H. Pim Goodbody, Jr.
38 East Curlis Avenue
Pennington, NJ 08534
March 28, 2000
Jonathan G. Katz
Securities and Exchange Commission (SEC)
450 Fifth Street, NW
Washington, DC 20549-0609
Re: File No. S7-28-99 - Regulation of Market Information Fees and Revenues
Market Data Should Be Free!
The purpose of this letter is to encourage the Commission to think a bit more expansively or "outside the box" than its release inviting comments reflects. At a time when the very structure of the world's capital markets are undergoing the most fundamental changes, now is when related elements of the financial puzzle need to be looked at in fundamentally different ways. I hope you'll agree.
Market Data Should Be Free!
Rather than tinker with how to price market data, why not simply make it free? This is the ideal solution to most of the issues your release raises and has many advantages:
Legalisms aside, it seems to me that the logic is that market data, which is nothing more than customer orders, whether executed (trades) or unexecuted (quotes), belongs to the broker/dealer introducing the order; i.e., the ownership of market data is exceedingly fragmented and, in this sense, belongs to the securities industry as a whole, and not to any exchange. This is becoming clearer as the exchanges and ECNs multiply and is perhaps most easily seen in the developing bond market data arena. The fact that the capital markets are infested with substantial public interest makes the case for making market data freely available to the public seem logical and reasonable.
There are a couple of issues in this. First of all, in most competitive industries, no firm is entitled to any particular revenue stream just because it has one at a particular time. Thus, the argument that some how existing revenues necessarily have to get replaced sounds more like a government agency that a competitive market place. Unfortunately, there is no competition in the provision of market data to control its price. Competitive forces often drive companies to reduce their costs to survive. Secondly, there are many other ways that these fees could be replaced if the cause were an important one. For example, the SEC generates many times its actual expenditures, with the excess going into the general government revenues. These might be tapped to cover any needed revenues for regulation or whatever. Exchange transaction and/or membership fees might be used, if competitive forces allow.
Any link between market data streams and regulation is completely arbitrary, any more than listing fees fund regulation. If there were a link, presumably market data revenues would be presumed as moving to the discussed single regulator, away from the exchanges. Also, how do rebates of market data revenues reflect any regulatory aspect? The reasoning in your release to try to create some link between regulation and market data is tortured. You could, of course, create such a link going forward, but I think it would be unproductive.
Creation of a Market Data Utility
The distribution of market data is crucial to the effective operation of the U.S capital markets. Accordingly, wouldn't it be a good idea to establish a "market data utility" with the responsibility to pick up feeds from all market makers (exchanges, ECNs and firms) and distribute integrated information to all comers? This new organization, for example, could be part of or affiliated with The Depository Trust & Clearing Corporation (DTCC). Its only role would be to take the feeds from all providers and redistribute the information. DTCC would simply determine its costs and charge them out to users in some logical way, as it does for all of its services. These costs will be solely those of gathering and distributing information and, therefore, should not be very great and should not be increasing over time. This would envision all market data (e.g., bonds, equities, options, etc.) being distributed by this dedicated organization.
Scrubbing of Market Data - This is an issue not mentioned in your release that bears some attention. Apparently, all recipients of market data feeds have created software that screens the incoming stream of market data for bad information and makes certain fixes; e.g., a bad trade price would be caught and adjusted. This decentralized and little publicized activity would be better performed within the proposed market data utility, thereby assuring greater uniformity of market data distributed and perhaps some other efficiencies. The more automated the markets become, the more correct the market data distributed needs to be.
Some Fall Back Ideas
There are a number of ways that the SEC could move this whole area in the right direction without making the decision to make market data free. Here are a few thoughts on some:
Your release indicates that only 9% of market data revenues come from individual investors ("non-professionals"). Thus, it wouldn't be too much to give up and limit the source of revenues to institutional investors.
The trials of so-called "enterprise licenses" to date have not been very successful for the primary reason that they have all adopted a metric for basing charges that don't work for all firms. For example, charging by number of RRs gets into such things as: are they active sales people and are they active in the product? Several other proposals, such as FOCUS total revenues or number of customers, just don't make sense across the board and engender resistance, except by an individual firm if the specific offer saves them money. My thought would be to look to the revenues that firms generate in the involved products and charge a percentage as a market data fee; e.g., NYSE would get a percentage of the NYSE revenues a firm generates. This would at least put some link to the value of the data stream to a firm.
Presently, the exchanges have control, with only the SEC to keep their monopoly in check. A governance model more along the lines of DTCC would bring users closer to the process and give them a say in the outcomes. Presently, the only countervailing force to the exchanges is for firms to urge the SEC to get involved. The events leading to this SEC release comprise a perfect illustration of how users have little authority in the process, but rather need to agitate with the SEC to apply leverage on the exchanges. Thankfully, this has worked well thus far. However, now would seem to be the time to change this for the future.
The SEC is to be commended for its willingness to look into the whole area of market data fees and raise a number of fundamental issues. The significant changes that are underway throughout the U.S. capital markets argue for a bolder approach than that raised in your release. I hope this letter contributes to that happening.