April 7, 2000
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Re: Securities Exchange Act Release No. 42208, File No. S7-28-99
Dear Mr. Katz:
Thank you for the opportunity to comment on the structure of the market information fees. This is a critical issue for the securities industry particularly in light of the greatly expanding use of real-time data and the market structure changes that will occur in coming years.
Jordan & Jordan is a management consulting, software development and search firm focused on the financial services industry. Our clients are broker dealers, exchanges and vendors of market information. We understand the value and use of market information.
Jordan & Jordan is also the staff managing office for the Financial Information Forum (FIF) - an industry organization whose participants include broker/dealers, exchanges, market data vendors, service bureaus and others. This response is not from the FIF. The FIF held a meeting on this concept release on February 1. The purpose of the meeting was to help FIF participants better understand this issue. The FIF Chairman, Leo McBlain, encouraged the participants to comment on your release. FIF itself has decided not to respond as an organization.
We do not concur with the approach described in the SEC Concept Release. We feel that the flexible cost-based process described in the document will not address the primary problems of the current structure. Further, we believe that the proposed approach will add to the administrative burden and add unnecessary costs to the industry's market data dissemination infrastructure. We should be cautious that we do not create an FCC-like structure whose usefulness has been replaced by a competitive model.
To implement the proposed flexible cost-based plan hundreds of accountants and economists will have to define and argue about what is included in the costs. The setting of base cost numbers is less than an exact science and will result in additional staff and posturing. The report talks about administrative nightmare. I believe that, if the proposed process is implemented, significant new costs will be added to the administrative burden.
Some of the reasons why we oppose this cost-based approach are as follows:
- There is no evidence that the exchanges have been indiscriminately gouging data recipients. Market data revenues as a percentage of total exchange revenues have remained relatively stable over the years. The percentage for NYSE and NASDAQ are significantly lower than similar market data percentages for the U.S. commodity exchanges.
- Market data revenue growth is not out of line when compared with the growth of the overall market. For example, Charles Schwab had a compounded revenue growth of 30% from 94-99 and 44% growth last year
- The basic market structure of the investment industry is likely to change in coming years. Will the proposed process be effective and fair in the new market structure? The SEC concept release regarding market structure recognizes the changes in the marketplace and is suggesting alternatives that will make the markets even more competitive. We do not want to burden any of these alternative structures with new regulatory processes that would have to be factored into the restructuring of the markets. We assume that any flexible cost-based justification would have to be considered for all entities providing market data into the public quotation system.
- Cost-based regulatory models generally do not encourage growth and innovation.
Some other thoughts
- The SEC should consider abolishing the Consolidated Tape Association and allowing each participant exchange to market their information products. The current process of CTA revenue allocation is questionable as to fairness and the governance of CTA is very restrictive. Perhaps CTA was a good model in the 1970s but markets have become more complex and ECNs and other new market entities should be allowed equal participation. Technologies have improved in the least two decades and the form of a consolidated National Market System should take advantage of current technologies and reflect current needs.
- The Financial Information Services Division (FISD) of the Software and Information Industry Association is working on standards for market data fee administration which are directed at making administration easier. This is an activity that should be encouraged and pursued. However, we also must be careful that such cooperation does not resulting in excluding new markets and other entities that may emerge.
- The industry has made significant progress in recent years through extraordinary cooperation on industry-wide issues. All parties - broker/dealers, exchanges and vendors have worked together to address a common cause in situations where there is no competitive issue. The extraordinary Y2K effort led by the SIA is the best example. This leadership and cooperation is continuing with decimalization. Such cooperation could be the key to developing policies and processes governing the dissemination of market data. We believe that the SIA, the New York Stock Exchange, NASD and other interested parties could create working committees that ensure that communications and education are properly addressed.
The systems for disseminating real-time market data for the U. S. markets are presently the best in the world. But we must adjust to the realities of new market participants while reducing the administrative burden on all parties. We believe that a renewed sense of commitment to that goal is needed. We must pursue the national market system goals while adapting to new market structures and new technology tools and global competition.
Thomas J. Jordan