March 31, 2000
Jonathan Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-28-99
Exchange Act Release No. 42208 (Dec. 9, 1999)
Dear Mr. Katz:
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") is pleased to submit its comments in response to the above-captioned Concept Release regarding the Regulation of Market Information Fees and Revenues ("Release"). The Commission has invited public comment on a number of issues, which it has identified and categorized within four broad areas: A) a proposed form of a cost-based approach to market information fees and revenues, (B) distribution of network revenues and SRO funding, (C) Plan and SRO disclosure, and (D) Plan governance, administration and oversight.
Our guiding principle in each of these areas is that any regulatory changes considered by the Commission to the present system should be based on a demonstrable need to protect investors and should build on the strengths of the present self-regulatory system wherever possible. Any prescriptions for setting fees for real-time market prices need to be considered in relation to the impact they may have on preserving the rapid pace of innovation and an effective well funded self-regulatory structure that together make possible the broad availability of high quality price discovery information which has served the investing public well. In this light, we question the need or practicality of embarking upon a detailed cost-of-service approach.
A. The Present Relationship Among Market Information Fees, Costs and Revenues is Fair and Reasonable
The Commission is considering certain approaches, utilizing detailed cost-of-service analyses, to determine whether the total costs incurred to provide market information support a determination that the total revenues derived from market information fees are fair and reasonable. The Commission is also considering undertaking an analysis of costs in relation to market data fees to determine whether individual fees are fair and reasonable or unreasonably discriminatory when compared to other fees. At the same time, however, the Commission rejects requiring a strict mathematical calculation of costs in every case. In our view, an approach based on a detailed cost-of-service analysis may be difficult to reconcile with keeping the overall process for setting market information fees practical and flexible.
1. Total Costs
Resolving market data fee questions utilizing detailed cost-of service data and analyses could lead to a highly complicated regulatory process resembling utility type ratemaking that is at variance with the self-regulatory scheme of the Securities Exchange Act of 1934 ("Exchange Act").
Merrill Lynch believes that devising and implementing a readily administrable cost-of-service approach, that is fair and perceived as such by all segments of the industry, may be much more complex and time consuming than it might first appear. As disputes arise concerning the proper measure and calculation of relevant costs (including allocation of common costs), the Commission could find itself engaging in precisely the kind of rigid ratemaking not contemplated by Section 11A of the Exchange Act and which the Commission seeks to avoid.
A key question is defining what constitutes the proper measure of "cost" and determining the best way to calculate the total relevant costs of operating and regulating the market and of providing the technological infrastructure for gathering, processing and delivering accurate, real-time information. Cost allocation of common facilities and resources that support various functions would be necessary, although the arbitrariness of such a process would risk under-recovery of these costs.
We believe that it is inherently fair for the SROs to use market data fees to partially defray the total costs of operating and regulating the market that generates the market data. Such fees are the most democratic way of spreading the costs of operating and regulating the markets among all that benefit, directly or indirectly, from their orderly operation. There is absolutely no evidence that the present system has resulted in unfairness to users of the information. Indeed, fees have come down while the amount of real-time data being generated has grown exponentially.
The Commission has noted that the percentage of total SRO funding provided from market information fees relative to the other sources of funding "has remained remarkably consistent, despite the rapid growth in market data revenues in recent years" (Release, p. 19). We suggest that the stability of market data revenues in relation to total costs being recovered from all sources of funding is a reliable indicator that the present system is working well. Further, the investing public is protected because the Commission has the ultimate SRO oversight function.
2. Professional Subscriber Fees
The Commission also requests comments on the fairness and reasonableness of specific fees. As we stated in our letter to the Commission dated July 27, 1999 regarding the changes to the Consolidated Tape Association Plan and Consolidated Quotation Plan for Network A, which have since been approved by the Commission, we support the current enterprise arrangement for United States registered broker-dealers. This same arrangement has been put into effect for Amex, and OPRA also has an enterprise arrangement of its own as part of its fee structure. Merrill Lynch intends to work with the other market participants such as NASDAQ to encourage them to propose enterprise arrangements for the pricing of market data. We also intend to encourage the markets to move toward a uniform approach to this type of arrangement.
The use of an enterprise arrangement is consistent with the conclusions of the SIA/Arthur Andersen White Paper on Market Data Pricing (June 1999) ("White Paper"). Such an arrangement not only reduces administrative burdens but also is not unreasonably discriminatory, because the arrangement is offered neutrally to all market participants under the same terms and conditions. We believe that the enterprise fees currently in place appropriately balance the need to fund the functions that produce the data with desire on the part of market data users for unlimited access to valuable market data on a low per-usage cost basis. In return for a significant contribution to the overall costs ($6,000,000 per year per firm under the current Network A and Network B enterprise arrangements), the firms that are willing to pay this amount are freed of certain administrative burdens and restrictions in making the information available throughout their firms and to their non-professional customers. Merrill Lynch believes that the enterprise arrangement fees should be capped to avoid excessive revenues to the exchanges.
We also recommend that the exchanges be required to continue to offer other pricing options tailored to the needs of those firms whose volume of use does not warrant their spending up to the level of the enterprise arrangement. Such firms should be able to continue to pay the market data fees on a per user basis, accompanied by volume discounts as their usage increases. This approach treats all participants in a neutral fashion; although at the same time, it is flexible enough to meet the varied needs of the professional subscriber marketplace.
Each professional subscriber should have available to it the same fee structure options, including volume discounts based on the scale of usage. The options should be disclosed to all participants in a non-discriminatory manner so that they can make the best choice for their respective businesses in a timely manner. Moreover, it is a worthy objective for all pricing alternatives to seek to reduce administrative burdens on participants.
3. Retail Investor Fees
Retail investors are participating in the equity markets in increasing numbers, particularly as more investors trade on-line. They need up-to-date, accurate market data to make informed decisions. We are encouraged by the reductions in the nonprofessional subscriber service fees that have occurred to date and urge the exchanges to continue looking for further opportunities to reduce such fees. We also support the current choice of payment schemes - a per-quote fee or a flat monthly rate for unlimited quotes. However, we do not agree that any fee applicable to retail investors for on-line access to market information constitutes unreasonable discrimination against on-line investors. We believe that there is a significant difference between the value to retail investors of having instant and continuous on-line access to real time information, versus intermittent access which the investor must initiate each time through telephone calls to his or her broker. In any case, retail brokers with whom the retail investors do business are free to compete, for example, by absorbing rather than passing on these costs in return for a certain level of commitment from their retail customers or by offering attractive packages of services that include access to the real-time information via telephone or on-line for a single price.
B. Plan and SRO Disclosure
Merrill Lynch supports appropriate SRO disclosure when establishing and revising market data fees, including disclosure of the terms and conditions of the various pricing options that are available.
C. Plan Governance, Administration, and Oversight
If the Commission deems it necessary to make changes to the present Plan governance and other operating procedures, such changes should be administratively easy to implement. We also endorse the continuation of pilot programs because such experimentation allows the testing in a controlled setting of creative adaptations to changes in market and technological conditions. In keeping with this purpose, we think it is appropriate for such pilots to be introduced quickly to willing participants without the necessity of regulatory approvals or filings but should also be of limited duration, after which the program could not be continued unless it is filed with the Commission.
The present system has proven to be workable and fair. We urge that any changes considered by the Commission be structured and implemented in such a way so as to preserve the incentives for continued technological innovation and effective self-regulation that have afforded investors with greater access to accurate, real-time market information than ever before and greater protections at the same time.
We believe that the Commission should avoid imposing cost-of-service allocations and rules that by their very nature could lead, in their implementation, to cumbersome utility-type ratemaking proceedings that are contrary to the intent of Section 11A of the Exchange Act. We also recommend that the Commission preserve the various pricing options that are now available to professional subscribers on non-discriminatory terms and conditions, including the current enterprise arrangements for those users willing to contribute such significant amounts to help defray the total costs associated with the generation and delivery of accurate, real-time market data, as well as the per-user pricing arrangements that might better fit the needs of other professional subscribers.
Individual investors should have high quality, up-to-date market information to enable them to make informed investment decisions. To this end, we encourage the exchanges to continue along their path of reducing non-professional fees for real-time market data. Competition among the many providers of retail brokerage services is already robust and can also be relied upon to help keep such costs down to a minimum for individual investors.
Very truly yours,
Kenneth S. Spirer