December 16, 2002
Ladies and Gentlemen:
Bloomberg L.P.("Bloomberg")1 has begun a review of the proposed rule changes referenced above, which the New York Stock Exchange (the "NYSE") filed with the Securities and Exchange Commission (the "Commission") on October 28, 2002 to permit the display and use of quotations in stocks traded on the NYSE to show additional depth in the market for those stocks (the "Liquidity Quote Proposal"). While we reserve judgment on the substance of the Liquidity Quote Proposal until we have reviewed the proposed rule change more thoroughly, we note that the liquidity quotations the NYSE will provide to market data vendors will be governed by the same form of contract that currently governs NYSE's OpenBook ("OpenBook").
In its order approving OpenBook, the Commission approved only the fee portion of the NYSE's OpenBook proposal.2 The Commission withheld approval of the terms of the NYSE's vendor or subscriber agreements in connection with OpenBook and stated:
We believe the vendor and subscriber contracts governing NYSE's OpenBook and, by extension, those proposed to govern its liquidity quotations are themselves rule changes in that they limit access to facilities of the exchange and have a significant regulatory impact on vendors and subscribers-an impact just as significant as if the contractual obligations were formally denominated rules of the NYSE. We recommend, accordingly, that the Commission require the NYSE to amend its filing to include the contracts and that the amended NYSE filing, including the contracts, be released for public comment.
It is particularly important that the Commission act now in this regard because the Liquidity Quote Proposal extends and substantially exacerbates the harmful effects of the NYSE vendor and subscriber contracts the Commission criticized when it approved the Open Book fees. The down-stream restrictions the NYSE imposes under its vendor and subscriber contracts are inconsistent with the Exchange Act, particularly Sections 6(b)(5) and 6(b)(8), should be subject to the Commission's rule-review process under Section 19(b) and should be reformed to cure those problems.
The OpenBook/Liquidity Quote contracts constitute rule changes under Rule 19b-4 that should be included in the NYSE's filing and subject to public comment
As you know, Rule 19b-4 under the Securities Exchange Act of 1934 (the "Exchange Act") governs filings with respect to proposed rule changes by a self-regulatory organization. Rule 19b-4(b)(2) includes within proposed rule changes:
any statement made generally available to the membership of, to all participants in, or to persons having or seeking access . . . to facilities of the self-regulatory organization ("specified persons"), or to a group or category of specified persons, that establishes or changes any standard, limit, or guideline with respect to: (i) The rights, obligations, or privileges of specified persons . . . ."4
As defined in Section 3(a)(2) of the Exchange Act, the term "facility", when used with respect to an exchange:
An exchange's means of distribution of market data is thus within Section 3(a)(2) and is a facility of the exchange. In addition, the NYSE's proposed Liquidity Quotes, as "services" within the meaning of the definition of "facility", also are facilities of the exchange.
Rule 19b-4 expressly governs proposed rule changes governing access to facilities of an exchange, including "any statement" that limits access to those facilities. Rule 19b(4)(b). The NYSE's OpenBook contracts are such "statement[s]" that effectively limit access to facilities of the NYSE, by restricting downstream use of the data by vendors and subscribers, and, as a result, the contracts themselves effectively are "rules of the exchange" and should be subject to Commission review as proposed rule changes under Section 19(b) of the Exchange Act. The fact that the substance of a rule change is embedded in the terms of a contract does not mean that the Commission is without authority to require that the contract be filed with the Commission and released for comment. In fashioning the Securities Acts Amendments of 1975, the Senate emphasized the need to subject major self-regulatory organization policies to Commission and public scrutiny:
The Committee believes the Commission has a responsibility to see that self-regulatory rules are fully responsive to regulatory needs. By explicitly providing that the Commission's oversight authority encompasses major self-regulatory policies, the bill would make this responsibility clear and substantially decrease the possibility of slippage between regulatory need and self-regulatory performance.5
As the Commission stated in amending Rule 19b-4, "[t]he Commission . . . believe[s] it is important to make clear to self-regulatory organizations that they must file all significant regulatory actions for Commission review."6 The Commission added, "[t]he Commission expects that, in most instances, where a self-regulatory organization acts in such a manner as to have a significant regulatory impact on persons, the self-regulatory organization will designate the action as a `rule'."7
In view of the public purposes underlying Section 19(b) of the Exchange Act, as articulated by the Congress and interpreted by the Commission, the Commission should now conclude that the restrictions contained in the NYSE OpenBook contracts and proposed Liquidity Quote contracts should be subject to review by the Commission under the standards of Rule 19b-4.
As noted above, the Commission concluded in its order approving the NYSE's OpenBook fees that these agreements are on their face discriminatory and may raise fair access issues under the Exchange Act. We believe it is now time, in response to the NYSE's Liquidity Quote Proposal, to revisit the issues raised by NYSE agreements that will govern its proposed Liquidity Quotes and require the NYSE to amend its Liquidity Quote Proposal by designating the proposed contracts as proposed rule changes and including the OpenBook contracts in its filing with the Commission.
On the basis of the above, we would recommend further that, when the Liquidity Quote Proposal is published for comment, we hope with the vendor and subscriber contracts treated proposed rule changes, the Commission will allow a comment period longer than the minimum 21 days in view of the significant regulatory impact of these proposals.
Significance of the substantive issues
The Liquidity Quote Proposal raises substantive issues that should be considered in the Commission's evaluation of this rule filing and that go far beyond even the substantive issues that the Open Book proposal presented. The Liquidity Quote Proposal is central to the information available to investors and other traders in the market. The data and market subsidy issues, including the cross-subsidy issues Open Book presented, are presented with even greater force. The Liquidity Quote Proposal involves not just interesting information that is additive to what is otherwise available to traders, but information that, upon becoming available, will be as critical as the national best bid and offer to those wishing to submit orders. For that reason, it is particularly important that the Commission provide for a full airing of the issues, including those presented by the contracts that will be used to restrict vendors and other subscribers in their dissemination of these data.
The terms of the contracts that will govern the use and dissemination of the NYSE's proposed Liquidity Quotes will have a significant regulatory impact upon both market data vendors and subscribers by limiting their access to a facility of the NYSE. As a result, those agreements are, by their terms, proposed rule changes governed by Rule 19b-4. We believe the Commission has the authority to require the NYSE to amend its Liquidity Quote Proposal to include in its filing copies of the OpenBook contracts and proposed Liquidity Quote contracts that will govern and limit access to the NYSE's liquidity quotation data. We urge the Commission to do so and to afford the public a comment period longer than the minimum 21 days.
Fully informed public review of and comment on the NYSE's Liquidity Quote Proposal requires consideration of the agreements that would limit access to data essential to market participants.
cc: The Hon. Harvey L. Pitt