December 22, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Attention: Mr. Jonathan G. Katz
Re: SEC File No. SR-NASD-99-65
Ladies and Gentlemen:
Bloomberg L.P. ("Bloomberg")1 appreciates the opportunity to submit its comments on the amended TRACE proposal in response to the request by the Securities and Exchange Commission (the "Commission") in Securities Exchange Act Release No. 43616 (November 24, 2000) (the "Amendment Release"). The TRACE proposal was originally submitted by the National Association of Securities Dealers, Inc. (the "NASD") through its wholly owned subsidiary, The Nasdaq Stock Market, Inc. ("Nasdaq") in Securities Exchange Act Release No. 42201 (December 3, 1999). In the Amendment Release, the NASD has filed Amendment Nos. 2 and 3 to its proposed rule change relating to the elimination of Nasdaq's Fixed Income Pricing System and the creation of a corporate bond Trade Reporting and Comparison Entry Service (referred to herein as "the TRACE proposal"). Under both the original and the amended TRACE proposal, the NASD would establish a mandatory trade reporting and dissemination facility for corporate bonds.
The TRACE Proposal. In a comment letter that we submitted to the Commission jointly with the Philadelphia Stock Exchange, Inc. (the "Phlx"), dated February 15, 2000 (the "Phlx/Bloomberg Letter"), Bloomberg opposed the original TRACE proposal because it represented a bid by a market competitor for an exclusive franchise over trade reporting in corporate debt securities. Under both the original and the amended TRACE proposals, the Commission would grant the NASD an exclusive franchise by mandating, with only limited exceptions, that all members of the NASD report their corporate bond trading data to a monopoly enterprise that the NASD would run. It would do so even though other market participants can gather and disseminate the data effectively. We pointed out that competitive market solutions to the challenge of gathering, consolidating and disseminating data in the bond market are now realistic and are likely to be achieved without involving the NASD as a monopoly operator if the Commission does not stifle such solutions by approving the TRACE proposal. Indeed, we offered just such a solution in the Phlx/Bloomberg Letter. In addition, we analyzed in detail the issues raised by the creation of a government mandated bond trade reporting utility, including monopoly rents, cross-subsidies, diminished incentives to innovation and the burden of ratemaking that the TRACE proposal would impose on the Commission.
In offering Amendment Nos. 2 and 3 to its original TRACE proposal, the NASD states that it would own and operate TRACE and exercise full ownership and operational control of the proposed facility. As part of its amended proposal, the NASD has stated in the Amendment Release that it will file an application with the Commission to become registered as an exclusive securities information processor ("ESIP") under Section 11A of the Securities Exchange Act of 1934 (the "Exchange Act"). Under its revised plan, the NASD will contract with Nasdaq to provide technology and operational support and to serve as its vendor of information processing services. The NASD argues that the proposed structure would parallel the structure used by other ESIPs under Section 11A, such as the Consolidated Tape Association and the Options Reporting Authority. In addition, the NASD plans to create a new committee, the Bond Transaction Reporting Committee ("BTRC") to advise the NASD Board on TRACE operations and decision-making. There will be eight members of the BTRC: four members will be recommended by the NASD; the other four will be recommended by The Bond Market Association. The BTRC would provide input to the NASD Board on issues related to the operation of TRACE, including future NASD proposals to phase in dissemination and the setting of fees for dissemination of real-time TRACE data to the public.
The BTRC is no substitute for a market solution to a market problem by market participants. Shifting ownership and operation of TRACE from Nasdaq to the NASD does not change the fundamental character of the original proposal. It remains a government-granted monopoly over corporate bond trading data. If anything, the amended TRACE proposal is even more far-reaching than the original proposal in that the NASD is seeking to establish a uniform debt-tape facility. The establishment of such a facility would have a significant impact on the bond market.
Unjustified burdens on competition. The Congress clearly recognized the conflicts of interest and other evils that would be present if a market center such as Nasdaq, sponsored by the NASD, were ever allowed to control, either directly or indirectly, an exclusive securities information processor and it sternly warned against such a practice:
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 necessary 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.2
Neither economics nor sound regulation dictate the formation of the NASD's proposed corporate debt tape facility. In the Phlx/Bloomberg Letter, we offered an alternative to TRACE. In proposing Amendment Nos. 2 and 3, the NASD specifically rejects our proposal, but it does so without addressing the arguments we made for a competitive solution. In place of a vigorous and considered analysis of the Phlx/Bloomberg proposal, the NASD announces in the Amendment Release that while "competition is an important goal, the NASD believes that the Commission and Congress have long recognized that in the areas of collection, consolidation, and dissemination of market data information, other factors, such as equality of access, reasonableness of fees, and sufficient system capacity and security, are equally important."
Incompatibility with Exchange Act. When the Congress was developing the Securities Acts Amendments of 1975, the U.S. Department of Justice argued that burdens on competition should not be tolerated unless they were absolutely necessary. Indeed, the Department of Justice argued that a burden on competition imposed by a rule promulgated by the Securities and Exchange Commission (the "SEC") or a self-regulatory organization rule should not be tolerated unless it represented the least anti-competitive means to the ends sought to be achieved. The SEC disagreed, arguing to the Congress that the delicate market mechanisms over which it had regulatory oversight might require the SEC to choose an approach other than the least anti-competitive one.3 The SEC's view ultimately carried the day and indeed was incorporated in the 1975 Amendments, which require of both the SEC and the NASD that burdens on competition be tolerated only if they are necessary or appropriate in furtherance of the purposes of the Exchange Act.4 That balancing task was assigned to the SEC in light of its unique and admired expertise and experience.
Indeed, when it adopted Rule 19b-4 under the Exchange Act in the wake of the 1975 Amendments, the SEC built in a requirement that self-regulatory organizations describe burdens on competition in detail and provide cogent justifications.5 Nevertheless, in the instant TRACE proposal, as in many others the NASD has submitted to the SEC in the intervening years, the NASD pays scant attention to that objective. As in prior rulemaking proceedings, the NASD has put forward, in response to the statutory requirement that burdens on competition be carefully evaluated and justified, simply what has become a standard incantation, which neither discusses burdens on competition nor informs the public on this important matter:
The NASD does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
That peremptory statement of a conclusion, unsupported by any facts or discussion, hardly comports with either the Congress's concerns about anti-competitive behavior in the securities markets or its mandate that burdens on competition be allowed only if carefully weighed and found to be consistent with the Exchange Act. The NASD's refusal to provide adequate information concerning the competitive burdens its proposal would impose deprives the public of an adequate basis to comment on the proposal and deprives the Commission of an adequate basis for determining whether to approve it.
Conclusion. The original and the amended TRACE proposals seek the establishment of a government-sponsored monopoly. If the Commission were to approve the TRACE proposal, it would be granting the NASD an exclusive franchise by mandating, with only limited exceptions, that all NASD members report their corporate bond transactions to the NASD. A proposal to establish such a monopoly raises fundamental questions about government's proper regulatory role in relation to the markets, the effects of the proposal on technological innovation and the unfair burdens that it would impose on competition. Such a far-reaching proposal requires careful and considered deliberation and the opportunity for full public comment and debate. The resulting burdens on competition are by no means adequately discussed or justified in the SEC's releases.
We urge that the Commission not grant the NASD a monopoly for providing bond trade data to the markets and the public but rather that the Commission consider the viable, and indeed preferable, alternatives offered by a competitive marketplace.
* * *
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 of the staff believe we may be of further assistance in these matters, please let us know.
Very truly yours,
By: Kevin M. Foley by RDB
Kevin M. Foley
cc (w/att.): The Hon. Arthur Levitt, Chairman
The Hon. Isaac C. Hunt, Jr., 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
Mr. Richard G. Ketchum, National Association of Securities Dealers, Inc.
Edward S. Knight, Esq., Executive Vice President and Chief Legal Officer, National Association of Securities Dealers, Inc.
Ms. Mary L. Schapiro, President, NASD Regulation, Inc.
Ms. Elisse B. Walter, Executive Vice President, NASD Regulation, Inc.
Alden S. Atkins, Esq., Senior Vice President and General Counsel, NASD Regulation, Inc.
|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||Securities Acts Amendments of 1975, Report of the Senate Comm. on Banking, Housing and Urban Affairs to Accompany S.249, S. Rep. No. 94-75, 94th Cong., 1st Sess. 11 (1975).|
|3|| Thomas E. Kauper, the then Assistant U.S. Attorney General in charge of the Antitrust Division, argued:
Proposed section (e)(5) reaches beyond the specific objectives of S.3126 to codify what this subcommittee has recognized as the prevailing law-that volitional anticompetitive rules or conduct of self-regulatory organizations are immune from antitrust attack only if they are found by an appropriate court to be necessary to make the statutory scheme of securities regulation work, and then only to the minimum extent necessary. We agree with this interpretation of the law and feel that enactment of section (e)(5) would provide a clear statutory expression of congressional intent.
Statement of Thomas E. Kauper in Hearings before the Subcomm. on Securities of the Senate Comm. on Banking, Housing and Urban Affairs on S. 3126, 93d Cong., 2d Sess. 46 (March 27, 1974) (Report on S. 3126).
Then SEC Chairman Ray Garrett, Jr. successfully countered Justice's argument as follows:
The . . . question is the weight to be given to competitive factors in fashioning the remedy, assuming that the relevant impairment [of competition] or threat of impairment has been found. In this regard, we have favored stating in the statute that the remedy of restricting trading to exchanges cannot be imposed unless exchange rules at the time do not unreasonably impair the ability of nonmember firms to solicit or effect transactions for their own account. On the other hand, we think it would seriously hamper the Commission in fashioning an effective remedy for the benefit of our securities markets if the remedy had to meet the test of being the one among all possible remedies that would produce the least anticompetitive effect. Still more would this be true if our decision under such a standard was subject to concurrence by the Attorney General.
Statement of Ray Garrett, Jr. in Hearings on S. 3126, at 18.
|4||See Section 23(a)(2) (SEC rulemaking), and Sections 6(b)(8), 15A(b)(9), 15B(b)(2)(C), and 17A(b)(3)(I) (SRO rulemaking).|
|5|| See Item 4 of SEC Form 19b-4, which provides as follows:
State whether the proposed rule change will have an impact on competition and, if so, (i) state whether the proposed rule change will impose any burden on competition or whether it will relieve any burden on, or otherwise promote, competition and (ii) specify the particular categories of persons and kinds of businesses on which any burden will be imposed and the ways in which the proposed rule change will affect them. . . . If any impact on competition is not believed to be a significant burden on competition, explain why. Explain why any burden on competition is necessary or appropriate in furtherance of the purposes of the [Exchange] Act. In providing those explanations, set forth and respond in detail to written comments as to any significant impact or burden on competition perceived by any person who has made comments on the proposed rule change to the self-regulatory organization. The statement concerning burdens on competition should be sufficiently detailed and specific to support a Commission finding that the proposed rule change does not impose any unnecessary or inappropriate burden on competition [emphasis added].