acceptable to SRO members, information vendors, investors, and other interested parties. This approach was adopted soon after the 1975 Amendments were enacted.
Release in text preceding n. 82.
16 Release in text accompanying nn. 122-123 [footnotes omitted].
17 "Visible Prices, Accessible Markets, Order Interaction ," Remarks by Arthur Levitt, Chairman, U.S. Securities and Exchange Commission, at the Northwestern University School of Law, Kellogg Graduate School of Management, March 16, 2000, accessible on the Internet at http://www.sec.gov/news/speeches/-spch355.htm.
19 See Release in text accompanying nn. 101-124.
20 Securities Reform Act of 1975, Report of the House Comm. on Interstate and Foreign Commerce, together with Minority Views, to accompany H.R.4111, H.Rep. No. 94-123, 94th Cong., 1st Sess. 48 (1975).
21 See Letter from Bloomberg and the Philadelphia Stock Exchange, Inc. dated February 15, 2000 in response to Securities Exchange Act Release No. 42201 (December 3, 1999).
22 As the Commission knows, a NRMSIR is a nationally recognized municipal securities information repository for purposes of paragraph (b)(4) and (b)(5)(i) of Rule 15c2-12 under the Exchange Act. Rule 15c2-12 requires underwriters to provide disclosure documents for new issue municipal securities to private vendors that the Commission designates as NRMSIRs. The NRMSIRs then make these documents available to any person upon request, for a reasonable fee. See Securities Exchange Act Release Nos. 26985 (June 28, 1989) and 34961 (November 10, 1994).
23 See: Greg Ip, "NYSE Considers Quitting the CTA, Supplier of Data," Wall St. J., April 10, 2000 at C10.
24 Today, Nasdaq distributes real-time quotation data from ECNs and market-makers over a Level 2 feed from 7:30 A.M. to 8:20 A.M., but does not make those data available to other vendors. In that way, by design, it favors its own data-distribution network and takes unfair and anti-competitive advantage of its monopoly power. That practice should be regarded for what it is, an abuse of monopoly power, and the Commission should prevent that kind of monopolistic behavior in a competitively driven system.
25 Report on S.249 at 9.