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U.S. Securities and Exchange Commission

Division of Market Regulation:
Advisory Committee on Market Information:
Minutes of May 14, 2001 Meeting

Monday, May 14, 2001
9:00 a.m. - 5:15 p.m.

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C.

Before: Laura Unger, Acting Chairman


Mr. Michael Atkin,
Vice President, Financial Information Services Division,
Software and Information Industry Association

Ms. Kerry Baker,
Director of Market Data,
American Stock Exchange

Mr. Harold S. Bradley, (by telephone)
Senior Vice President, Investment Management,
American Century

Mr. Richard Bernard,
Group Executive Vice President,
New York Stock Exchange

Mr. Robert Colby,
Deputy Director, Division of Market Regulation, SEC

Mr. Tom Demchak,

Mr. Matthew S. DeSalvo, (by telephone)
Managing Director,
Morgan Stanley Dean Witter

Mr. Michael T. Dorsey,
Senior Vice President, General Counsel and
Secretary, Knight Trading Group

Mr. James Doughan,
Susquehanna Partners

Mr. Robert H. Forney,
President and CEO, Chicago Stock Exchange

Ms. Adena Friedman,

Mr. William R. Harts,
Managing Director, Salomon Smith Barney

Mr. David A. Hunt,
Partner, McKinsey & Company

Mr. Isaac C. Hunt, Jr.,
Commissioner, SEC

Prof. Simon Johnson
Sloan School of Management, Massachusetts
Institute of Technology

Mr. Edward J. Joyce
President and Chief Operating Officer,
Chicago Board Options Exchange

Mr. Richard Ketchum
Deputy Chairman and President,

Prof. Donald C. Langevoort
Georgetown University Law Center

Mr. Bernard L. Madoff
Bernard L. Madoff Investment Securities

Mr. Brian Mcnelis,
Vice President, Reuters America

Mr. Mark A. Minister
President and CEO, Bridge Training

Ms. Annette L. Nazareth
Director, Division of Market Regulation, SEC

Mr. Edward Nicoll
Chairman and CEO,
Datek Online Holdings

Mr. Paul O'Kelly
Chief Operating Officer,
Chicago Stock Exchange

Mr. Eric D. Roiter
Senior Vice President and General Counsel,
Fidelity Management & Research Company

Dean Joel Seligman,
Washington University School of Law

Mr. Mark Tellini,
Senior Vice President,
Charles Schwab

Ms. Laura S. Unger,
Acting Chairman, SEC

Agenda For Fifth Meeting

I.Report by Don Langevoort: General Description of Alternative Model
 A. Don Langevoort: What Technological Standards Need to be Set?
 B.Tom Demchak: SIAC Presentation
 C.Mike Atkin: Summary of Vender Survey
 D. Discussion
III.Economic Model
 A. Annette Nazareth: Summary of Display Rule and Best Execution Obligations
 B.Don Langevoort: Summary of Potential Benefits and Costs
 C.Simon Johnson: Economic Issues
 D. Discussion:
    How a Multiple Consolidator Model
           Would Work with the Display Rule
      Should the Display Rule Be Rescinded?
      Would the SEC's Role Need to Change?
           If so, how?


I.If the Display Rule is Retained, How Should Information Not Subject to the Display Rule (i.e., Deeper Data) Be Treated?
 A. What Should Be the SEC's Standard for Reviewing Fees (If Any)?
 B.Should Fee Filings Be Made with the SEC?
 C.Should Market Makers and ECNs Be Permitted To Sell Their Data Directly to Vendors and Others?
II.Other Open Issues


Morning Session

Mr. Seligman:   Let me call our meeting to order. This is the fifth meeting of the SEC Advisory Committee on Market Information. During this meeting we anticipate completing our review of equities and market information prior to the preparation and initial circulation of one or more draft reports, and I anticipate there will be more than one.

The focus of our meeting today will be on what we have referred to as multiple consolidators, and because the technological and economic issues here were particularly complex, I asked one of our committee members, Professor Don Langevoort, to chair a subcommittee to prepare the agenda for today.

The subcommittee was open to any member of this committee who wished to serve on it, and 11 members did serve. We made it a point, consistent with the Federal Advisory Act, that the subcommittee met off the record. That is, there were no transcripts prepared. Unlike everything else in the process or virtually everything else, there was a private discussion. The purpose was somewhat like an attorney work product to help prepare the discussion today, which is the official discussion on the issue.

Anyone who was a member of that subcommittee has the same right to submit any document he or she would wish for our record, and as you will see, Don Langevoort, Simon Johnson, Mike Atkin prepared various documents that have been submitted to the full committee and will be part of our record.

When I say "part of our record," I both mean the official record kept at the SEC and because we live in an age of technology, these documents will also be available through our website or through the SEC's website on the subject, as well, of course, as meeting agendas, meeting minutes, and so forth, and meeting transcripts.

Now today, let me highlight just a couple of other points. At the conclusion of our meeting I want to walk around the table and give everyone an opportunity to make final observations or remarks with respect to equities issues. This can be of enormous value to me and others who are working on the initial draft report. We are very eager not to miss anything. We are very eager to capture all of the nuances and points of view of those on the committee.

The draft report, as I mentioned, will be circulated I anticipate at some point early in June in its first version, and we'll keep going through round-robin circulation till we are comfortable we have it factually accurate and we have accurately captured everyone's views.

I don't expect that there will be total unanimity on every aspect of the report, although I am willing to be surprised, but I will make it a point to ensure that differences are effectively reflected in the report. This can either be in the text, this can be in footnotes, or in separate statements that will accompany the ultimate report.

Finally, let me remind everyone that the last meeting of the Advisory Committee will be on July 19th and my intent is that that meeting will focus on options and particularly how whatever our reports suggest would be appropriate for equities might be applied to the options side. We are all well aware there are significant differences in market information in the options context than in the equity context.

I do not anticipate forming a subcommittee in a formal sense to prepare for the options meeting, but I will have a conference call probably early in July with any who wish to participate in it, and the purpose will be somewhat like the subcommittee that Professor Langevoort chaired to focus on structuring the best agenda for our July 19th meeting.

Under the Federal Advisory Act, all of our official action must be in open public meetings and I will remind those in the audience that they will have the opportunity at the conclusion today to ask questions or make comments and any decision that is made must be by the full committee rather than by any subcommittee.

With that said, let me ask Don Langevoort to give a report on his subcommittee and then we are going to focus this morning on what emerged as the two pivotal issues, Technology and the Economic Model.

Don has expressed to me a belief that in terms of weighing the significance of the issues, he would like the technology discussion to be completed, if possible, by about 10:30 and then to leave considerable time for development of the economic model. Don?

Prof. Langevoort:   Thank you, Joel, and I do want to thank the members of the subcommittee for their participation in this extracurricular activity.

We did have, I think, a very fruitful discussion. Members of the full committee can judge whether it was productive, but I think we did more forward the discussion of what the world would look like under an alternative model of data consolidation.

I am going to try to be very brief. As Joel said, there are lots of issues to discuss. So what I am going to do is simply outline for you what the model looks like that we were working from and the move on to the way we saw the policy issues falling out.

When I say the model we were focusing on, our charge was to consider all alternatives to the current system, and we had two meetings in which to do that. What we did was simply choose what we saw as the most logical mechanism, which is to introduce a strong dose of competition into the process by which data is consolidated and distributed.

The vision we were working from was one in which there is no mandatory consortia. Each market center is free to sell its data on the terms that it could negotiate to a set of competing consolidators.

We had some discussion, as you will see, in terms of predicting how many consolidators there might be. We are not necessarily assuming that there will be many or assuming that there would be more than one.

The key in what I said is each market would be free to negotiate with one or more consolidators. Markets could choose, and one suspects that some of the secondary, nonprimary markets, would join in consortia that would work together on this, but certainly the primary markets, New York Stock Exchange, Nasdaq perhaps, others, would choose to go it alone and sell their data under terms and conditions that they set without going through the complicated governance process that we see today.

Consolidators would then take the data and package it in conformity with whatever rules and regulations prevail with respect to the consolidation process. Now I emphasize that because very early on in our discussion and indeed in some of the meetings of this full committee that were held in the fall the issue was put on the table as to whether the world of vigorous competition in the dissemination of market data should retain the display rule. That is an open question. We made no judgment.

But it is an important question, because in a world in which there is a display rule, what consolidators have to do, then the nature of the market structure is different from what that world would look like without the display rule.

So that is the outline of what the system would look like -- more than one consolidator, markets free to set the terms and conditions, of course in conformity with the prevailing regulatory structure in the dissemination of data.

As we evaluated the benefits, the risks, the costs associated with moving in that direction we broke down our discussion into two distinct parts.

First, and what I would like our discussion at this meeting to focus on first, is the technology. What does the system look like in terms of the hardware, the software, the process by which data is disseminated? Are there benefits to moving to competing consolidators in terms of that? Are there costs and risks?

We are going to have two presentations that address that, which we will turn to in a second, but that is the technology issue.

Will the system work, will it break down, or will it indeed be doable with relatively manageable sets of risks? To anticipate a little bit, and I don't want to jump ahead or abuse my position as subcommittee chair, my suggestion is what we are going to hear is that there are things you could characterize as risks but depending on your perspective about the economics, the policy issue, you are going to have a very different view of those risks.

In other words, if you think the economics point to the viability, the desirability of the move to competing consolidators, my sense is you will see these risks as manageable without significant regulatory intervention. On the other hand, if you don't think the economics suggest that we ought move in this direction the risks are going to stare you in the face, and you are going to ask yourself, "Why bother to take them?"

That is why I suggested that we have a discussion of the technology and these kinds of risks, but we don't belabor it much past 10:30. There are important issues to talk about. However, I think the economics, the underlying policy question, is the real driver here, and I do want to make sure we have enough time to get to that.

With that in mind, I would like to ask Tom Demchak to give us an overview of what the technology looks like and what risks we might face in moving to a competing consolidator model, and I hope he can do that in about 10 or 15 minutes.

Mr. Demchak:   I will try to do this within five or 10 minutes and then I will open it up for questions.

At the first subcommittee meeting, I conveyed to the participants of that subcommittee how the current CT/CQ system works and then four risks that we had identified in a competing consolidator model that I think the committee has to consider.

So what I would like to do this morning is just very briefly set the tone of how CT/CQ works and then talk about the risks, because I think you need to have that understanding of the systems.

The way CT/CQ works today is that we have got nine market centers that send the data into discrete systems located in Lower Manhattan and Lower Brooklyn supporting the Consolidated Tape System, the Consolidated Quote System. These are full tolerant platforms. The way we get the data from the market centers is we use TCP/IP protocol.

The market centers, when they are reporting their trade and quote information, package the information in what we call "packets." They send that information into the respective systems. The systems then validate the information to make sure that it's following the proper formats, that, for example, in the Consolidated Tape System we have a spread-checking capability to make sure that it is within a certain parameter from that perspective.

So once the system accepts the messages from a particular participant, we then validate it to make sure it is a valid symbol within our database. Once it is a valid symbol in the database, then we subsequently consolidate that particular message with all of the messages coming from the market centers. We do some value added calculations for our internal system in regards to what we store within our database, and we use that information for value added dissemination of information later on in the day, not with a particular trade per se.

Then we disseminate that information, the trade, to approximately about 66 direct connects that receive the data and we use a capability called IP Multicasting, so that we simultaneously distribute the data out of both of our facilities to our direct data recipients.

Now what is important about that is what we have identified as potential risks.

The first risk that we have identified is risk of sequencing. You could potentially have information get out of sequence in regards to the way we are receiving the data from each of the market centers.

Now there are three or four factors associated with out-of-sequence information. In a competing consolidator model you could have and you will have competing consolidators utilizing different routers -- in other words, communication infrastructure, different hardware platforms, and it will also be utilizing different internal software design.

Now what is important from that perspective is that in the hardware platform standpoint, when a market center sends traffic into competing consolidators -- for example, we used a Tandem environment, another competing consolidator might use a Unix system -- each of those systems service input lines differently in regards to time-slicing of information, the way they pull it off what we call the TCP/IP stack.

So you could have a situation where one market center is sending the same exact information to multiple consolidators and because of the way the operating environment is time-slicing the information and picking it off the TCP/IP stacks you could have information getting out of sequence for one consolidator versus another consolidator. Now we feel that that should be of minimal impact in regard to competing consolidators. The reason is because the way we do sequencing within the system is really on a symbol basis. That is what is important.

Once we get a message for a symbol in CTS we make sure that we guarantee the sequencing of that information going out in relationship to other messages coming in for that symbol.

Now the likelihood that in a multiple competing consolidator arena that you actually have several exchanges sending at the exact same time and the same packets the same symbols is probably very minimal, so we feel that in the processing of the time-slicing information, putting information off the stack, there should be minimal impact.

Another consideration in regard to getting information out of sequence is message-gapping. The communication infrastructure between the market centers and SIAC is a high bandwidth network and also from SIAC sending it out to the vendors is a high bandwidth network. You could have situations where either receiving a message from a market center or disseminating messages out to the vendors, the data recipients, there are gaps experienced on the lines. In other words, we either drop a message receiving it from a market center, or in sending it out to a vendor, a vendor might have a problem receiving the data.

In today's environment, utilizing the state-of-theart protocol that most competing consolidators would use, which is primarily TCP/IP protocol, the general feeling is the message gapping that might transpire is very minimal. In fact, back in 1997 we converted out outbound network from a bisynchronous point-to-point network to a router-based IP Multicasting network, and we noticed that there was a decrease in the number of message gaps that the data recipients were actually experiencing, so it is actually in today's environment a more robust environment than in previous point-to-point environments.

Mr. Demchak:   -- the third consideration could be attributable to the way a competing consolidator has actually designed their own internal software within their systems.

I had mentioned that in CTS we guarantee the sequencing of information once we get it, acknowledge it back to the market center we received it and then process it through the system.

The way CTS is designed, we actually have 73 different paths within the software structure of CTS. And that's based upon on simple distribution.

The reason we have so many different paths is because we noticed several years ago that we were getting skewing in a particular symbol.

In other words the over all system utilization would be fairly low but because of a break-out in a particular stock or industry we would all of a sudden get a high concentration of trades coming through for a particular stock like Motorola.

So in the CTS world we have the capacity of about a thousand messages a second. And we actually have designed the system to handle a hundred messages per second on a symbol basis, to handle the skewing situation. So we've set up these 73 different paths.

Now, what could happen in competing consolidator, each competing consolidator would set up their own infrastructure potentially differently so you could have out of sequencing occurring based upon the way the internal system design occurs.

So the first major risk that I've just talked about has to do with out of sequence information.

The second risk that we have identified is what we call validation tolerances. When I was describing the way CTS works, we receive the messages from a market center. We validate them. And the competing consolidator mode or model, you could have multiple consolidators validating information differently.

So we see, for example, competing consolidator might reject a message based upon the validation criteria they're using.

In addition there are a lot of calculations done -at least in the CTS system and in the consolidator quote system for the national best bid and offer, for example.

We have criteria we use for calculating that information. You could have in the competing consolidator world where one consolidator is using a different calculation for the NBBO versus another consolidator.

We use price, time and size as the priority scheme for calculating an NBBO. So that's the second consideration is dealing with the validation tolerances.

And one way to mitigate that particular concern is to set up some type of standards committee, or to set up some type of organization that would -- assuming there is a continuing requirement to have that NBBO, that would set up a standard of what that calculation would entail and other calculations in the industry.

The third major consideration in dealing with a competitive consolidator model has to do with capacity. I'm sure you're all aware of the need to have adequate capacity to accommodate the traffic growth that we've all be experiencing over the last five, 10 years.

There are many, many different factors that we look at when we're dealing with capacity implications. First off, you got the network. You have to make sure that the network we have in place can accommodate the traffic requirements. Then you also have to make sure that the communication infrastructure coming from the market centers to the consolidator is adequate enough to accommodate each market center's capacity requirements.

The third component has to deal with internal system capabilities. I mentioned in the consolidator tape system we actually have threads that allow for us to support up 100 messages per second per symbol.

You have to make sure that there's adequate capacity to accommodate not just the overall industry's requirements but a particular breakout situation that might occur.

Another consideration is how much storage you have in your system, memory, the size of your database to make sure that you can handle the number of transactions and the number of symbols that you might have to be dealing with.

All these are factors that go into the equation for determining whether there's adequate capacity in a system. If any of those factors do not have adequate capacity and the demand is greater than the supply then we're going to potentially have queuing within the system.

One way again to look at in a competitive consolidator model to make sure that there is adequate capacity is to deal with some type of standards that would be put forth, or the competitive marketplace could determine whether or not a consolidator has sufficient capacity.

Because if you find that one consolidator is queuing a lot, then the industry probably would go to another consolidator to get the information.

The fourth consideration that we had looked at in competing consolidator model is kind of -- I've already talked about it to a certain extent -- and that has to deal with protocols and data formats.

Right now we have standard discreet message structures that we use in receiving data from the market centers and disseminating the information out to the data recipients.

I mentioned we're using a network-based protocol -TCP/IP in receiving the data and a distribution network based upon in IP multicasting and distributing the data.

In a competing consolidator model there should be some minimum standard set so that we have commonality to a certain degree in the way the data is distributed.

From a data format standpoint, there could be a standards committee that could be set up to deal with how we handle basic message structures -- for example, if there's going to be an NBBO required, how that should look.

And there are very effective examples that are out there in the industry such as the fixed committee which is the financial exchange committee that deals with format structures between institutions worldwide and distributing order flow information.

They're not currently being used widely for market data information, but that is a structure that has been out there for many years.

So those are the four considerations that we felt potentially could create some risks in a competing consolidator model. And as I went through each of those considerations, the general feeling that we have is that they are manageable risks based upon whatever economic model needs to be addressed in putting forth the competing consolidator scenario.

I open it up for questions now.

Mr. Seligman:   Tom, for our record, can you identify the position you have with SIAC?

Mr. Demchak:   Sure. I'm senior vice president in charge of one of the development organizations at SIAC. I also have the national market systems responsibility under me, which is the development side of the shop and also the product planning and operational side of the shop.

Mr. Seligman:   And again just to highlight the conclusion you reached, you don't see any technological reason why a competing consolidator model isn't feasible?

Mr. Demchak:   Well, I've identified the risks associated with the competing consolidator model. We feel that those risks are manageable as long as they're well recognized in the industry and that there are certain mitigation steps taken to deal with some of those risks -for example, potentially having some type of standards committee to deal with message structure changes or deal with capacity requirements associated with what we need to process on behalf of the equity and the options marketplaces.

Mr. Seligman:   Appreciate that. Are there other questions from the committee? Yes, Bill.

Mr. Harts:   When you were talking about the sequencing and message gapping issues, I want to make sure I understand correctly. Are you saying that the quote and trade stream that you disseminate is not necessarily on a first-in, first-out basis?

Because you were sort of implying that maybe you aggregate on a per symbol basis?

Mr. Demchak:   Well, what transpires is we have connections from all nine market centers into each of our sites. We have consolidated tape system in one site, consolidated quote system in the other site. And they back each other up if we have a system or a site disaster.

The market centers, based upon the efficiency of their market systems in regards to the way they block the messages, accumulate trade and quote information from their respective trading floors.

They have a market data system that gathers that information and then they would be submitting it SIAC -separate logical line for the consolidated tape system and a different logical line for the consolidated quote system.

The way the system is structured -- I'll CTS as an example -- we use a tandem platform. The tandem platform has -- the operating system determines how it services those lines.

And it basically does it on a very quick round-robin approach.

For example, the New York Stock Exchange might have two input lines. The Cincinnati Stock Exchange one input line, the Philadelphia Stock Exchange another input line.

The system would very quickly go through those input lines and pull off the messages that have been blocked coming from the market centers and then processing them.

Once we pull them off what we call the TCP/IP stack, and we safe store them at that point, then they go through sequential processing through the system. We consolidate them and process them after we validate them to make sure it's a valid symbol and it meets the valid format criteria a market center needs to use in submitting the data to us.

Mr. Seligman:   Are there other questions?

Mr. Roiter:   Thanks, Joel. This should probably wait until Michael has presented his piece. But at some point I would like Tom to address what I see as dissonance between his conclusion that the risks appear manageable and at least the perception that I get from reviewing Michael's survey of vendors that the risks are not as Tom summarizes them.

Mr. Seligman:   Tom, have you had a chance to take a look at the written submission that Michael prepared?

Mr. Demchak:   Yes, I've read Mike's submission, the summary of the vendor. In fact, Mike had conversations with people on my staff in preparing that document.

Mr. Seligman:   I think Eric characterized in crisp fashion the basic conclusion in Michael's report. How do you respond to the kind of concerns the vendor community is articulating?

Mr. Demchak:   Well, they're very valid concerns. And I think I've articulated that we're also concerned in a competing consolidator model that those risks also exist.

You look at the way the industry is dealing with the path of dissemination of market data, once it leaves SIAC, you have -- as I've indicated -- 66 CTS direct recipients connecting to us to get the data.

They then provide the data to their end-users. We have no idea how they actually are providing the data to endusers and these risks that I've articulated probably exist in that distribution side of the equation.

In addition when you look at some of the risks I went through -- and I'll use the validation tolerance risk and the potential inconsistencies in the way calculations are done such as the such as the NBBO.

The CQS system gets all the information from the market centers and on a symbol basis generates the NBBO. We know that a lot of the market centers in receiving that feedback from us, actually regenerate their own NBBO.

And they do that based upon the root quotes that they're getting from us. And the reason they do that is for ITS purposes. They basically calculate the best quote.

Also the vendors today are calculating for every trade open, high, low, last, volume information. We don't really provide that information. We only provide it on correction messages.

So you already have a lot of the calculations being done by the vendors today. You have the market centers calculating best markets.

So if you look at potential inconsistencies in the way some of these calculations are done, they exist today. But I think there's minimal discrepancies because there is a standard that is put forth.

And that primarily from our standpoint would be our vendor specification where we tell the vendors and the data recipients how you calculate a last, what particular trade is eligible for calculation of the last, which are not.

For example, a sold condition -- that's an out of sequence trade submitted from a market center -- we do not include in the last calculation. So that's well articulated to the vendors.

We have a table in our spec that gives them an indication of how everything should be calculated. So if you have standards set up, I think it would minimize some of the risks from that standpoint.

Capacity -- that's another major concern that we're all dealing with -- I know in particular in the options world. You know, we've just made some recent upgrades to dramatically increase the options capacity.

And the data recipients are also going through a similar type of situation in upgrading the capacity to receive the data.

I know there have been situations where the some of the data recipients have been behind the eight ball in getting their capacity upgraded. And I think that's been then subsequently dealt with by their end-users in regards to whether they're happy with the service they're receiving.

Mr. Seligman:   Are there other questions from the committee?

Mr. Atkin:   Eric, I think that there's really little difference between what Tom is saying and what I've found by the vendors.

And I think Don summarized it to start this conversation. There are risks. The risks can be mitigated, but the vendors say, what's the point?

And they get a good feed from SIAC and there's no real value to them in taking multiple feeds and in mitigating those risks under the current structure of NBBO and display rule.

So I think the two-minute summary -- if you don't mind, Don -- of my report, which I think is pretty much that, that there are risks. The risks can be handled.

I think Tom did a great job in outlining what they are and how they can be handled. If it's simply a matter of continuing to do what we currently do none of the vendors thought that that was useful.

SIAC does a great job. However, the people that we talked to were all the technological feed processors -- the open question is, if you change the rules, does that have any impact on NBBO?

And I think it does. So I think the real conversation is about the economic structure -- certainly the technological risks look like they can be managed.

Mr. Seligman:   Are there other questions for Tom?

Mr. McNelis:   I don't have a question, but I would like to --

Mr. Seligman:   Sure, Brian.

Mr. McNelis:   -- a little bit on Mike said. You know representing a vendor view here, we would agree that -if the status quo is maintained in terms of the NBBO rule, there's not much point in anybody attempting to reconstitute what SIAC is doing.

But in an environment where the rules were changed, where we had other options and we had the ability to build different business models, this might well be a factor.

And certainly Reuters feels that we would be able to deal with these technological issues.

Mr. Seligman:   Let me just ask everyone who speaks to identify themselves when they begin speaking. I noticed our reporter scrambling madly to keep up with, if you will, the traffic flow here.

Ms. Nazareth:   And also for the telephone --

Mr. Seligman:   Forgive me, I didn't realize that.

Ms. Nazareth:   Yes.

Mr. Seligman:   Who are the two people on the phone?

Ms. Nazareth:   Harold Bradley and Matt DeSalvo.

Mr. Seligman:   Is it possible for me to confirm they're here? Harold, are you here?

Mr. Bradley:   I am here, thank you.

Mr. Seligman:   Matt?

Ms. Nazareth:   One out of two.

Mr. Seligman:   All right, well, that's not bad.

Ms. Nazareth:   So anyway it's helpful for Harold if we identify ourselves, as well.

Mr. Seligman:   Okay. Are there other questions for Tom? Other statements? Tom, thank you. I would really be grateful if you can stay near us for the technological discussion.

Mr. Demchak:   Okay, thank you.

Mr. Seligman:   Mike, do you want to go beyond the summary you've just made?

Mr. Atkin:   Not necessarily. I think my report is pretty much submitted for the record and if there are any questions, I would be more than happy to take them. But I think the conclusion is pretty much as I just stated.

Mr. Seligman:   Are there questions for Mike? In other words, as I understand what you're saying, you agree with Tom that it's technologically feasible to operate in a multiple consolidator system.

At least a consensus of vendors you spoke to are skeptical that it economically makes sense to move to that system.

But in terms of can we technologically do it, you're basically saying you agree with Tom that it is feasible?

Mr. Atkin:   Absolutely, except skeptical that it makes economic sense given our current structure. If the structure has changed, the game will change.

Mr. Bradley:   Can I ask a naive question?

Mr. Seligman:   Now, you have to start by identifying yourself.

Mr. Bradley:   Harold Bradley. And I guess, the question I have is, as I listen to the vendors' main concern, isn't their business model basically to pay what is charged by the central vendor and then mark it up to the users? And that's the business model? So it's kind of immaterial what the cost of the information is.

Mr. Atkin:   I think there might be two or three things in that. One is the cost of the data, second is the cost of processing the data. Then third is do the vendors just pass on any of those two costs to their customers. Is that right, Harold?

Mr. Bradley:   That's correct, Mike.

Mr. Atkin:   I'll let the vendors speak for themselves.

Mr. Bradley:   I mean, that would certainly speak to their -- any interest in changing the model if cost is not an issue for them, as it is for us.

Mr. Seligman:   Okay. Let's start with Brian and then I saw Simon.

Mr. McNelis:   Okay. I'm Brian McNelis from Reuters. Our issue is not so much with the cost of obtaining the data, but the cost of distributing the data. If we're locked into a one-size-fits-all distribution model, we can't effectively serve our customers. Customers have different requirements. Some need the tradable data, if you will, and some do not. We would like to have the flexibility to distribute on a different set of rules.

Mr. Seligman:   I think I saw Simon.

Prof. Johnson:   Mike, I'd like to ask about something in the summary of your report which I did not quite understand. I thought the report otherwise was very clear and very helpful. You say two things. In the first paragraph you say, "Their biggest concern is the inability of assisting in multiple consolidators to prevent price inconsistencies and distortions."

And then you say in the next paragraph, "If the existing NBBO regime would have changed, certain vendors believe that not only would data quality consideration be vindicated," and then either one. I don't understand why removing the NBBO requirement would eliminate or reduce this data quality considerations, assuming that you're trying to produce, you know, unified non-fragmented market information.

Mr. Atkin:   I'm not sure if that's a given, Simon. I think the question is if you are getting data from many places to produce the same NBBO, vendors thought there was a potential for that calculation to be different. If that criteria is eliminated, then you don't have the problem any longer.

Prof. Johnson:   So let me see if I understand correctly. The problem then is producing a unified coherent across-all-consolidators information. That may be tricky.

Mr. Atkin:   Consistent price across all distributors.

Prof. Johnson:   So, in other words what the vendors are thinking tell me if this is a correct understanding is that if the NBBO regime were ended or it wasn't such a requirement you would necessarily get some fragmentation of the market information. And that's kind of what they're -- their working assumption, if you like, for what you think the data picture would look like. And that then has implications for, you know, their not being concerned about their quality and so on.

Mr. Atkin:   Well, I mean I believe that all vendors or think that the inconsistencies in NBBO could be mitigated. I think tom laid out the fact that they could. So certainly everybody would be concerned with having consistent data disseminated. In the current structure, it really just seemed not worth the trouble. So I think the point was if the structure changes it is worth the trouble because you can do other things and I think the other things are what you combine the data with, what kind of data you provide to your customers, what kind of added value data you can disseminate with it. I think Tom laid out that there is lots of data that is useful that is not disseminated by SIAC that vendors or other consolidators could combine together and send to their customers.

Mr. Seligman:   Eric?

Mr. Roiter:   Thank you. I just want to make sure I'm clear on this. I think I am. If two or more multiple consolidators decided, "You know what? Even though I'm not required to provide a consolidation of all market center data, I am choosing to do so and I am choosing to provide the same consolidated data as would be required if the NBBO rule was retained.

Am I correct to understand that the vendors in that situation would say that the risks associated, the technological risks associated with that are manageable?

Mr. Atkin:   Let me make sure I understand your question. Multiple consolidators try and deliver a consistent NBBO quote. Right?

Mr. Roiter:   Yes.

Mr. Atkin:   There is concern that that is difficult to do because of network issues, capacity issues, sequencing and routing. I think SIAC's assurance that that stuff could be mitigated is pretty good. The vendors also thought it could be mitigated; but it carries with it a cost of managing that and they didn't see the value in doing that.

Mr. Roiter:   I'm sorry. I hate to belabor this, but for those who might feel that the preferable approach would be to allow for multiple consolidators, but to retain the vendor display rule, this is a crucial question. And that is is it technologically feasible and are the technological risks manageable to go to a model of multiple consolidators where the vendor display rule is retained?

It seems to me that these issues of sequencing and validation are going to exist in an environment where you don't have a vendor display requirement if two or more consolidators choose to consolidate. And it need not necessarily be consolidate all markets, but at least a group of markets. You're still going to have sequencing questions. You're still going to have validation questions. And I for one see an inconsistency in the responses that vendors have given depending on whether the vendors display rule is retained or not.

Mr. Atkin:   Well, Eric, I think the answer to that is, yes, those risks -- the answer is there are risks. Whether those risks can be mitigated or not is an open question. I think SIAC says their evaluation is for areas of risks. All can be mitigated, but require standards, coordination, and work.

So I think that's the point. That, yes -- yes, there are risks. The general assumption is those risks can be mitigated. But what is the value in doing that if you have a, you know, a continuation of the existing regime?

Mr. Seligman:   I think I see Ed.

Mr. Nicoll:   Ed Nicoll from Datek. As I remember, there was a discussion at the committee level when I was there to the extent of how much SIAC's sequencing now actually reflects the order that the trades, you know, were executed at in the first place. I mean we have -- since we have the single source and since that single source sequence is the trades, we have sequencing by fiat more than we necessarily have sequencing that reflects the actual order of the transactions.

As I remember, in fact, is it not true that the exchanges, themselves, don't sequence the orders. They're basically reported in the order that they're received by SIAC. Is that correct?

Mr. Seligman:   Let me allow Tom Demchak to join us for this part of the discussion and respond to your question.

Mr. Demchak:   That's correct. That was the discussion we had, that the nine market centers accumulate the data within their own environment however they do that. When I went through my evaluation here, I mentioned about sold conditions. There is a requirement, for example, in the CTA plan that if a trade is reported, 90 seconds or more than you have to denote it as the condition in sending it to SIAC.

Now in regard to the actual point of execution or the issuance of the quote and the gather of information on the floor and issuing the quote. From a consolidator's standpoint, we don't know when that occurs. We do have a time stamp of when we received the information from the market center. And that's when their market data system basically transmitted it to us.

What happened south of their market data systems down to their point of sale and the actual trading floor environment, the activity that goes on there, we have no indication or understanding of when the actual execution or generation of the quote occurred.

Mr. Nicoll:   So, if I could just -- one of the issues, the real world issues here is that, you know, professionals use the time stamp that you put on a transaction as the time when the transaction actually occurred. It was commonly thought that that is, in fact, the time when the transaction occurred. It's important.

Mr. Demchak:   The time stamp that we generate on our trade line and quote line is the time stamp at point of dissemination. So we have already received the information from the nine market centers. We have gone through the validation exercises. We have gone through all of our internal processing. We've consolidated information and now we're putting it out on the outbound dissemination network. And that is at the point in time we add the time stamp. That is clearly defined in our specifications that the time stamp on all of our records is at point of dissemination not reflective of either the input time stamp received from the market center or the actual time that it occurred on the market center's floor.

Mr. Atkin:   And the queuing you're talking about is the input queuing; right?

Mr. Demchak:   Yes.

Mr. Nicoll:   Okay. I hate to belabor this point, but there is something commonly referred to as sort of time in sales. People go back to the time in sales and they look at the time that an execution occurred. When they're looking at that time, is that not the time stamp of SIAC?

Mr. Demchak:   That could be one of two time stamps. We put the CT/CQ dissemination time on our outbound records I think it was about six or seven years ago. And that was actually at the request of the ITS Operating Committee. Prior to that, we did not have a time stamp. We worked with the vendors, once we introduced that time stamp to get them to start utilizing our time stamp. We don't really know which time stamp they're utilizing. It could either be our time stamp or their own internal time stamp of when they received the message, when maybe they put it out to their end users -- you know, I'm sure that each day the recipient is using a different time stamp reflective of what they feel is appropriate to provide to their end users.

Mr. Nicoll:   Okay. I just think that this is an important point. So, in fact, what we commonly refer and what investors commonly see as time in sales is either SIAC's time stamps or another layer in between them and the time the transaction actually occurred, which would be the vendor's time that they received. That or the vendor's time that they actually sequenced the transaction and put a time next to the transaction.

Mr. Demchak:   That is correct.

Mr. Nicoll:   Is that what you're saying?

Mr. Demchak:   That is correct.

Mr. Nicoll:   And so that up until today for a long period of time -- and it is generally well known by professionals that there is a certain difference between when the trade actually occurred and when these times -- and the times that are on these time stamps, so that we tolerate a certain level of uncertainty on a daily basis even with a single consolidator at this point.

Mr. Demchak:   Correct.

Mr. Nicoll:   Thank you.

Mr. Seligman:   I want to turn to Bill Harts, but let me just make one more follow-up to Ed's line of inquiry. What is your sense of the time intervals between input and when you disseminate data and when a vendor might post a time stamp on it? Are we talking about seconds or are we talking about minutes?

Mr. Demchak:   In the consolidated tape system based upon some recent measurements that I had done prior to this meeting, our internal dwell time -- and that's from the point in time we receive the message to the time we disseminate it averages anywhere between a second and a second-and-a-half. That's our internal system dwell time.

Now, I cannot give any indication of what the requirements are from a market center standpoint of how long it takes them to actually gather the information, the execution report, submit it into their system and then the internal dwell time within their system, I don't know that. Nor do I know what the vendor's dwell time is. The only thing I can tell you is the internal SIAC system time.

Mr. Seligman:   I would be grateful if you would submit a brief memo reflecting that.

I actually think Bob was before Bill.

Mr. Colby:   I just had two technical questions. Bob Colby. Tom, first question is what do you do to prevent any sort of systematic biases with respect to sequencing when you get the order from different markets?

And the second is what reason would a vendor have to put a separate time stamp and to resequence the data once they receive it from you?

Mr. Demchak:   Well, I'll deal with the second question first. This is really an intuitive comment on my part. There could be some concerns on the data recipient end if they use our time stamp. It could give their end users an indication of the dwell time within their own systems for processing.

So, for example, if we're putting a time stamp at 11:00 and they use our time stamp, and by the time it actually gets displayed in the end user's terminal, it could be 11:00 in 5 seconds or 8 seconds. And, in fact, one of the reasons the ITS Committee back I believe it was about five years ago asked us to put time stamps on the records is because several of the market centers were using multiple vendors on their floors and they were finding a lot of inconsistencies between the time stamps that the vendors were putting on their time in sale messages for research purposes for ITS trade-throughs. And that was the genesis of this TC/CQ time stamp.

Bob, can you repeat the first question?

Mr. Colby:   How do you manage to make sure there's no bias on incoming flows?

Mr. Demchak:   Oh, bias. Okay. We have for the consolidated tape system and the consolidated system dedicated input lines from the nine market centers. Those are basically high band width T1 lines coming into us or T3 lines in regards to the size of the pipe.

For each of those particular lines, the market centers assign what we call logical circuits. So, for example, you might have one physical pipe supporting the traffic from one of the exchanges and then they would assign logical circuits within that pipe for trade information, for quote information and then some of the options exchanges also use that pipe to send the options data to SIAC.

So we are receiving all of the market centers information through these pipes. They link up to our communication infrastructure network and then subsequently that network hooks up to the respective systems at SIAC, whether it's the consolidated tape system, consolidated quote system or the options systems, options price reporting authority system.

Let me use CTS as an example. We've got the nine market centers sending data into us. They block those messages in what we call 1000-block bite messages. The Tandem Operating System which just happens to be the hardware for the system that we utilize determines, based upon some time slicing of how it pulls information off of each of those input lines from the nine market centers when there is traffic being sent.

The protocol determines whether there is traffic to be serviced or not. So we just basically pull the information off on a very quick round-robin basis. And that just happens to be the way the Tandem Operating System structures it.

Once we get the information then we would -- what we define as a safe-storing routine, to make sure that we have the information, we acknowledge the information back to the market center. Once we safe-store that information, then it is sequenced throughout the rest of the system with every other market center's information, because we safe-store all the information, basically simultaneously as we pull them off the stacks. And then we process them on a symbol basis through the system based upon the respective threads that we have established in the system. And then those threads are affiliated with outbound what we call IPA logical groups going out based upon letters of the alphabet. So, we use the first letter of the alphabet as a range determination for the dissemination of data. And that's how we guarantee sequence. It's on a message-by-message basis from the market center.

Mr. Seligman:   Bill?

Mr. Demchak:   Did that answer your question?

Mr. Colby:   Okay.

Mr. Seligman:   Bill Harts?

Mr. Harts:   Bill Harts. Thank you. Bill Harts, Salomon Smith Barney. Actually, as I'm sitting here listening I suspect I'm not the only one thinking that maybe a regulatory change that we should recommend is that the exchanges transmit the actual time of execution to SIAC which could then possibly pass them on to the vendors and ultimately to the users. I mean, you know, some kind of synchronization with the Naval Observatory or something like that as we do today for ticket stamps on every trading floor.

But the other thing is, as I was listening to you earlier about this sequencing problem, I think I'm sort of coming from the same place as Ed Nicoll that I was concerned that if we have a system of multiple consolidators that possibly, in your words, we could mitigate the risk of essentially having different NBBOs at the same time from different consolidators. However, based on what you're saying, I don't think there's ever going to be a way that we could eliminate that entirely. I think we're basically -- by saying this we are accepting the fact that there will be different NBBOs at the same time.

Mr. Demchak:   Yes, I definitely agree with that. As I've indicated, I think that the way we do the process, it's on a symbol basis and there definitely still though is a potential risk here where you could have in the NBBO calculation, we might be pulling off a message and IBM from the Boston Stock Exchange and another message from the New York Stock Exchange as one consolidator in that sequence and another consolidator can be doing the reverse based upon the way their system happens to be servicing those lines. And, at first, I thought that that would be unacceptable.

And then I started thinking that, well, maybe we're not sequencing by fiat now, but it certainly seems that we are frequency by the rims of the designer of the Tandem Multi-tasking algorithm. And I would almost guarantee that the designer of UNIX's multi-algorithm would have a different idea as would Microsoft's and TD designer and so on. And possibly, in a competing consolidator environment, maybe one consolidator would want to place more emphasis on a particular market center. Maybe the primary should get more processing resources. Maybe they're generating more quotes or more trades or so on.

Mr. Demchak:   Well, actually, the way the system is set up today is, we have both on the in-bound side and outbound side, throttles where we control the data to make sure that one market center does not flood the system.

With today's open network technology, you might have a system problem on the market centers, then, and they can flood the system.

So we've actually, at the direction of CTA, put in what we define as a dynamic throttle on the inbound side, and currently those throttles are set based upon the last capacity planning process that CTA went through several years ago which, because of DOJ considerations, is no longer being followed, but it does allow a market center to go above their level of capacity and then, if any of the market centers are experiencing, or the system is experiencing queuing, we then throttle everyone back to their approved capacity levels.

So there are mechanisms that could be put in place to manage the traffic flow in a system, and then also on the outbound side, we have throttles to make sure that we send out the traffic at the agreed-upon maximum capacity level, because again, we can flood the vendors based upon several factors.

For example, if we're having a system problem independent of what the capacity of the system is, we can be queuing a lot of information up on our end and then, once we resolve that problem, we could flood the vendors a lot higher than what we've actually indicated the capacity requirements are.

So we build throttles on both ends of the systems, CT and CQ, to kind of control some of that traffic allocation and to make sure that there is adequate capacity for everyone, based upon what they've given to us as their requirements.

Mr. Seligman:   Are there other questions for Tom?

Mr. Demchak:   Did that answer your question?

Mr. Harts:   Yes.

Mr. Seligman:   Mark?

Mr. Minister:   Yeah, and I think -- Mark Minister -- I think I'll pick up where Ed and Bill were going, a little bit.

Thirty minutes ago, I would guess, if we put all the major market vendors' equipment here and picked five stocks and froze them -- I picked 30 minutes ago because the market is more active in that first 20 minutes -- we would have seen different last sales, different NBBOs, different highs, lows, VWOPS, for certain, on every one of them today, with a single consolidator.

We do this all the time. We know that. We would see different time stamps. Some people would lose sequences.

I can only envision that with multiple consolidators, it multiplies this problem, even more so, so that even with the elimination of an NBBO, you're still going to have market data discrepancies magnified by the number of increased consolidators.

So I guess I'm an acceptor of the system with its weaknesses. We use tandems, too, so we're more comfortable in our order processing.

So I guess that's more of a statement than a comment.

Mr. Seligman:   Appreciate the statement. Are there other statements, questions, or comments?

Mr. Roiter:   I actually thought Mark was going in the opposite direction.

Mr. Seligman:   This is Eric Roiter.

Mr. Roiter:   This is Eric Roiter, Fidelity. I thought you were going to say, "Well, we tolerate a little bit of discrepancy now, so if multiple consolidators just introduced an incrementally greater degree of modest discrepancy, then we could tolerate that as well."

I think the real challenge is to try to quantify the amount of discrepancy.

To me, it's comforting to know that the markets operate as effectively as they do with a modicum of deviation using a single consolidator, so it's no -- it doesn't persuade me at all to be against multiple consolidators, simply to observe that there may be some degree of greater discrepancy.

I have to know how much greater and at what level do we reach a threshold of intolerable discrepancy.

Mr. Seligman:   I see Bernie.

Mr. Madoff:   Yeah. Well, I'm -- the more I listen to this conversation, the more concerned I'm getting about these inconsistencies of the information.

We're going into an environment almost immediately where firms' livelihood and market centers' livelihoods are going to be determined by the statistics that they put out as to how trades are executed, from both speed as to general quality of these trades.

I'm not suggesting at all that any market center is going to knowingly, you know, do anything to improve the statistics.

However, I think the information that we're all going to be dealing with, it's going to be more important than ever that this information can be relied upon and can be accurate.

Quite frankly, I think that a lot is going to be determined just by one second, the difference between one market center's execution and another.

So from my standpoint, I think it's more important than ever that these inconsistencies be eliminated, if at all possible, and I don't know that that's possible, but certainly, I don't want to see -- I don't want to go into an environment where there's going to be more inconsistencies.

I think that some of us are hearing this for the -you know, a little bit trouble information here -- for the first time, quite frankly.

It never really was a problem when everybody was sort of dealing with the same statistics, so, you know -- but now, you're talking about a whole different environment, and I'm not sure that I understand it all, what the consequences are, but I will tell you that I'm not -- I'm leaving this conversation somewhat more uncomfortable than I came in.

Mr. Seligman:   Let me address that at two separate levels, and I think I want to speak to Tom a little more.

In the midst of an answer a few minutes ago, you referred to DOJ considerations, which I presume means Antitrust Division, and you suggested that they may, in some respect, have made it more difficult to collectively address practical problems.

Can you please amplify that a little bit? What are the DOJ considerations you were referring to?

Mr. Demchak:   Approximately three years ago, primarily as a result of the 1997 movement to 16ths, where there were some queuing situations in the consolidated quote feed, and that was primarily because of transitional situation in moving from a bisynchronous technology to IP multicasting technology for the data recipients.

The Consolidated Tape Association and the Options Price Reporting Authority working with the Commission moved forward with putting a capacity planning process in place. They retained Stanford Research Institute, SRI, to help facilitate that process.

That process has been followed for the last three to four years. As a result of some recent direction that we've received from the Options Price Reporting Authority and CTA, it's our understanding that they are no longer pursuing that process, and in fact, OPRA is re-looking at their whole process of how they do capacity planning.

There was a point in time, for example, when the process was first developed that the market centers were allowed to look at each other's projections for the next couple of years, as they went through the evaluation on the options side, associated with the DOJ considerations. The message came across very clearly that they could no longer share projections with each other.

So as a result, the CTA, for the last year or so, has put on hold any capacity planning process and the Options Price Reporting Authority, I believe in response to a recent SEC order, is re-looking at their whole capacity planning process and their whole structure of how they do things.

So from SIAC's standpoint, it's made the capacity planning process extremely difficult. We're still using about a year-and-a-half-old projections.

Luckily, in regard to where we've configured the system versus the peaks we've experienced, we've only experienced peaks of about 40 percent on CT and CQ of where actually capacity numbers are, and in fact, we're going to be increasing some of the capacity of those systems anyway, and OPRA has authorized us, independent of what the estimates are from a projection standpoint, to do very dramatic increases on the OPRA capacity.

In fact, we're going to be later this year doubling the current capacity of OPRA from 24 to almost 48,000 messages a second.

Mr. Seligman:   Let me pursue this a bit. A re the areas where you have stopped going forward with efforts areas which would eventuate in a filing with the Commission, whether it's in the form of a plan or an amendment to some existing plan?

Mr. Demchak:   I don't know if I can really speak to that as the processor. That's really more the OPRA policy and CTA exchanges pertaining to that. I mean, we're not really --

Mr. Seligman:   Well, let me ask Bob.

Mr. Colby:   I didn't want to address that question directly.

What I wanted to say was that the DOJ order, one of the orders that came out of the options case, said that they -- that the options markets needed to stop sharing capacity planning information directly, but it left open the ability to use an agent to collect it, and use that as capacity planning, without distributing each market's individual capacity planning estimates to all the other markets.

Mr. Seligman:   All right. My assumption is, having read a fair number of antitrust cases dealing with the implied immunity for securities and options markets, that there are ways, as Director Nazareth has suggested, where you can address this.

Mr. Demchak:   The only point I was making, over the last year or so, it has made -- we have not been getting projections from the exchanges pertaining to what we should be configuring the systems for, and I know that, at least in the options world, they're looking to address that.

Mr. Seligman:   Rick?

Mr. Bernard:   Rich Bernard, if this is an intelligent comment, and it's Bob Britz it's a dumb comment. (Laughter.)

Mr. Seligman:   Let the record reflect it's Rich Bernard initially.

Mr. Bernard:   If I can try to put what Tom was saying together with what Bob was saying -- and this is simplifying a lot, and competing consolidators doesn't change this problem, I should point out -- the issue in the options case was an allegation that brought through to the Department of Justice settlement that capacity decisions made by OPRA had the effect of chilling competition among the markets.

In effect, they capped the system so people couldn't, who wanted to add new classes, couldn't do it.

The problem that Tom is talking about is that if Tom or any competing consolidator can have the shared wisdom of the consortium in thinking through capacity issues, that allows a more careful capacity design program.

What the import of that order is, is that you can't get the markets talking to each other to come to seem like a sensible capacity decision, and so the burden now shifts to SIAC or anybody independent, or any competing consolidator, to talk one-on-one to each of the markets.

The net result of that is to force more capacity, probably, when you get it all done, being built into the system because you have to -- you're doing more guessing, because you don't have the synthesis of the markets talking to whether, because what was really happening is, to no one's surprise, was that the primary markets would make, you know, capacity -- provide capacity information because they had more complex models, and then basically, the regionals would tend to just kind of, you know, put in their pro rate capacity projections.

So that's the problem that's been caused.

Mr. Seligman:   Thank you, Rich, and that was a comment which I think should go out under your name.

Let me return back to Tom, and I want to follow up on Bernie's last statement and on Bill Harts' last statement.

We are moving towards a report that will probably be bimodal in nature, that will both focus on what improvements we would recommend if we keep the NBBO and a unitary consolidator, and what improvements or recommendations, I should say, we would propose if we moved to a multiple consolidator system.

Most of today's discussion is going to be with respect to multiple consolidators, but I want to focus on our other prong, if you will.

I would like Tom to prepare for us a memorandum which would address how we can move to reducing some of the temporal and other discrepancies he suggested exist and Ed, I think, rather eloquently brought out exist.

Bill suggested a time stamp -- I suspect it would be at the time of input rather than dissemination -- might be a means.

I'm not going to pretend to have the technical comprehension of the system at the level that Tom does, but there may be other similar issues he would want to put on the table for us that would, I think, enrich our record, and I would be grateful if, within the next couple of weeks, it would be possible for you to forward that memorandum to us.

I now have Mike Dorsey.

Mr. Dorsey:   Mike Dorsey, Knight Trade Group. I just wanted to follow up on what Bernie said. Bernie came at it from more of a business side, but these inconsistencies affect the disciplinary side, as well.

We have seen NESDR reports inconsistent with vendor-type information, where their report, of course, is the cornerstone of their disciplinary actions.

Right now, there's a kind of a controversy brewing in their best execution reports, but we know it's pervasive. It goes through all the reports that they generate.

Mr. Seligman:   Let me at this point see if I can make some generalizations and see how the committee feels about them.

Number one, I would infer, from a series of comments, if we stayed within the current model, which is an NBBO model unitary consolidator, the committee would favor moving as effectively as possible to eliminate these kind of temporal discrepancies.

Does anyone disagree with that?

(No response.)

Mr. Seligman:   Okay. So I take it there's consensus on that.

Number two -- and this is based both on the statements that have been made to us today and on the written submissions -- I take it that, as far as technology goes, there is a general belief that there are risks and costs associated with moving to a multiple consolidator model, but nonetheless, such a model is technologically feasible.

Does anyone have disagreement with that? That is, there would be collective action issues, there would have to be ways in which you could have effective conversation without running into DOJ-type problems, there would need to be certain standardization by one means or another.

But with those kind of understandings, which I think were very well suggested by Mike and Tom's oral statements and written statements, does everyone at the table agree that moving to a multiple consolidator system would be technologically feasible?

I see Ed Joyce here, and this is in the equity context.

Mr. Joyce:   Yes. It sounds to me that it would be acceptable and do-able with that level of tolerance, I guess was the word, possibly expanding, as you go to it, that on one hand, you introduce the notion that we would have to reduce the tolerance that's in the current system, and as I've understood what I've heard this morning, is extending to a multiple consolidator, would expand that tolerance among market centers.

Mr. Seligman:   All right. I see Rich.

Mr. Bernard:   Just to put something in perspective, although we don't see it, except in the way Michael was talking about, the issues of time sequence are far more profound within the market centers than they ever are going to be at the consolidation level or at the vendor level.j

Secondly, in the competing consolidator environment, where I at least think we're talking about a handful of competing consolidators, the issues of managing these risks are simpler than when you move either back up the chain to the markets or back down the chain to the 1400, ultimately, vendors and brokers who are disseminating data.

So while these are real issues, it's an easier problem because the number of players that would be involved is really quite small, in my prediction.

Mr. Seligman:   Rich, let me move you down the time sequence of the chain, if you will.

Bill has suggested that one approach that might deal with some of the apparent discrepancies in NBBO would be time stamp at point of input to the consolidator.

Could we have time stamp at the point of the transaction?

Mr. Bernard:   Well, that's easier the more electronic the exchange is, but when you get to a dispersed market like NASDAQ, time stamping, sequence, last sale rules, sold sales are far more profound issues, because the actual trade is taking place at a trading desk.

And then, I'm talking about ex-facility execution, a NASDAQ is moving toward, but when you're talking about upstairs trades, we have no idea what the delays could be from the moment a trading decision is taken by Bernie or Michael's time, and the moment it's actually input in the trade reporting.

So as I say, the more electronic the market is, the easier it is to get market center time stamps.

Mr. Seligman:   Let me ask you, Adena, do you agree with that?

Ms. Friedman:   I would agree that the more electronic the trade is, the faster we get the execution in there, the faster we get the trade reporter.

And the fact that we do have a dispersed market model and you have some manual trades and some electronic trades. And what we receive is a time stamp based on the time the trade is sent into us.

And I do believe that that is the case, that it becomes more difficult where you have different models all functioning within the same market.

But we are becoming more electronic, just like every other market. So that issue is lessening over time.

Mr. Seligman:   All right, Bill, another comment?

Mr. Harts:   No, my point was that, we'll never get perfect time information for all the reasons that people have said here. I think that the problem tends to actually be exacerbated on floor-based exchanges rather than upstairs because in upstairs trades at least there is an extremely accurate time stamp placed on that trade.

The problem here is that that information is never making its way out to the end-user. It's sitting in Nasdaq's computer or the New York Stock Exchange's computer, or wherever.

Mr. Seligman:   All right, we have Mark Tellini, who is representing Schwab today.

Mr. Tellini:   I just wanted to reiterate that in the Nasdaq market, we synchronize our clocks to Nasdaq daily -- 97 percent of our trades are electronic.

So from that perspective it would appear that those Nasdaq trades are at least more synchronized than the floorbased environment.

Mr. Seligman:   Okay. Well, I think we've addressed the technology. We'll have some further document input. We all appreciate that this is a process where the consequence of our efforts will ultimately be reflected in a report.

And the report can reflect documents that arrive after this meeting. We'll all get potentially several efforts to comment, modify, address the report.

Let's take at this point a 15-minute break until 10 to 11:00, when we will start promptly. And then we'll focus on the economic model.

(A short recess was taken.)

Mr. Seligman:   We want now to focus on the economic models that were considered by the sub-committee with respect to multiple consolidators. Let me turn to Don Langevoort to set this issue up.

Prof. Langevoort:   Yeah, as I said before the economics are probably the driver in the ultimate policy question here. And our discussion within sub-committee broke down into two separate parts -- what do the economics look like if you move to a competing consolidator model but retain the display rule?

And secondly, what do the economics look like if you move to a competing consolidator model and also rescind or substantially modify the display rule?

The benefits that come from moving to a competing consolidator model are fairly standard and obvious. Whereas today we have one for a small set of monopoly consolidators, you would have competing consolidators who would have a marketplace incentive to deliver a state of the art product and succeed in the marketplace based on the quality of their consolidation work.

Therefore, you would hope that innovation would occur more rapidly and product development -- quality of product development would follow.

In addition, there would be benefits that would come from dismantling the consortia. And again, I have to be careful what dismantling the consortia means.

But remember my initial description of the model, it's one where the market centers at least have the freedom to negotiate their own contracts for data dissemination and set their prices. They will be in competition in the market dissemination business. Rewards will go to the markets that succeed. Cross-subsidization, which is possibly a part of what we face today as a result of the consortia, would disappear.

So those are the benefits even within the framework of keeping the display rule.

Should you abandon the display rule, then product innovation, vigorous competition will occur much more aggressively because the vendors can design and market their products without having to conform to a mandatory display.

Market demand will determine what is delivered to investors as opposed to regulatory initiative.

Down sides. Obviously if the display rule is maintained and you have multiple consolidators and markets setting their own prices, you're essentially saying to the consolidator you have to buy each of the markets' data.

And there is a pricing power that comes with that. We had a long discussion in the committee -- not so much as to whether there is that pricing power, but whether it's likely to be abused.

The market centers are constrained by their governance structure, representation on their boards, they are constrained by the fact that they compete for listing standards.

And listed companies don't want high prices for data if the effect of that is to limit the amount of information, or widespread availability of information.

The existing regulatory structure -- probably the anti-trust laws -- provide some dampening influence.

And so even though there is a question about the extent -- or a question about what pricing pressures would look like in this environment, that's an issue that we have to face --the question of pricing pressure within a display rule environment.

Eliminate the display rule and two things happen. First of all, any pricing power that the secondary markets may have had simply because the display rule said to consolidators, "you have to buy the data," disappears.

On the other hand, there was no sense in which the mere elimination of the display rule would affect any pricing power of the dominant or primary exchanges.

On the question of whether that pricing power would be abused, you simply move back to the discussion that I outlined a minute ago.

The other cost that deserves discussion in an environment is which the display rule is eliminated is the effect on best execution.

To what extent will investors -- whether sophisticated or average investors -- be able to execute trades with a high degree of confidence in best execution if there is not a bench mark like NBBO if there is competition for various measures of execution quality, as opposed to a single mandatory one?

Obviously that's something you can look at in two different ways. You can say we need that benchmark and regulation has to set it.

You can also say that competition for different benchmark will actually deliver a better best execution environment to the investing public.

We had a very vigorous debate on all of these issues and no consensus on their resolution. And as I said before, it's probably this set of issues that really should be the driver on the full set of questions.

Now, a predicate to a lot of what I just said is an understanding of the display rule and the best execution obligation.

And I guess, we would like to turn to Annette who might provide a little bit of background as to at least what these obligations and rules are.

Ms. Nazareth:   Right. I would be happy to do that. Obviously we thought it would be helpful before we engage in a full-fledged discussion of these important issues to make sure that we all understood the landscape to be exactly the same.

So I thought I would discuss the display rule and the best execution obligations of broker-dealers. I'll begin with a summary of the display rule and the rationale for its adoption.

Under the display rule a vendor or broker-dealer that provides quote and trade information to customers has to include in its display two specific pieces of data -- a consolidated quotation display and a consolidated last sale display.

Specifically if a vendor or a broker-dealer provides quote information for any stock that is traded on an exchange or on Nasdaq, it has to provide either the NBBO for the stock -- in other words the best bid and offer with size from any reporting market centers and an identifier for that market center -- or it has to provide a quote montage for the stock from all the reporting market centers.

And if a vendor or broker-dealer provides transaction reports or last sale data for any exchange or the Nasdaq NMS stock, it must also provide the price and the volume of the most recent transaction in that stock from any reporting market center, as well as an identification of that market center.

And prior to the adoption of the display rule in 1980, vendors had been displaying trade and quote information in a manner that highlighted primary market data -- both in terms of format and ease of access.

And the commission had encouraged vendors to make consolidated data at least as accessible as primary market data. But for competitive reasons at that time the vendors were reluctant to do so voluntarily.

And instead, they preferred that the Commission established a mandatory, industry-wide minimum display criteria at that time.

So the Commission adopted the display rule, which in effect requires that consolidated data be displayed in a manner that is at least as readily accessible as the market data for a particular market.

And in doing so, the Commission recognized that the manner that vendors and broker-dealers distribute data impacts both market competition and transparency.

By requiring the distribution of consolidated data the Commission sought to promote market competition by assuring that markets can compete through the display of their quoted prices.

And I think Simon will talk about this a bit later. It certainly enables newer markets to enter the market and to compete for market share on an equal basis which would probably not be the case if all of the markets' data had to be distributed.

In addition, the display rule promotes transparency by assuring that market participants are apprized of basic pricing information for securities.

Many believe that this core data, namely the prices at which other trades recently were executed and the best quoted price currently available in the national market system is essential to permit an investor to make an informed investment decision and a broker to choose the best market.

This information also assists investors in monitoring the executions that they received from their brokers. So as you consider the display rule I also wanted to note that you might recall from prior meetings that we've discussed a number of things about the display rule.

We've not only talked about whether it should be retained or abolished, but whether in it's current form, it is sufficient -- whether in a decimalized environment, the kind of information that you get under the display rule is sufficient, and whether if further information is required because of the lack of depth at any particular quoted price, whether that additional data, we should let market forces determine what that additional data would be or whether the display rule should even be amended to require additional data.

So you might want to recall those discussions as we go forward.

I thought I would also give you a brief overview of best execution obligations.

Best execution -- the duty of best execution requires that a broker-dealer seek to obtain the most favorable terms reasonably available under the circumstances for customer transactions.

And while, as I'll discuss, best execution encompasses a number of factors. Undoubtedly one very significant factor in the best execution analysis is the price of a security.

And the NBBO has served as a critical tool for broker-dealers in satisfying their best execution obligations.

As you probably know the duty of best execution derives from common law agency principles and fiduciary obligations and it forms one of the corner stones or market integrity.

And as an agent, or fiduciary, a broker-dealer has an affirmative duty to obtain the most advantageous terms for a customer's order.

Best execution concepts have been incorporated over the years into enforcement actions under the anti-fraud provisions of the federal securities laws, as well into various SRO rules.

And in encouraging the establishment of the national market system, Congress and the Commission gave a prominent role to best execution concepts.

In fact, one could argue that each of the five statutory objectives of the national market system -economically efficient executions, fair competition, price transparency, executions in the best market and the opportunity for executions without the participation of a dealer, each of those emphasizes the importance of best execution in maintaining fair orderly markets and protecting investors.

As you know, best execution is a facts and circumstances analysis. And it encompasses a number of factors, starting with the price of the execution and the opportunity for price improvement. Also relevant are execution speed and with limit orders the likelihood of execution.

Other factors include the size of the order, the trading characteristics of the security involved, the availability of accurate information and the cost and difficulty of achieving an execution in a particular market.

For institutional investors certainly anonymity and liquidity might be overriding concerns, as well. In any case the quality of execution must always be viewed, as you know, from the customer's perspective and not from the brokerdealer's perspective.

And to reiterate the NBBO provides important information to broker-dealers seeking to satisfy their best execution obligations.

But as I've just mentioned and as the Third Circuit recognized in the recent Newton Case, there are several other relevant factors besides price.

The relevance of the NBBO alone may not be sufficient. And routing orders to a market that merely guarantees an execution at the best published quote does not necessarily satisfy the duty of best execution.

Broker-dealers have to regularly and rigorously examine their overall execution quality that's likely to be obtained from different markets trading in a security.

And as Bernie rightly noted earlier on, the Commission's recently adopted execution quality disclosure rules will assist broker-dealers in this examination.

But keep in mind that they're only as effective as the inputs. And one significant input under those rules is the NBBO which is used as a bench mark for determining market quality -- execution quality.

Mr. Seligman:   Thanks, Annette. Appreciate that. Let me also turn to Simon Johnson who prepared as memorandum looking at some of the potential economic issues if you move to a multiple consolidator environment.

Mr. Johnson:   Thank you. There is a detailed memo which is available outside and I'm not going to repeat all the details.

We can perhaps go to some specific definitions and try to clarify issues that come up repeatedly in other discussions such as precisely what we mean by market power. We can come back to that.

What I would like to do is just take a couple of minutes and emphasize a few key points in a slightly different way that I hope is going to be helpful.

I think that there are some very important economic assumptions in our discussion and I think these assumptions are somewhat hidden or a little bit implicit, perhaps, in some of the alternative models that are being put forward.

I would like to make those assumptions clear and question them a little bit.

So here's the reasoning, as I understand it, sort of the hypothetical thought experiment that's going on when somebody proposes so-called competing consolidators model.

I think there are two very, very important assumptions. I want to sort them out.

The first takes us from the step of saying, right, we have now competing consolidators, and this leads us to more competition with or without the display rule, and we'll come back. Obviously, that's a critical distinction. We'll discuss that at great length, I'm sure.

Now, that section is pretty obvious. We're calling it Competing Consolidators, after all, so competition is implicit in that, perhaps, and somehow, perhaps clearly, perhaps not to clearly, we're going to get more competition in the profusion of market data.

So that's assumption number one, which I'm going to question in a moment.

Assumption number two is that, by having more competition in the market data, let's say that happens, this is going to lead on to some good outcomes, hypothetically.

For example, innovation has been mentioned quite a bit. More satisfied customers is also, I think, more or less implicit in what people are saying. So this is with regard to quality and lower prices, perhaps.

Now, I think at this level, you know, the argument has seemed to many people in the room rather appealing and perhaps very obvious, and perhaps that's why they haven't expanded on every one of these steps, and I hope that we can have a discussion about this.

But this is just a -- this is one hypothetical construction and one set of assumptions, if you like, economic assumptions, that gives you this logical structure and this supposed set of outcomes.

I have three issues that I really want to raise, three, I think we can call them risks, each one of which by itself is a fairly serious risk that we need to discuss. I think, taken together, they are extremely serious.

The risks are like this. Each one of them is expanded on in more detail in my memo.

The first is the assumptions, the reasoning that I gave you a moment ago really assumes a regulatory structure which ensure fair and reasonable behavior on everybody involved.

I think the first risk, that's a very important risk, is that this regulatory structure and the way that regulation works, if you really look at the details, this is going to be undermined by the movement to multiple consolidators.

There's two issues, one of which I feel we still haven't discussed satisfactorily, which is about SRO funding. That's clearly very important in the existing system, and just waving your hands at that, I think is not satisfactory. The second is, picking up on what Anette just said, that clearly, in the way the regulation currently functions, the display rule, and perhaps more particularly the NBBO, plays a very important role. It's not the only thing you have to look at and it's not the be all and end all, but it's really a crucial part of the regulatory mechanism.

If you take that away -- so this is obviously in the competing consolidators without the display rule -- if you take that away, how is regulation going to function?

So that's one problem, or one risk, potential risk.

The second potential risk, perhaps a more serious risk -- we can discuss that -- is that some form of market power will develop.

Now, we've had a lot of -- there was a lot of perhaps confused discussion last time about what exactly is market power, and I've tried to spell it out in considerable detail in my memo, and we can talk much more about it, if you want.

I think that we're talking about situations in which there is price setting ability, not necessarily the ability to charge infinite prices, that's certainly not what market power usually implies, the ability to set prices to some extent, and the extent to which you can set prices obviously has various constraints.

Now, the really important aspects of this, I think, that I would want to emphasize relate to the fragmentation of information.

I think that given the discussion, the technological discussion earlier today, and given what we know tends to happen when you have relatively unconstrained market competition, I think you would have to expect that market information would fragment into different pieces.

You would not have the same sort of consolidation, you would not have -- there's a further additional assumption, which is put forward in some proposals or assertions, saying that these multiple consolidators would necessarily product the same sort of consolidation of information as exists today.

I think that that's quite uncompelling, based on what we know about how markets of this kind operate.

I think we could also have -- I think that the nature of market power would change. I think who has the market power would change.

I think you could well have the emergence of socalled monopsony power, rather than monopoly power. This is, monopsony power is the power, market power on the part of buyers rather than on the part of sellers. That would change things in an interesting way.

But I think market power as these proposals are currently construed, particularly without the display rule, I think that really pushes us much more towards fragmentation. I also think that, in terms of the consequences, remember, innovation is one of the assumptions that people are making, you get more innovation with competition.

That's not clear to me at all if you think that there's fragmentation of information, as mentioned a moment ago, if that fragmentation makes it harder for new market centers to enter, because nobody has to carry the data, nobody has to report that data. Then, you're going to actually have less entry. We tend to think that a lot of innovation is associated with either actual entry or potential entry.

So I think the step from multiple consolidators to competition is questionable, and that step, even if you have some competition of a particular kind with market power, competition not inconsistent with market power in some places and some times, whether that will give you more entry, I think is a big question.

So that's the second risk, risk of market power. The third risk, I think, is fairly obvious, and I'm surprised it hasn't come out more clearly before, is that if you're in a situation where you have this fragmentation of information, the incentive for some players, I'm sure none of whom are represented in this room, but some players to emerge who have an interest or decide that it's in their interest to pursue more short-term incentives, to put out lower-quality information or misleading information, or maybe even just to engage in actions that create the perception of problems on the part of small investors, so that small investors feel that they're not being treated fairly.

I think that this danger is really considerable, and shouldn't be ignored by us.

So there's another hypothetical. I discussed one hypothetical outcome, which is more competition, more innovation, more satisfied customers.

There's another hypothetical outcome, if I'm right about these risks, then not only may that, you know, the positive effects be less, you can actually have negative effects.

You can actually have more market power emerging. You could have less innovation. You may have -- you may well have some more satisfied big customers, but you may have much less satisfied small customers.

Now, I don't think that this would necessarily propel you into a total breakdown of the U.S. markets or anything like that. I think what you would get most likely is pressure for re-regulation, and I would urge you to think very seriously about what kind of re-regulation you would be likely to get in this situation.

I think you would get, most likely, a much more heavy-handed system of regulation than you have now.

So I really don't see either the short term or the long term consequences of this being good. Perhaps they're good for certain people, but I don't see them as being good for the whole system.

That leads me to my final point, which is what really is wrong with the current system?

I raised this question at a much earlier meeting. I've been sitting here waiting to -- trying to draw up a list of the major problems, because if we're considering radical -- usually, we consider radical change when there are very serious problems to be addressed.

But at least as people have described the current system, there's been a tremendous amount of innovation, including a remarkable degree of entry compared to other markets in other countries or in the U.S. in different markets, or the U.S. over time.

We have falling prices and falling costs of providing this market data. Perhaps they would have fallen faster. That's not clear, and I've never seen any real hard evidence on that. And we have remarkably high quality in terms of data being provided, with the caveats that have been mentioned earlier.

So if I'm correct that there are these risks that could cause some disruption or some damage to the reputation of markets, or just to the perception of markets in the eyes of small investors -- perhaps not in the eyes of professionals, but in the eyes of small investors -- why is there a case for taking these very big, I think relatively radical steps, if -- unless I'm missing something, unless you want to tell me, perhaps I've misunderstood there is something much more problematic about the current system than we've currently discussed.

It seems to me that the current system works well. It can be improved, and that's been discussed in earlier meetings, but the case for taking these steps, these risky steps towards a model of competing or multiple consolidators particularly removing the display rule, that justification seems to me to be very weak.

Mr. Seligman:   All right. Well, we've had a series of introductory remarks. Let me just comment briefly on the very last point that Simon suggested.

There have been concerns with the current system that have been articulated in the recent past, going back to an initial petition and memorandum from Schwab with respect to fee levels, certainly incorporating all of the comment letters on the SEC's December 1999 conceptual release, and various submission to this group, and none of those are going to be forgotten. That is, as part of the final report, we will draw on those documents.

If we've emphasized need somewhat less than we might today, it's because we want to take very seriously those concerns, but we do operate in a framework which I think Simon has accurately captured, where we are dealing with a system that seems to work pretty well.

There haven't been, to my knowledge, so far, major questions raised about the quality. There have been falling costs.

So that ultimately, when we decide what we want to recommend to the Commission, we're doing it not with a system that appears to be broke, but with a system that we may argue can be improved or can be replaced by a better system.

But this is not a case of something that has systematically broken down. This is not a crisis response, if you will.

Now, having said that, Don's subcommittee looked at the question of competing consolidators in two different ways: first, competing consolidators retaining the display rule; second, competing consolidators rescinding the display rule.

I would suggest it's worthwhile for this group collectively to take a look at the models in those two different ways, as well, starting with the question, does it make sense to move to a competing consolidator model as suggested by Don's comments throughout today, his background memorandum, and the various proposals we have received in the course of our meetings retaining the display rule?

I would be interested if someone could make the argument as to why that would be preferable to the current system with various modifications we might consider.


Mr. Atkin:   I just want to get a point of clarification, if I may.

Mr. Seligman:   Sure.

Mr. Atkin:   Because Simon, maybe I misinterpret what you're saying, but I need clarification on what you mean by competition and innovation, because I don't hear -- I mean, I hear you saying competition is dependent upon more market -- more people entering the market, as opposed to competition on better data resulting from what we can do with the output from the market; and everything that I've heard you say assumes that competition is dependent upon more markets entering the business.

Did I miss something?

Mr. Johnson:   Sorry. I was trying to parse out a little the statement about where innovation comes from. I think it comes from two places.

One is people already in the market who may feel competitive pressure or pressure from their Government structure or pressure from something else to change what they're doing, so to innovate.

I was also pointing out what seems to be a feature of the U.S. securities market and a feature of many other markets, which is that a lot of innovation comes from new entrants and from incumbents responding to new entrants.

I was that you have two mechanisms, and my concern would be, if you get a lot of -- if you don't have a display rule, I think you would have -- it would be much harder for the second mechanism to work.

Mr. Atkin:   Harder to have more market entrants --

Mr. Johnson:   Correct.

Mr. Atkin:   -- but still possible to have vigorous competition in information, because you have more vendors processing data?

Mr. Johnson:   Subject to my other concerns about market power, yes.

Mr. Atkin:   And then the second question for clarification, market power I understood you to say meaning market power in setting market data fees, right, that's what you're referring to here?

Mr. Johnson:   Well, I tried to go through this --

Mr. Atkin:   Price-setting ability means price setting of --

Mr. Johnson:   I was trying to go through this in a little bit more detail. In my memo, I think that that is part of it.

I think more generally we would be concerned about price setting in various parts of the -- not necessarily just at the consolidator level, but in terms of other people who may be working with data and packaging data, so the question of who has monopoly power at different parts of the production chain, if you like, where you take it going from raw data from transactions down to customers, right?

So I think it's -- I mean, I think it will be actually an extremely interesting, fascinating natural experiment, which people will write lots of papers about, even though I don't think it's a great idea.

But I think what could happen is the locus of market power may change; so people have expressed concern about certain entities having market power in the current system, those guys may well not have market power in the next -- in the alternative system.

Market power may move from this level, strictly the consolidator level, to the level of extremely powerful participants either upstream or downstream of that consolidator.

Mr. Atkin:   All right.

Mr. Seligman:   We, alas are proceeding under a sort of time-bound and meeting-bound charter, and now is the time to focus on a multiple consolidator system initially with a display rule.

Who would like to make the argument that would be preferable to the current system with or without various proposed changes?


Mr. Bernard:   Well, I don't have anything new to say, and I know people like Bernie have read all 300 pages of stuff that we've already written, but I'll try to get it done with a few things.

You will recall that in our December 1 model, we never made very glorious outcomes from getting rid of the consortia. They were fairly parochial, fairly pedestrian and they had a lot to do with how the markets inter-related with each other, not about more profound issues.

Let me remind you what they were.

We touched on one today already. If you're going to have the SROs getting together into a single system, you would think you would want to reap the benefit of them being together in that system, but because of the way the antitrust thing has turned out, you don't even get the ability to do a good job of minimizing capacity expenditures by sharing information.

There's no systemic reason for bringing these nine markets together, save for managing these risks that we've talked about, which I think we've heard are manageable if we care to manage them.

Secondly, I can't think of any reason, including the viability of markets, why you would ever put nine competitors into a consortium in which they would set prices together and agree on contract terms together.

Yes, there's an issue of a subsidy running from the primary markets to the regional markets, if you think that is what's happening, but why as a matter of national policy you would solve that problem by forcing them to get in a consortium together, we still don't understand.

Thirdly, those of you who don't sit at CTA meetings and OPRA meetings and the sort -- and I went to my first CTA meeting in the late '70s -- you know, with the change in market structure, those meetings have become very adversarial.

I've listed, and, you know, we've listed in some of our documents about those, but I'll tell you the most recent one, we have a very peculiar situation with our friends from the CBOE with .00001 percent of market share, so they're basically not a CTA participant in any active way, are getting about $600,000 of free market data fees every year, because they happen to be a member of this consortium.

And I just cannot make a case for why CBOE should get that benefit, but, you know, the International Securities Exchange, which happens not to be a CTA market participant, shouldn't get that benefit.

So, I mean -- and I could go on with lots of these kinds of disputes that show that the consortia have become dysfunctional.

If it's about constraining New York Stock Exchange market power of NASDAQ market power, the consortiums don't do that.

We have behaved before 1973, and I promise you we'll behave after 2001, in basically the same way, unless something else changes that I can't anticipate, which is, as I've written, more than you would like to hear it, we view fees denominated as market fees several ways of covering the costs of the exchange, and we get to those fees by going through a budgetary process and representatives of our users, and it happens to have come to out to be about 15 to 17 percent for the last 26 years, and it could get bigger.

I mean, there's nothing magic about it. It's what the users -- it's where the users care to put those.

But it has nothing to do with the consortium. The consortium slows us down, maybe, in terms of getting to market with new ideas, in terms of the number of steps one has to go through in order to change a market data fee or whatever, but it's not a positive force in terms of somehow constraining whatever market priority the primary markets have.

So I get back to, you know, people sitting around in 1975 and saying, you know, in the world of mainframe computers and that sort of thing, maybe you need a consortium to get the data of the non-primary markets out.

I'm not sure that was necessarily true in the mid1970s, and indeed, it was never required for quotes, and the requirement to do so in terms of last sales was rescinded by the SEC in the late '70s, so today the only thing keeping the consortium going is the fact that we're in a joint venture agreement, and to withdraw requires the SEC approval.

There may have been a technological reason. I don't -- no one ever made a case for subsidy to the regional stock exchanges. The reason why the CTA plan or the CQ plan was created, people really thought there was going to quote competition, for example, in this country.

In any event, whatever those reasons were in the mid-'70s, they're no longer true, and what you have is nine competitors coming together, and we just don't see the basis for forcing that to continue -- nothing more grant than that.

Mr. Seligman:   Okay, appreciate that, Rich. Others who would like to speak in favor of a competing consolidated model retaining NBBO? Eric?

Mr. Roiter:   Eric Roiter of Fidelity. If I could, Joel, could I preface this by asking Simon a question first? And then I'll get to it.

Mr. Seligman:   Sure.

Mr. Roiter:   I did read your paper. I didn't see the words "natural monopoly" in your paper and in your summary this morning, you didn't speak of a natural monopoly. Can I ask do you see a single consolidator as a natural monopoly?

Prof. Johnson:   I'm not quite sure I understand the question. By natural monopoly, we usually mean, you know, that there is a single gold mine or a single source of oil in this particular place, so it makes sense for one company to run it. Is that what --

Mr. Roiter:   No. I mean something different. I mean that as a practical matter there is no way to deliver a service or a product other than through a single provider.

Prof. Johnson:   Well, I think that, you know, you can -- I don't think it's physically impossible and that was the discussion this morning. I don't think it's physically impossible to deliver the consolidation of data through more than one provider just as I don't think it's physically impossible to deliver electricity, more than one production, electricity production company, generating company. The question is what is the cost and benefits of doing it each way.

So, it's not a natural monopoly that in the sense that physically, it's just an overwhelming case for one person doing it. I think it's a question of economic costs and benefits of having one consolidator versus multiple consolidators. And that's what I was trying to address.

Mr. Roiter:   Okay. Well, with that I think I would try to articulate a public policy for multiple consolidators. I think we are starting from the premise that it is not a natural monopoly to have a single consolidator. And I think we also have the shared premise that the technological challenges of multiple consolidation are manageable.

So then that leaves I think a question of whether to err on the side of allowing for a greater potential for competition when it's at least conceivable that potential competition could arise. And I think if we look back to other examples where we had single providers, whether they were, you know, a single telephone company, AT&T, even single cable operators in local areas, it was hard to make a case that competition would really lead to great benefits because often monopolists did a pretty good job of providing a product, a service.

I, for one, would say that if there is not a natural monopoly and it's technologically feasible to provide a given product or service through multiple providers that there should be a presumption in favor of that unless there are identified serious public policy interests that would be compromised by moving away from a single provider.

And Simon has alluded to some risks, but I, for one, am not yet persuaded that they are anything other than speculative at this point.

The SEC, let's remember, does retain regulatory oversight. If other problems arise from a multiple consolidator model, those could be addressed. I think the burden should be on those who are in favor of preventing the potential for competition to be more specific and to try to put some quantification to the level of risks to various public policies that would come about as a result of multiple consolidation.

I can't tell you that there will be tremendous benefits arising from multiple consolidators either in price or innovation, but I can't rule that out. I can't rule out the possibility that somebody could come up with a completely different model for delivering consolidated data, perhaps an advertising model where users who accept consolidated data might get it more cheaply or might get it for nothing if that particular provider of consolidated data were able to find another source of revenue that could make it profitable to provide market data free or at least at a price that is lower than a single consolidator would provide it.

So I'm still listening and I'm open to being persuaded, but I am not yet -- I have not yet seen a compelling case for preventing the potential for competition. And I would add, finally, that even if there are no new market entrants, if you remove the barriers to entry, there is potential competition. And the mere presence of potential competitors can have a pro-competitive impact even in environments where you have a single provider of the service.

Mr. Seligman:   Eric, let me ask you a follow up, if I could. The question I posed was who would like to make the case for multiple or competing consolidators with the NBBO. I would like you to focus on the final with the NBBO or display rule part of it which I don't think you did address and explain why you both favor or seem to favor competing consolidators and the retention of the NBBO.

Mr. Roiter:   Okay. Well, I think that is one public policy that is dealt with in Simon's paper and one that I think on balance probably has much to be said for it. I think it preserves the potential for competition from the smaller markets. I have a concern that in the absence of an NBBO requirement that the already difficult competitive position of the smaller market centers will be made even more difficult.

Much has been said and debated about payment for order flow. I think if you eliminate the NBBO rule you will see even greater development toward payment for order flow as smaller market centers have to pay simply to have their quotes looked at, perhaps, if not to actually have orders brought to their market.

And, accordingly, I think that the NBBO is imperfect, the NBBO rule; but on balance, it does at least have a pro-competitive impact. And that is to allow for the market centers outside the primary markets to at least put themselves in the position to get their best prices, their best quotes and last sales out to the wider markets.

Mr. Seligman:   Thank you, Eric. I think I saw Adena.

Ms. Friedman:   I'm not going to say anything dramatically new from what you have already said, but I think the crux of the issue really lies in whether the vendors would be able to comply with the vendor display rule without a single source of the data.

We do believe that the NBBO is an important piece of information to have out there. I think it's important from the firm's view to meet their best execution obligations, it's important as a benchmark for evaluating execution quality. So we don't disagree that the vendor display rule is -- the existence of the NBBO is important. But the question is over the last 25 years has technology improved to the point where we don't need the cumbersome nature of a plant and all of the issues that Rich just described that go along with the existence of a plan in order to make sure that those vendors can comply with the vendor display rule.

And NASDAQ believes that they -- that the data can be delivered effectively to the vendor community without the existence of a cumbersome plan. I think it's a pretty simple issue and it does circle back mainly to the technology issues.

Mr. Seligman:   I see Michael.

Mr. Atkin:   Isn't it possible to be able to get the benefits of consolidation from processing efficiency side, but change the other three things that Rich talked about which is contract terms and business models, revenue sharing and fee mitigation?

I mean you can still have a centralized processor sending out a consolidated data. You don't necessarily need to have everybody sitting around the table doing admin together and saying contract terms and -- are we talking about both of those things together as one subject? Or is that yet another alternative?

And, Rich, I think that's what I kind of heard from your presentation.

Mr. Bernard:   We've always distinguished between the two. We've always said that if you -- if a compelling case is made for retaining the single tech system as a technology matter, that still was no argument for setting prices together and for entering into contracts together. So, yeah, that's the middle ground, but I don't want to completely equate it.

If you're going to have the systems together, that would make a whole lot more sense if you weren't putting the anointed facilities manager, in this case, SIAC, into the bind it's in now where it has got to -- it is at risk in making capacity -- in effect in making capacity decisions because it's got to enter into dialogue one-on-one with each of nine markets and then figure it all out. That's not a role they originally signed up for. I imagine they will manage it if we ask them to, but that is a non-trivial issue and I would still continue to argue that if we can manage the risk that Tom Demchak and Mike have talked about we'd still be in a better place if we could also break the consortium system.

But I agree with Mike, those can be approaches to different questions.

Ms. Nazareth:   Can I ask, Rich? How would even in a competing consolidated model, how would any consolidator be able to plan, you know, from a business perspective capacity, plan unless they had some means of getting information on the kind of traffic they would be seeing through their systems?

Mr. Bernard:   The point is that you wouldn't have a single point of failure, so if you had multiple people doing that, if somebody made a bad guess, you wouldn't bring down the whole national market system.

We had actually -- I was talking to Eric about this -- we never executed, but we talked to the subcommittee about finding out what the switching costs were because one of the theories behind the competing consolidator model is that you don't have to get too hung up on controlling and technical specs and that sort of thing if a dissatisfied customer of a consolidator can switch to another competing consolidator. We never actually -- I guess we never got around to asking Mike to look at that. But that's part of the premise.

Mr. Seligman:   I think I say Mark Tellini.

Mr. Tellini:   I'd like to speak to this for one second because although we support elimination of the display rule and I don't want my vote recorded otherwise, I think the question of whether you have a competing consolidator with an NBBO or not turns on what the model looks like. And I think that's where this discussion is heading.

If we envision a model where the competing consolidators are forced to buy data from the markets on the same terms as we see today and, in fact, all of the problems we have today with data rationing, monopoly pricing, preapproval, the administrative burdens associated with those, all of those continue to imply in fact that consolidator and competing consolidator is a mere intermediary, then we don't at all recognize the benefits that could be possible from competition. If we would address those issues and, in fact, those issues could be addressed without a competing consolidator, then we're starting to talk about some real changes here notwithstanding what Professor Johnson had to say about the problems on the table. I think those problems have been well articulated in over 600 pages of transcripts and a couple hundred pages of submissions.

Mr. Seligman:   Thank you. Let me by way of getting more ideas on the floor, now put on the floor the second approach that the committee addressed which is the multiple consolidators and no NBBO. Let's have a proponent of that approach or perhaps a series of proponents speak in favor of it. Somehow, I feel I should turn to Ed, if he doesn't mind.

Mr. Nicoll:   First, let me address what I think needs to be said with respect to Simon's questioning of do we have a problem here.

Not to be crude, but we have about a half-a-billion dollars in rent being extracted from the financial services industry as far as we can tell right now in terms of market data fees. And there are it seems to me two groups of participants who are troubled by those fees. One are people like Datek and Schwab which question the scope of the consumers of the data which questions whether the scope of those fees are correct.

And others are participants like, for instance, the New York Stock Exchange and the Island ECN which are concerned about how those fees are allocated amongst the producers of that data.

To take two extremes, one gets a tremendous amount; the other one gets nothing under the current system. And the notion that it is not time that we look at these from both the consumer's and the producer's point of view, I think is putting your head in the sand.

With respect to our position, you know, I couldn't agree with Eric Moore. I mean what basically he's saying is where do you, you know, what's your basic policy position and where do you place the burden?

I mean our position is that there is not enough evidence to suggest that there ought not to be competition along every level that we can have it and that that ought to be -- especially in the bastion of capital markets the rebuttable presumption of the participants. And that it is for others that want to regulate heavily that automate the case otherwise.

We can't get to that. We don't see a robust competition without addressing the issue of how the consumers of the data choose to display that data to their clients. and to the extent that they can have choices as to how they display that data, that that will encourage innovation and competition along the entire chain, value chain.

We think that essentially that there are lots of questions and lots of issues to address and lots of issues of market power that exist today within the existing framework. We don't claim that by doing away with the display rule that there aren't going to be issues of market power. We just say that it is our preferred policy to deal with those issues of market power. Those are complex and we would agree with Simon that it is how the market power is exercised rather than whether it exists.

It exists today and the question is how do you deal with it?

At the end of the day, put simply, unless the brokerage firms and the mutual funds and consumers of the data have flexibility in terms of who they can and cannot purchase data from, we don't see that there is going to be the necessary competitive forces put in place to control that market power.

Mr. Seligman:   Ed, let me pose a question to you. I'm a bit of a historian and I recall the origins of what is now the display rule. One of the major concerns was the regionals literally couldn't give away that data. That, in effect, if you have the equivalent to a free market system, they would simply be left off the display.

That it is not that they are not capable of competing, it is simply that the disseminators of the data would ignore them. How in a world with multiple consolidators and no NBBO could we have any assurance that the regional status still would be communicated?

Mr. Nicoll:   Well, we would have to -- with all due respect, and I do mean that and I don't mean to be flippant -- we would have to examine why there's a public policy to protect the regionals in the first place and make that explicit. If that's going to underlie a policy choice, we would have to say, "Well, we think that these regional exchanges ought to be protected in some way."

But I would argue, let me argue that actually, going back to something that Eric said about his concerns about doing away with the display rule, and try and make people understand how complex an issue this is, and this does touch on your question with respect to the regionals -- and that's the issue of payment for order flow.

Datek actually, and I have no problem with payment for order flow, and we think, though, that markets will compete away payment for order flow rather than that payment for order flow ought to be regulated away.

We think that the policies ought to be to construct efficient markets, so that payment for order flow is competed away by the participants, because otherwise, it will just be transformed from one kind of payment to another.

But I would argue that actually, the almost Rube Goldbergish regulatory structure with respect to market data right now is one of the causes of payment for order flow, that there are market venues which get considerable revenues from market data, that they are incentivized in such a way to create transactions, because it's on the basis of transactions that they actually share in that market data, and that they pass along the fees that they get from creating the transactions back to the originators of the order flow by payment for the flow.

They're in effect taking the market data, a portion of the market data income and paying it back to the people that are giving them the order flow so that they get that market data, and that they are non-incentivized to actually compete for the quote.

So what we have now is a system where you have regional exchanges which exist, and their competition is in name only, in many instances, and in at least one or two of those exchanges, they have auto quote, so that they're always outside of the primary exchange.

What they're doing is being parasitic so that they can, in fact, participate in the market data income.

So I think you have a completely dysfunctional system based upon a well-meaning regulatory structure which, in fact, operates to create inefficiencies rather than efficiencies, and a lack of competition rather than true competition.

I would argue, just to answer your question, I would argue that if we allowed consumers of data, if we allowed Schwab to buy a regional's quotes and Schwab devised a, just to use an example, or Datek went to a regional exchange and said, "You know, I really want to provide my customers with efficient services and I want you to compete on the quote," but by paying them to compete on the quote, they'll compete on the quote.

Right now, they're not competing on the quote. They're competing on the tape, and I don't believe they're providing a very valuable service, at least some, and I'm not certainly addressing my comments at any particular exchange.

Mr. Seligman:   Let me just offer a few observations.

First, I agree that payment for order flow is a legitimate question. It's outside of our scope, but clearly, if the Commission chose to examine it again, that would be understandable.

Let me make a comment, I guess, about regulation, if you will.

There are some forms of regulation which I think have justifiably been criticized, when they limit entry to markets, when they create monopolies that might not otherwise exist, when they engage in certain forms of rate setting.

There are other forms of regulation, and I associate the SEC's mandatory disclosure system with them, whose very purpose is to make competition more possible.

And if one looks at the NBBO, as we must in the context of this committee, simply standing within a framework of market information, and unfortunately, putting totally to one side other, not doubt related issues, such as payment for order flow, the question I pose is, in a world we can imagine with multiple consolidators, is that a form of regulation, if you will, that makes potentially more competition possible, or is that a form of regulation that we should be critical of?

And let me send that back to you, Ed.

Mr. Nicoll:   Okay. The only reason I bring up payment for order flow is as an illustration of unintended consequences of a heavy regulatory hand, and to show that in fact, that when we try to create competition where it otherwise doesn't exist, and especially when it involves the way that a significant rent is allocated among market participants, we often get it wrong and we have all kinds of unintended consequences as a result of that.

That ought to be why the presumption should be on the other side, for markets, rather than for regulation, but that, of course, is a policy decision that we all have to either buy into or not.

I would certainly -- you know, the rest of our argument is simply that there are enough other burdens on the participants in the marketplace to create the outcome that we want, which is that, you know, investors are generally protected and that information is generally distributed as widely as possible and as efficiently as possible.

I mean, after all, as you've already said, underlying this question is, I think, a generally accepted notion that this information is part of the building blocks of our markets, that its wide and immediate and efficient distribution is necessary to proper price formation, and the question to us all is what set of incentives and what set of regulations will best accomplish that goal?

And we believe that with the changes in technology, and the changes in investor behavior, and with the retention of the duty of best execution, that the display rule is no longer necessary, and that it serves very little useful purpose in terms of accomplishing its intended goal.

Mr. Seligman:   Okay. I appreciate that. I think I call Bill Harts next.

Mr. Harts:   Dean Seligman, in response to your initial question about, in a multiple consolidator environment, how would you force or how would you incent the consolidators to continue to carry regional quotes, nonprimary -- and I believe that was your question.

I think that actually comes back to what Annette said earlier, which is that it's the duty, it's the obligation of the broker to obtain the best execution under the circumstances, and I would think that if a broker chose to ignore non-primary markets, he would do so at his own risk.

Therefore, theoretically, the brokers would demand that consolidated information or that NBBO, if for no other reason than to make it simpler to ensure best execution.

The other thing that occurred to me is that we're actually in the middle of something that's really on point, I think, in the options markets, that Joyce probably wants to talk about, which is, I mean, a very real instance of exactly this, that I believe it's Reuters chose not to carry a consolidated NBBO on their primary feed, and the options markets apparently are fighting that.

Is that the case?

Ms. Nazareth:   The consolidated -- there is no consolidated NBBO, so --

Mr. Harts:   I'm sorry.

Ms. Nazareth:   -- they didn't refuse to carry it, there was none to carry.

Mr. Harts:   They didn't want to carry multiple exchanges information, and since that seems to be really on point to what you're saying, I thought maybe Ed could elaborate a little bit.

Mr. Joyce:   Well, in the way you laid it out, Bill, you said that the firms would demand consolidated information to protect themselves in the manner in which they do their job.

Were you laying that out in a world with or without a rule that required you to do that? I mean, if there was no rule requiring you to display regional data, do you think that would still occur?

Mr. Harts:   Well, we always -- I don't see any kind of world where we won't have the obligation to obtain best execution for all customer orders. Whether or not we have to display that information to the customers is another question, but we always have the best execution obligation.

Mr. Joyce:   Yes, and my issue, and I'll touch on the Reuters issue in a second, but if people are obligated to display all the data, which was the earlier premise, then I think their -- I don't know what changes from today's world in terms of pricing.

If this is all driven by economics, whether or not there's a single consolidator, if all of the receivers of the data have to obtain all the data, then the people with the data still have all the clout, I would think, and the economic issue will still be there, that currently, the single consolidator is regulated to act in a fair and reasonable manner in providing the data at prices that are fair and reasonable, and if each exchange or each market is in a world where the receiver of the data must receive that data from them individually, I still believe you're in a world, economically, where they'll set the price wherever they want to set the price, because the market data vendors have to display their data.

So I'm not sure how it changes when you go from a single consolidator to a multiple consolidator.

Mr. Seligman:   Did you want to touch on --

Mr. Joyce:   Yeah. And on the other issue, it's the OPRA plan interpretation, our interpretation of the plan that people displaying OPRA data have to display all market data, meaning each market's data, and that's the dispute that is currently being addressed.

Mr. Seligman:   Okay. So -- excuse me. Do you want to come in on that?

Mr. McNelis:   Yes. Since we're involved -- Brian McNelis from Reuters -- our issue again, in this situation, is of being able to provide all the data, which we do in the OPRA situation, to those customers who want to buy it, but not have to supply it all to those who don't want to buy it, and it's just, you know, it's a pure business decision as to whether those people actually need it all.

Mr. Seligman:   Okay. Remember, we're focusing on the proponents of multiple consolidators or competing consolidators without the NBBO.

I think I saw Mark.

Mr. Tellini:   I'm going to answer the original question which you had asked, which was why would anyone buy a regional NBBO -- I'm sorry -- the regional inside quotes.

Mr. Seligman:   Please.

Mr. Tellini:   And so I will elaborate on Ed's point and explain that first, to the extent that Schwab is a big proponent of the national market system and supports the competing markets, although we are one of the primary market's biggest customers, we nevertheless also support the retail exchanges, and that's just want they are, they're retail exchanges, and the retail limit order books there are, despite sort of conventional wisdom, the retail limit order books there do set the inside quote.

The value of that is demonstrated by the fact that the buy side and sell side alike clamor for access to those retail limit order books.

The turning point there may have been around 1995 with the advent of the Internet and the 1996 limit order display rules, but regardless, those limit order books are fairly active, and in an era where we're seeing institutions increasingly reluctant to display limit orders in the market, those limit order books may be even more valuable.

Second, our own customers display their limit orders, among other designations, on the limit order books of those regional exchanges, and our own customers are some of the biggest customers for market data, and obviously, we have to buy that market data to show our customers their orders so they can monitor their orders.

One of the fundamental issues here is that our customers would like to track their orders and like to see where they are in the markets, where they are in queue, whether their order is still at the inside, whether they have to change and cancel and reprice their order.

So just the retail customers themselves represent a customer base for that information.

Mr. Seligman:   Okay. I see Bob.

Mr. Colby:   Mark, could I just ask a question about the -- your comments about the limit order book are based on a static state where there is an NBBO.

A customer's willingness, and hopefully, a broker's willingness to route a limit order to a market whose quotes were not being displayed is less certain, I think, in the future, and so the question of whether they would have a limit order book if they didn't have -- if vendors weren't picking up their quotes is, I think, one of the things that needs to be considered.

Mr. Tellini:   It's a fair question. I wouldn't presume the answer, though, because I think it is a bit of a chicken and egg problem.

What you have is, if in fact -- you know, the retail customer doesn't see that the order is not reflected in NBBO.

They measure success by first, whether the order is displayed in the NBBO they see, so that would be the NBBO delivered to them by the vendors that we would subscribe to, and I would argue that every major vendor would have a significant market incentive to produce a consolidated NBBO, much like we have today. I think NBBO is minimum plain vanilla of what customers demand.

In any event, they would both see their order in the NBBO, but also they measure the quality of their fill by how likely they are to have that order executed, and I would order that likelihood of execution doesn't depend on whether it's in a consolidated NBBO that's produced by the Government or, you know, a Government-sponsored monopoly plan, or whether it's an NBBO that's produced by competing consolidators and disseminated that way.

So I think that would be the test. If, in fact the market did produce rapid executions for those orders, because, in fact, those players interested in executing those orders were there, subscribing to that feed, then, in fact, retail customers would place to place limit orders as they do today.

Mr. Seligman:   Go ahead, Bob.

Mr. Colby:   I think there is a chicken and egg problem, because -- and I think you have to figure out what's the problem.

If there's going to be competitively driven NBBOs that pick up everyone, then the issues about market power and the like, I think, remain, even for the regional exchanges. If there isn't, that means that there's a possibility that people will choose to exclude certain markets.

I assume it has to be a realistic threat that they will choose to exclude certain markets from the NBBO, which then means that there's a question of whether a startup market can get market liquidity such that you'll have a reasonable risk, reasonable chance of being executed in that market, because liquidity has to come from someplace. It either comes from advertising or becomes some sort of selfgeneration.

So if someone can be cut off, then I think that -or never included to begin with -- I think new entrants are the biggest problem -- then the question is, how do they ever get going? How do they get their critical mass that then draws more orders? There was a second point, which has slipped away.

Mr. Tellini:   One thing I would point to, also -- and I note Bernie is sitting at the table here -- others in the listed market are offered the same sort of protection, but to the extent that there's print protection versus the primary, I don't think the customer would, you know, if there were subscribers to market data out there that were subscribing to a data feed that did not include the market on which their order was displayed, I don't think that market would have a prayer of actually receiving that order if that market didn't offer print protection.

Mr. Colby:   I'm sorry. Mark and I are long-time colleagues, and we did this all the time when he was here, so I just have this natural inclination.

But by saying print protection, you're necessarily dictating that it's a dealer market, because an agency market can't offer print protection, so if you rely on that, then you're defining the structure of the markets that can enter the marketplace.

Mr. Seligman:   Go ahead.

Mr. Nicoll:   I would just suggest that people take a look at the island market and the EPS, and how they've evolved over the past six months outside of a regulatory environment in which they get representation within the NBBO, and I believe in the last six months, that Island has captured about 15 percent of the volume in the queues.

For instance, right now, and according to our calculations, in fact, 60 percent of the time is better in the inside on the primary right now, and that's outside of the NBBO as it exists today.

So I mean, it can happen. It has happened, and it can happen.

Mr. Colby:   That's because Island -- I think you can't discount the fact that Island already is an established market.l

Mr. Nicoll:   I agree.

Mr. Colby:   But I remember, and I'm sure Mark does, too, the Island founders coming down, and the significance they put on being able to get their quote displayed widely in order to get the market going in the first place.

Now, Island has done wonders with it, and they're doing wonders in the queues, and it's certainly an argument for needing to get the quotes in the queues widely displayed.

Mr. Seligman:   Let me turn to Paul, whom we haven't heard from for a bit.

Mr. O'Kelly:   Paul O'Kelly, the Chicago Stock Exchange. We've talked about the concerns about new entrants in the market -- and they are concerns.

I'll speak about concerns about a participant in the market today. And this is actually a question back to the SEC -- and it goes back to something Simon was talking about earlier about simply re-regulation -- today we have the NBBO. What we're talking about here is doing away with the NBBO as if then market forces -- and presumable we're talking about doing away with the NBBO because there's some quotes that people simply want to exclude going forward, for whatever reasons.

And this talk about that the market will dictate which ones are valuable and which ones aren't and we'll reach a happy equilibrium, I think to some degree ignores both best execution responsibilities and SEC's role in going forward and going into a broker.

And I'm talking about a very practical circumstance. Now, I'm a lawyer for a broker-dealer and I know OC is going to come in and do an inspection in six months and I've got to say what data are we getting from what marketplaces?

And if it isn't -- if we're not at least picking up these people, OC will have a problem with us. But before they come in let me write a letter to the SEC and ask the SEC what the minimum level of quoting or trading in a market center is necessary for me to drop that quote?

And I think there will be an endless back and forth of people for whatever reasons going to the SEC saying, do I have to carry these kinds of quotes? Do I have to pick up these kinds of feeds?

And we'll be back into a morass of regulation again trying to define what is that minimal level of market activity that one needs to pick up to honor their best execution responsibilities.

And as you set those new limits, it will be the kiss of death for anybody underneath those limits.

Mr. Seligman:   All right. Michael?

Mr. Dorsey:   Mike Dorsey, Knight Trading Group.

As far as new entrants are concerned, I don't know how did Instanet do it 30 years ago? They got so successful at creating a side market that the federal government put them onto the montage.

And as far as Island -- the federal government put them on the montage and forced me to pay drawing liquidity out through them. So Island got jump-started.

But my question more to Bob is, Instanet seemed to be successful?

Mr. Colby:   Well, I don't want this to be -Island, when they started, did not charge you. They didn't charge ECN fees until several years into their -- so that second statement wasn't actually accurate.

The Instanet -- I think we could all speculate how Instanet got -- I think the conventional wisdom is that the Nasdaq market didn't offer a book.

There was something essential about that market that they did not offer and Instanet filled the gap. So the question comes -- that says that if somebody offers a completely new innovation, that they might be able to innovate -- but the question is, what about the second person?

How does anyone that wants to come in and offer an improved version in that situation do it without the ability to get the publicity that they're offering the innovation and get those prices available?

Mr. Colby:   Well, I think one way is you can pay people to come to you. So Instanet, as a broker, would be charging their customers to put liquidity in, and then they could pay the dealers to come to take it out. And that would create value.

Mr. Seligman:   Let me -- oh, I'm sorry. Bernie?

Mr. Madoff:   It's hard for me to imagine that we're even having a conversation about eliminating the NBBO. I mean, it's like a fantasy. I mean, if you want to go through an exercise of fantasy, then clearly you can discuss that. But to me, I just don't understand it.

Secondly, it's all well and good to sit here and talk about that you don't have to worry about a regional exchange coming into existence, and maybe it's because I've been at it for a long time, that I remember the history of all of this, but you would not have any of the innovation that you had over the past certainly 25 years in these markets had you not had the small entrants jump-start it or given the ability to compete with the help of the regulators.

So I mean, to sit here and think that the markets are going to sit back here and do the right thing, necessarily, and allow people to come in and compete on a level playing field, to me is just I think a Pollyanna environment.

And what happened here -- although it's not directly related, I think it's important to put it into perspective because I think we're forgetting about a lot of things here -- once markets started to compete with each other and the primary markets lost market share -- whether it to be the regional exchanges -- whether it be to ECNs or whether it be to the third market, then those markets started to vocally attack these competitive environments.

And the way they did that was to go the media and basically attack the creditability of those markets saying that the execution quality was not there.

All right, now, it was very hard for people to defend themselves against those accusations because there were not the best execution rules in place at that time that there are today, nor -- and we don't have the statistics that -- relatively soon -- that we're going to be seeing, all right?

So you would have an environment where you would have the dominant players keeping -- whether it be something like Island, in the very beginning, whether it be someone like myself when I first started out, or the regional exchanges -- those markets would never get the opportunity to exist because the dominant players would do what they always do -- which is what any business person does.

This is not to say anything against any particular market center. That's what every -- that's what you learn in business school, that's what every business does, that they try -- you know, they don't sit there and say, oh, this is nice, let's let all the competitors come in. And let's give everybody a chance to compete.

That's an unnatural state. And that's where we come to -- it's amazing to me that we can sit around tables like this and get as much done as we do get done considering the fact that we all want to each other's lunch every day.

So I think that we have to accept the fact we're not in a perfect world. I think that to sit here and say you're not going to have an NBBO is a waste of time.

To think that you're not going to allow regional exchanges or ECNs to be able to go to the SEC and force the SEC to allow them to exist, in my mind, this is counterproductive.

Mr. Seligman:   All right, let me -- you said one of our magic words, which is lunch, which we'll get to probably maybe about 15 to 1:00.

What I would like to do before lunch is to get a sense of how people feel ultimately on what will be a relatively complex question which is retaining a unitary system with certain innovations versus multiple consolidators with the NBBO, multiple consolidators without.

Before I do that let's have someone speak in favor of the unitary system, why, in effect, the multiple consolidators system seems less attractive.

I can't believe, Mark, you want to speak in favor of that.

Mr. Tellini:   No, but I actually want to speak to something that Bernie raised because we've had a lot of discussion here for the last hour or so about a competing consolidator model. But we haven't actually focused on an assumption that Bernie made, which I think is an important assumption.

And that is the NBBO is actually valuable. Maybe it's because we're on the West Coast and the data just takes longer to get to us, but the fantasy for us is actually that the NBBO suggest the price we would actually be trading at.

So it's repeated as dogma that the NBBO is a reasonable benchmark for execution quality. But for our customers it's not.

From reading the transcripts, it looks like for many of the customers of the people in this room, it's not. For Morgan Stanley it certainly wasn't when they talked about the 10,000- , 25,000-share bench marks.

At the end of the day I think the NBBO may actually be a highly misleading indicator. Regulation with 11A(c)(15) is moving in a different direction, focused around the NBBO.

But in fact, the executions that our customers get actually look very different from the NBBO given the size that they're bringing to market and given the size that's in the quotes.

And I think that's something that is worthy of some discussion.

Mr. Seligman:   Okay, Bernie?

Mr. Madoff:   Yeah, you're right, Mark. When I refer to the NBBO I don't think anybody any longer refers to the NBBO as just the bid and ask. That's the starting point. It's a reference point.

So if you didn't have that, then how do you get in between? So I made the assumption that -- us all being professionals -- we understand that, yes, the NBBO is not meaningful unto itself. And that is the acceptable reference point.

But it's the starting point. At least you know where you start from and what happens in between. I don't think anybody uses the NBBO any longer.

You're correct and I think it was good that you clarified that. But it's more that you need a reference point, whatever you want to call it is unimportant.

Mr. Bradley:   Hey, can I get in here?

Mr. Seligman:   Now, who is this?

Mr. Bradley:   Harold Bradley.

Mr. Seligman:   Harold, good to hear from you again.

Mr. Bradley:   I'm just biding my time here.

As I listen to this I'm a little concerned that people forget our really recent experience and the reason the order display rules came into effect which was related to Instanet.

During that period of time we saw increasingly the retail market looking at the wrong prices as the dealers were engaged in trading on Instanet and what became basically a private, kind of hidden market for professionals to lay off risk and to get quotes inside.

As soon as we went to the new order display rules and a change in the NBBO and the construction of the display, we saw a uniform decease in the quoted spreads, which went into retail, who are -- because of payment, order flow and internalization practices -- looking at the spread as a direct cost -- I believe -- of a savings of about 30 percent. So I guess, I start kind of confirming what Eric said earlier, I really believe that we have to look at the NBBO and or depth of book -- which gets back to our very first meeting -- more availability of transparency of that information as critical for those us in the institutional investment community to do our jobs well.

Mr. Seligman:   Thank you, Harold. I think I saw Bill Harts?

Mr. Harts:   Just briefly -- Bill Harts from Solomon Smith Barney. I think it's interesting that Ed Nicoll mentioned the Nasdaq 100 ETFs because that's actually a fairly good example of the failure of the NBBO concept, particularly lately where we see locked and cross markets a very large percentage of the day.

And I guess, going to what Mark had said, the NBBO as a measurement statistic of best execution seems to be getting lower rather than higher.

We're starting to see or think about different statistics as far as that goes, things like effective spreads and that type of thing, rather than the NBBO.

But not to take anything away from Island's meteoric rise in volume of the Qs. I think that the NBBO in terms of that particular instrument is really problematic.

Mr. Seligman:   Okay, again to focus us on where we are, before we walk around the room -- or I proceed around the room -- does anyone want to speak in favor of a unitary or a consolidator system?

We have had certainly Simon's observations. We've had Don's cost and benefits looking at multiple consolidators. Anybody want to add anything?

In that case, let me return to the beginning of the alphabet. Michael, I would like you to begin expressing your view as to whether your preference would be to take the current system and make the kind of changes we've discussed in prior meetings -- whether it's to a more free-market approach to what's not covered by the NBBO? Or a competing bids system for choosing the consolidator? Or changes in governance such as Rick Ketchum's proposal for advisory committees?

Or alternatively whether you would favor multiple or competing consolidator system? And if so, would that be with or without a display rule?

So it's a compound and complex question, but it I think reflects the point to which we've come after close to four and a half meetings.

Mr. Atkin:   I think I would favor retaining the unitary system if there was no change in the display rule.

And within that I would separate out the function of processing efficiency from the function of market data, business practices and deal with those two things separately.

If there was to a be a modification of the display rule, probably most in line with what's included in the display, then I would favor a movement toward multiple consolidators.

Mr. Seligman:   Okay, let me flesh this one out. Ultimately, one does have to choose.


Mr. Seligman:   Would you prefer a world with multiple consolidators -- and I take it what you're talking about is not the elimination of the display rule, but the amendment of it?

Mr. Atkin:   Well, I think there's a conversation still to occur on modification of the display rule. We have not -- we've really talked about either eliminating it or having it.

I think there is clearly some value in it and there's a benchmark price. And lots of the conversation I think is what's included in the NBBO?

And do you include out of the market price -- far out of the market prices from the regional? Or don't you? And there's a conversation that should be had about that.

Mr. Seligman:   And that's where we'll go this afternoon -- or later this afternoon, I should say.

In any event you would not favor a multiple consolidator system if retain the display rule as it now exists?

Mr. Atkin:   Correct.

Mr. Seligman:   Okay, Kerry, you are computer quick today.

Ms. Baker:   I am. Our position has not changed. We are still in favor of keeping the current system and making a number of changes that have been discussed at the previous meetings, kind of bringing the current structure up to date.

Mr. Seligman:   Okay, Rich.

Mr. Bernard:   Well, I guess, it's no surprise that we would like to move to the competing consolidators model, regardless of what's done with the display rule.

As regards to display rule, we share the view that -- as to the folks at the broker-dealers who are making order routing decisions -- and responsible for best execution and as for the institutional investor, they will by demand get whatever they need including the NBBO and anything else they need.

Our concern continues to relate to the individual investor. But we're not persuaded that market forces will supply the NBBO and the last sale from all markets.

And I say that knowing what -- and I certainly agree wit those who say that if you want to turbo charge the impact pricing-wise from moving to a competing consolidator model, you certainly would want to get rid of the display rule.

But we just can't get over the issue of the individual investor and the RR serving the individual investor.

Mr. Seligman:   Again, to be absolutely sure I understand --

Mr. Bernard:   We would keep the display rule but get rid of the single consolidator.

Mr. Seligman:   I got you. Harold Bradley?

Mr. Bradley:   I am persuaded by the discussion this morning that there aren't significant technology barriers other than perhaps vendor reluctance to move.

I've already stated I think I'm also persuaded by Eric's logic earlier that the order display rules to me are critical for any model we move to. And I would prefer a competing vendor model, given the idea that I think we note we're certain that there will not be competition or solutions coming out of our existing 30-year-old structure.

I think that would be more likely in a competing vendor structure.

Mr. Seligman:   So it's competing vendors, but keep the display rule?

Mr. Bradley:   Correct.

Mr. Seligman:   Okay, Matthew DeSalvo, are you there? Okay, let's turn to Mike Dorsey.

Mr. Dorsey:   I think my trading group would like to see consolidators. We respect the fact that the trading venues create a database and its third database and let them sell it to whomever they please. We believe that the market forces will compel them to make it widely available. As a matter of fact, we think prices will drop, not increase.

As far as the display rule is concerned, it's a little bit tougher because we really do like the new rule that the SEC promulgated; but, again, one of the broker dealers in our enterprises is connected to all five options exchanges and makes routing decisions based on the information it's getting from those exchanges. We think that we can do that service, the NY stocks and the NASDAQ stocks. So we don't really see a need for a display rule anymore.

Mr. Seligman:   Okay. Jim?

Mr. Doughan:   I guess I would say that at this point, we choose not to say anything. We don't really have any particular strong opinions. If we were forced, we would abstain.

Mr. Seligman:   Far be it from me to force you then.

Mr. Doughan:   That being said, we are in favor of free and fair competition at Susquehanna and it seems to be a difficult pose to strike that we have to restrain competition in one sector of the market place in order to allow it and encourage it in another. So that is something that we're wrestling with. We don't know exactly what is the right answer.

Mr. Seligman:   Rick Ketchum, welcome.

Mr. Hunt:   Thank you, John. I apologize for not being here this morning. It seems a little wrong to vote after not having contributed to the conversation, but I am sure NASDAQ was well represented.

Our view has been to set down on paper. I won't go into great details again, but we do support competing consolidators. We think it is -- it simply will provide some additional innovation and that makes sense. Beyond that, it simply is inappropriate in an environment that is going to evolve as much as this for markets to be required to be participants of a single plan.

And the impacts on how those plans are regulated when all markets are required to be in them, I think are far too difficult, as well as the exposure from the competitive and anti-trust standpoint to require that. So we do believe that competing consolidated is preferable. We do believe strongly that consolidated information remains something that should be required in the market. Without that, there are risks as Richard said well with respect to retail executions.

We do think, though, that this is a good opportunity for the committee and then the Commission to clarify the public interest in allowing all markets and all participants to be able to make available in whatever way they find useful additional information over and above the consolidated best bid and offer. And that we distinguish between the consolidated best bid and offer and the making available additional information beyond that.

Mr. Seligman:   Thank you. Bill?

Mr. Harts:   With the caveat that there would be the appropriate standard setting that Tom Demchak spoke about this morning, we would also be in favor of competing consolidators. And recognizing that there is the potential for confusion on the part of some people given that there may inevitably be different prices, different information coming these difficult consolidators.

It is too important a function to not allow true competition. So we would be in favor of that. And also of maintaining the display rule. That's very important.

Mr. Seligman:   Okay. Simon?

Prof. Johnson:   I disagree with -- I agreed with a lot of what Ed Nicoll said, but I disagree with both him and Eric on this key point which is the number 1 priority and presumption should be promote competition whenever you can. That's number 1.

I think number 1 priority should be protect the individual investors and be sure that what you're doing does not hurt their interests. And subject to that, if you can find ways to do that and be sure of that, then I'm in favor of promoting competition absolutely. But I find the case to be very weak -- the case in favor and the benefits that have been laid out, very weak on the side of multiple consolidators and I find the risks to be potentially large and I think for that reason I would prefer to stay with the unitary system with the change in governments that have been discussed.

Mr. Seligman:   Ed?

Mr. Joyce:   I agree with that statement. I find the risks greatly outweigh the benefits. I would stay with the existing system and implement changes, governance, get more input from the users in the form of an advisory committee.

Mr. Seligman:   Don?

Prof. Langevoort:   Three points. I don't know that -- and being an outsider and all this, but I know enough about the display rule, the impact the providers of services, to make a prediction about what the effect on individual investors would be of eliminating it.

I think there are a lot of questions worth pursuing further, but this is a committee on market data rather than one that has taken the display rule head on and sought all the voices that would be important on that. So, I'm not in a position to say I know enough to articulate, to advocate repealing it.

So assuming we keep it in place, I'm indifferent between the competing consolidator and single consolidator. I think there's a wash in costs and benefits. I'm convinced in principle by NASDAQ and New York about what an ideal model would look like. My sense is moving to that model will create points of tension that will take a good while to work out and, indeed, be a drag on that transitional process.

So having said two fairly useless things, let me add one useless thing, but at least it is a note of hope. I am going to hope or predict that the topic we come to the first thing this afternoon may in the end be the most important, which is the sale of enhanced data products in a fairly free and open market place and the hope that if we encourage that and create an environment in which that can occur fairly vigorously, the NBBO and the consolidated product may indeed wither away and become less and less important until the issue essentially goes away on its own.

Mr. Seligman:   Bernie?

Mr. Madoff:   I would vote for the competing consolidators and retention of the display rule.

Mr. Seligman:   Brian?

Mr. McNelis:   Well, Reuters would remain in favor of the competing consolidator model. I take from this morning's discussion that, first of all, in terms of the display rule, it's a two-part rule, really: one governing last sale and one part governing the BBO.

As Tom Demchak clearly pointed out this morning, we have no idea when the last sale occurred, so it is really ineffective. That part of the display rule is useless, apparently.

With the BBO, itself, we've heard some of the customers explain that they actually are looking towards other measures and that there may be other ways that they would prefer to receive the data. We would certainly like to accommodate that if they wanted that.

So we don't see that there's a great utility to the display rule as it exists. And perhaps it would be a stumbling block in moving to a competing consolidated model from the business standpoint of being able to actually negotiate contracts with exchanges.

And, finally, the whole idea of the governance plan, I support the things that both NASDAQ and NYSE have been saying about the difficulties of the current governance plan. We certainly feel the effects of that as a vendor and would like to see changes in that area.

Mr. Seligman:   Okay, appreciate it. Mark?

Mr. Minister:   We would also support competing consolidators. I think it actually exists today. We put out an NBBO on the options market, there isn't one, so we create one. We are certainly taking in full order books from various ECNs, so it's going on today. And I think that I would actually like to see it get more competitive so we would move faster. So, certainly, I think there is benefit to the industry from competing consolidators.

Brian and I were kicking around the idea of possibly competing consolidators and a single vendor would be something --

(Laughter.) Maybe that's a different group can take that up.

Mr. Seligman:   That's the DOJ.

Mr. Minister:   I do think, though, that a form of NBBO -- I agree with Bernie -- needs to be made available. Certainly, enriched data, the New York Stock Exchange is doing quite a bit in this area, as are others. I think we'll talk about it this afternoon, but as a minimum benchmark, I think there has to be a minimum display rule.

Mr. Seligman:   Ed?

Mr. Nicoll:   Well, obviously, we would vote for competing consolidators and to do away with the display rule. I do want to note that I did overhear Mark and Brian's conversation. They promised that they're going to do the right thing. Okay? You don't have to work.

Mr. Seligman:   Paul?

Mr. O'Kelly:   We would answer the questions this way. First, the question of the NBBO, we would be in favor of keeping it. We are in favor of keeping it. And that implies the answer to the next question about whether there ought to be competing consolidators or not. We think there ought to be a single consolidator.

We acknowledge some of the problems that New York and NASDAQ have mentioned. But if you have an NBBO and competing consolidators, you are just going to be substituting another set of problems. And that's -- I am probably more closest to Don down there. I think it's kind of a wash and this is a system that has worked well for a long time. If you've got a wash, stay with what you've got.

Mr. Seligman:   Eric?

Mr. Roiter:   Thank you. Well, to reiterate, I am in favor of multiple consolidators with retention of the NBBO. I would like to clarify, though, in response to Simon's comments, that I didn't express unqualified support for competition whenever it's available.

I did say that there should be a presumption in favor of competition subject to a reasonable degree of confidence that other important public policies not be compromised or undermined and I have been listening and I've read Simon's paper. And I have not been shown that there would be that undermining or compromising of other policies at least where you retain the NBBO.

I think Simon alluded to a number of risks that are particularly present when you abandon the NBBO; but I think if you retain the NBBO and consider the public policy risks posed by multiple consolidators they are at this point essentially speculative.

I would say that when we talked about competition we really have today and on other occasions talked about three different arenas of competition and, perhaps, if we had a different word for each of those three arenas of competition some of our discussion might have been a little more clear.

In my mind, there are at least three. One is the market for market data. And that market, if we were engaged in market definition, has its own set of market participants. It includes all of the market centers. It also includes a single consolidator currently. And, of course, it includes all of the vendors and users.

There is a second market that we have talked about also and that is the market that each market center represents for order flow and transactions. And that is not to say that those two are not related, but they are different and they are different market participants.

And then finally, there is a market between and among buyers and sellers of securities. One can place relative values on each of those three markets. I happen to place the ultimate and transcendent value on the market between and among buyers and sellers.

I think the SEC historically has been very prescient and very prudent in not trying to cut off competition in any competitive arena to advance competition in another. And I think that was alluded to a little earlier today.

I see that preserving that NBBO and allowing multiple consolidators would tend to promote competition in each of those three competitive arenas, the arena for market data, competition among market centers for order flow and then ultimately competition among buyers and sellers.

It may be that there will have to be some modification or tweaking of the SEC's rules that would address any discrete regulatory issues that may arise from multiple consolidators, but I think it is far better not to prejudge the outcome of allowing for greater competition consistent with preserving other important investor protections; but, instead, to let the potential for competition unfold and then address whatever issues might come out of it with discrete responses.

Mr. Seligman:   Mark?

Mr. Tellini:   So, not surprisingly, we support competition at every level. So we support elimination of the display rule as an anachronism and one of the biggest impediments to real competition in this market and to real accessibility of meaningful market data product for our customers. And, obviously, we support a competing consolidators model, which we actually support regardless of whether you eliminate the NBBO.

Mr. Seligman:   All right. Well, we've had a very, very productive first session today. Let's take a lunch break until 2:00.

Let me just observe as we depart for lunch, I think this was one of the most optimistic sessions we've had. I think we are moving unequivocally towards a more competitive environment, but I think we've been very constructive and taking seriously the costs and risks involved. I think we will have some interesting proposals at the end of the day. I want to thank the group for their participation so far in the process.

When I contrast certain moments I had of the dental variety at the last session with the constructiveness of comments today, I think we are really making some progress.

See everybody promptly at 2:00. We still have a ways to go. And the SEC facing I take it the new budgetary realities have decided not to have lunch today, but there are lunch places nearby.

(Whereupon, a luncheon recess was taken.)

Afternoon Session

Mr. Seligman:   Why don't we get started. This afternoon there is a residual issue that we realized we want to spend a few minutes on as we reviewed the transcripts of the minutes from the earlier meetings, and that is the question if we retain a Display Rule either in a unitary or competing consolidator mode, what would be the process with respect to the dissemination of information that is not subject to the Display Rule?

I thought to give this discussion some context, I'd ask Annette to give us an illustration of how, for example, the potential filing that the New York Stock Exchange alluded to at the last meeting by which they might make their entire limit order books available, would currently be treated by the SEC in terms of what must be filed, what kind of review there would be, what kind of standards?

The question I am really going to pose to the group then is is that what you would anticipate and want with respect to information outside of the Display Rule or would you want a different kind of model?

Bob, we haven't heard much from you.

Ms. Nazareth:   Share the wealth.

Mr. Colby:   The process that typically happens with respect to both rule amendments and also plan amendments is that they are -- rule amendments are under the statute, plan amendments under our plan rule need to be filed and then they are noticed for comment, and after the comment period comes in they are approved, disapproved -- or -- I guess those are the choices -- or not acted on -- no.

Ms. Nazareth:   That never happens.


Mr. Colby:   They are approved or disapproved. The fees typically are -- they go out for notice and comment and fees that are -- market data fees are not typically effective on filing. They go out for public comment before becoming effective.

The standards that apply to market data revenues, as we read the standard, there's two sets of standards that apply to fees in a sense. One comes under self-regulatory standards and those self-regulatory -- dues, fees or the charges have to be equitably allocated. It has to be fair dues and fees that are equitably allocated. Did I garble that? I garbled it. Did I get it close to right, Rich? Okay, thanks.

And then under 11A charges for market data, if you look at it, it's fairly broadly defined or subject to standards of fair and reasonableness with respect to data made available by exclusive processors, which of course is markets making it available on their own behalf or through an agent, and then subject to "not unreasonably discriminatory" or beyond. That goes beyond exclusive processors. That also potentially applies to vendors.

An exclusive processor would be CTA is an exclusive processor, Nasdaq is an exclusive processor, OPRA is an exclusive processor. But if any exchange were making data available on their own, they would be an exclusive processor also. So of there was not a CTA and New York and Chicago made data available separately that they would each be an exclusive processor for their own data.

Mr. Seligman:   Bob, and I am not necessarily describing what New York would intend to do, but just hypothetically if New York made a filing to the effect that we will provide a limit order book without charge to anyone, and I don't know if that is our anticipation, how long would it take the SEC to decide whether to approve or disprove that in the normal course of things?

Mr. Colby:   Well, rule filings that go out for notice and comment because it is typically a 45-day comment period, on the best of times it is a three month process, but if they get controversial typically what happens is -- and that is if it's -- if it's New York I'm sure it will be perfectly clear. Not every rule filing always expresses itself in clear and consistent language.

But if it is controversial, what typically will happen is that in order to try to evaluate whether it's approved or disapproved we look for a response to the comments back from the SRO and that and just trying to understand the area will take longer, so if it is something that is pretty plainly in the public interest and not particularly controversial, as I assume something like this would probably be. It would be a couple of months at a minimum.

It was the depth of quote filing that came in from New York that, it seemed to us that it was something that was badly needed in the light of decimals and noncontroversial and we approved it, accelerated, I believe -- accelerated basis -- and so it was filed and approved in a very short, maybe in the same day, but it was in a very short amount of time.

If that happens there is a possibility of comments afterwards.

Mr. Seligman:   And this is what you sometimes refer to as "immediate effectiveness"?

Mr. Colby:   Well, there's two different possibilities. Immediate effectiveness is something that comes in and it is effective on filing but it goes out for a comment period. We have the ability to abrogate it and throw it over from the category of effective on filing and to a formal notice and approval process, so if it is immediately effective and we don't abrogate it, it stands approved -well, it is not approved. It stands in effect without any further Commission action. I'm sorry. It's a complicated process. I am probably not explaining it very clearly but, yes, things that come in -- they are operative when they come in and if the Commission takes no action whatever it stays operative indefinitely.

We put those out for comment in order to get comments on whether we should abrogate. If we abrogate it, it just slips over into another category where it gets put out for formal notice and comment but has to be approved before it could be effective.

We have this separate ability to take a rule that came in that was filed not effective on filing and speed up how quickly it goes into effect, and that is acceleration, so we can, for good cause we can do something without a comment period or in a faster timeframe.

Mr. Seligman:   So that to generalize a little bit here, with respect to data outside of the NBBO, if that is the direction the Commission goes, there really is one huge initial choice. Do you continue filings with the SEC or do you do it totally exogenous to the SEC?

Mr. Colby:   I'm sorry, that's not the choice. (Laughter.)

Mr. Seligman:   Well, in fairness, Bob, it is, because we can recommend -- going forward --

Mr. Colby:   Oh, I thought you meant under the statute.

Mr. Seligman:   I understand under the statute you would have to proceed through the SEC filing route. We could recommend a new approach.

Now let me highlight that there is an enormous consequence to a nonfiling approach, and that is you lose your antitrust immunity. The real or one practical significance of the SEC's review is to my knowledge when the SEC has reviewed a rule or a plan amendment there has not been a successful antitrust suit.

Outside of SEC review, all bets are off. That doesn't mean that there would be successful antitrust lawsuits, but it does mean that there wouldn't be the same kind of implied immunity that you now have.

So that one question I want to pursue, and let me just get the sense of the room, is with respect to data that would no longer -- that would not be covered by the Display Rule, are there some who would want to speak in favor of what we might call a totally free market approach. That is, an approach with no SEC filings. Is that what you want or is the assumption that you would have the same kind of filings that, for example, the New York Stock Exchange is contemplating with respect to its limit order book?

Let me just ask, anyone want to speak in favor of no SEC filings?

Mr. Bernard:   Not exactly, but I want to draw a distinction and we have had this debate a little bit with the SEC Staff -- something like what we are literally talking about, which is limit orders, I think that is so core to what exchanges do that it is rightly understood, as Bob said, as being part of an exchange facility and subject at least to the section 19 and the section 6 side. I have a little debate with Bob about whether this stuff is actually an 11A, but for the purposes of this discussion that is not an important debate.

It is no less core than many other things exchanges do, like execution services and, you know, top buy market data, and so it would be a very peculiar world where something as core as limit order book would not be part of the filing requirement.

When you move away from stuff that is sort of peculiar to exchanges, then I begin to have a different view.

Mr. Seligman:   Give me an illustration.

Mr. Bernard:   Well, certainly nonprice data, for example, which is very meaningful, becoming meaningful, with the databases that Nasdaq and New York have, order management, order information, that sort of stuff. I began to see a difference from what is core and what is something else that exchanges are doing.

Mr. Seligman:   And help me out a little bit, if you will. "I am from Missouri" -- show me what nonprice data is.

Mr. Bernard:   How many, what is the ratio between buy and sell orders that have come into the New York Stock Exchange at up till 9:30 -- are consumers planning to be on the buy side or planning to be on the sell side.

Mr. Seligman:   The approach that was ultimately commended by this committee was we retained filings but we would assume that specified kinds of them would be immediately effective. Would that be sufficient to deal with that type of issue or would you prefer basically to identify things that would not be subject to filings at all?

Mr. Bernard:   We may be going real far afield, but let me tell you how we think about it.

There are those things that the exchange have uniquely -- for example, and I really am speaking in the stock exchange concept, because it gets a little different when you move to the third market in particular or the over the counter market.

But in the case of the auction market, the last sale price is uniquely known to the auction market because it happened on the auction market.

The quotation is uniquely known to the auction because you don't know what orders that came in or what proprietary interest came in until it's inter-reacted with the other orders to know what is the best quote. You just can't tell that from outside.

So in those things you are definitely in areas that no one can go gather that outside of the stock exchange. You have got to have that information. You have got to be on the floor of the stock exchange or in the systems to know the answers to what's the last sale price, what's the best quote.

When you move away from that and limit orders is in my view the last frontier, but as you move away from that you now have information that is not generated on the stock exchange. You literally could go to Schwab and Merrill Lynch and DLJ and everybody else, collect all the orders and the proprietary interests they care to put in the market, put it together. A vendor could do this and never talk to the New York Stock Exchange.

That is the continuum. The more you move into that area, the less I see the case for viewing the exchanges doing something that is peculiar to exchanges and you are more into the realm of something that we're just another person in the competitive landscape.

Mr. Seligman:   Rich, you may want to think of how you articulate the continuum, if you will, in ways that could be consistent with some sort of standard. That is, the problem we are going to have is we are going to have to make a recommendation to the Commission and we are going to basically have to say either everything is subject to filing or certain things are subject to filing, and how do you distinguish, if you pursue it that way.

Mr. Seligman:   Well, the black line I would give today is price data but --

Mr. Bernard:   Okay.

Mr. Seligman:   -- but think about whether or not you want to amplify that. Richard Ketchum.

Mr. Ketchum:   Let me first totally agree with Rich that I think there is at least some line in there that needs to be looked at and we will do some thinking on that.

If anything, I would probably draw it more tightly than Rich. There are going to be a variety of ways that markets just as in other participants are going to data mine the information they have and try to provide things that are useful either simply out of that data alone, or on a voluntary basis with respect to the fact that we know who traded with whom and that may provide us abilities to find the other side of trades and a variety of other things that may not be available otherwise.

I think whether it is from the standpoint of not treating that as rule filing information, which I do believe raises at least interpretative issues without changing the statute today or exemptive action by the SEC, and whether it is that more of that should be effective on filing I believe that there needs to be a thorough rethinking where an exchange is trying to operate in a private environment where they are more effectively competing against other possible products, as opposed to simply displaying something that is part of essentially their priority system of who is going to trade with whom, when, as a limit order book would do.

The other piece that I really fear to tread, Joel, given your position as the historian of the SEC and given the fact that the SEC has also said something almost identical to what you said, I just want to note that at least Nasdaq disagrees with what you say as to the fact that rule filing is the sole determinant as to whether there is a indemnification built into antitrust liability with regard to the SEC.

In fact, at least two of the major cases including one of the major Supreme Court cases involve not that situation at all. It involved where the SEC had been actively reviewing and using its oversight responsibility, and it does not seem -- it is not over simply because the SEC doesn't approve a rule, and I would just like to say that.

I think there obviously, it is undoubtedly more open to interpretation and there is more risk involved but I believe the standard is a much more a facts and circumstances test with respect to SEC oversight than just whether the SEC proves something.

Mr. Seligman:   Actually, Rick, I think we don't disagree so much as I didn't sufficiently articulate what I think the law would be.

You are correct. The issue is SEC oversight.

A rule filing essentially ensures that there are other ways to provide it, and I think we are probably on the same page with respect to that. Bob?

Mr. Colby:   I just wanted to say that the Commission currently has out for comment a rule proposal that would make rule changes involving trading systems effective on filing, unless they were super material.

Mr. Seligman:   Okay and that poses an intriguing question as to what super materiality means.


Mr. Seligman:   Michael, I'll get to you in a second. I think we had Eric next.

Mr. Roiter:   Eric Roiter. Two points.

First, maybe there's some room to allow market centers to opt in or opt out of filing for SEC review, and if they choose to go through SEC review they get some level of immunity from antitrust laws.

If they choose to go without SEC review, then they would be subject to whatever antitrust laws might be applicable and that might sort itself out in a way that the noncontroversial, relatively noncontroversial filings just get put into effect immediately without the need to go through an SEC review process.

I would point out that once you get away from the crown jewel of market data, if you will, the NBBO and last sale, and speak in terms of providing supplemental or ancillary market data, if it is coming from a market center with market power, then you always I think have to be sensitive to the potential for tie-in pricing, and there may be a justification for tie-ins, but then again there may be instances where a market center is inappropriately trying to leverage its market power where it does have a position to exact market -- nonmarket prices in one area to subsidize the other segment of the market where it does face competitors.

So I think it's not quite as simple as saying once you get past a certain category of market data the rest can be left to the free flow of competition.

Mr. Seligman:   Michael? We really had Michael Atkin, then Michael Dorsey.

Mr. Atkin:   I just think that I wanted to emphasize that point that I think that this is a very important concept.

I have been cornered more than a few times by a number of our members on the concept of the definition of "core data" and what is and is not included in core data, and there is a lot of things that are in question. For example, something like an official exchange VWAP price, is that core data or is that not core data? How would you then -- and what would then be subject to SEC oversight and fee regulation? Really important idea that I think needs full discussion.

Mr. Seligman:   -- to have mutual discussions today, this may be a discussion in effect that takes place in our round-robin circulation of manuscript.

It seems to me there are two conceptual approaches one could take to this. One could say, in effect, any market data has to be filed, but much of it we would anticipate would be subject to immediate effectiveness.

And we would encourage the SEC to use that approach as broadly as possible.

The alternative would be to say specific types of data would have to be filed. Other types would not. And if we pursue the second approach, we then have to try to delineate which is on what side of the line.

And I don't know if we have strong or well formed views on that yet, but that's certainly something that those who are intrigued and interested in this question may want to send a memo or a letter.

And I would encourage you to do so no more than the next 10 days or so on this topic.

Mr. Atkin:   Well, as you get to the point where we're thinking about allowing exchanges to compete in the marketplace for data, and I personally don't have a position on this at the moment, I'm just trying to reflect what I've heard from our membership that the definition of what is and is not included in oversight by the Commission is an absolutely critical question.

Mr. Colby:   Can you tell what the considerations are? When you say it's critical, what are they concerned with? Whether your members are concerned --

Mr. Atkin:   Yeah, the concern is how much they're going to be charging for that data. And is there any means of oversight on what's being charged for that data?

Mr. Seligman:   Well, let me make it a little more complicated. Because I think if you aren't charging for the data, I would assume you would have to file it.

We could talk about not. But the SEC does have a statutory responsibility at this point with respect to certain types of fees that would certainly kick in --

Mr. Atkin:   How would something like an exchange volume-weighted average price be considered by the Commission?

Mr. Seligman:   Charged or not charged?

Mr. Atkin:   Charged -- they can charge for it. Vendors can create their own volume-weighted average price. But if it the exchange issues an official one and investment managers say, we don't really care what the real one is, we just care whether our prices match, they're going to want to use the exchange calculated price.

And that way the exchange is kind of competing outside of the traditional domain -- perfectly reasonable for an exchange to do want to do that.

Ms. Nazareth:   No, I think the point that you're raising and I think it was the one that Rick mentioned earlier is that you have to be sensitive to the issue that if you've got regulated market participants like SROs who are competing head-on with folks who are using these value-added services that they're making available and don't have to file that it creates an untenable problem for the regulated entities, that they can't really compete head-on with respect to that data.

Mr. Atkin:   Absolutely, it works both way.

Ms. Nazareth:   That's why this is all quite definitional. What is that should be regulated? What is that should be outside the scope? Because really what you're doing is competing with others who are not regulated in that same space.

Mr. Colby:   Just to complicate it a little more, Joel, we've have instances of where commentators argued that the exchanges were charging too little for the data products made available.

Mr. Seligman:   Can you maybe amplify that a little bit?

Mr. Colby:   Well, the arguments sometimes are that a particular data service has been subsidized and so they're undercutting a competive product offered by a private vendor.

Mr. Seligman:   I think there's an intriguing aspect of our earlier discussion that focuses on services outside of the NBBO or rather outside of the display rule for which fees might be charged.

There was a lot of discussion at earlier meetings about most favored nation as a really non-discriminatory pricing approaches.

And it may be that you're going to charge a fee but there's only one fee and it's charged to everyone, there would be either a presumption of immediate effectiveness or what have you if it's outside the display rule. And I throw that out as a possibility. ccc Joel, Don was subjected to all this. But you were not. We had a lengthy discussion at the sub-committee about whether one size fits all if truly nondiscriminatory.

And I can give you several examples of where we had the same fee for differently situated people, it would be discriminatory.

The obvious example is the no-pro fee where most people think -- not everybody -- that charging $120 a terminal for the first terminal to a pro is okay, even though you're only charging $1 or 50 cents to a non-pro.

So there's a first example.

The second example is in the current situation with the Internet distribution by the brokers where we charge $120 for the first terminal to a broker who re-disseminating by telephone, but we charge $1 or 50 cents or a penny per quote or a fraction of a penny per quote if that same broker is disseminating it to his customer through the Internet.

So I can tell you right now that the idea that one size fits all is going to get you out of this problem, it won't. At least not in our market data experience.

Mr. Seligman:   And I don't disagree with the significance of your arguments.

What I'm suggesting is a different point, though. And it goes to, if the SEC does have a review role of some sort, with respect to data outside of the display rule, how does one craft that review role?

And it seems to me, if you're dealing either with - let me use the term material -- less material information or information where there is the one size fits all in terms of fees, expedited or immediate effectiveness for the SEC review might be more appropriate that if you're dealing with more complicated types of applications, such as different fees for different types, where the effects and circumstances might be harder to improve on an immediate effectiveness basis.

Let me go back to the initial question. I take it so far there have been some suggestions that there might be some types of information that are non-core that should not be subject to filing with the SEC if the we can identify what non-core means.

And I take it we'll pursue that through our kind of round-robin circulation. I take it with respect to filings that include fees, we need to flesh that out a little bit.

Is there anyone who would like to suggest that any filing that would be on a fee basis, that is would have a fee, would not have to be made with the SEC?

And let me withdraw that question and get it right. Any data for which a fee would be charged would not have to be filed with the SEC.

Are we really saying, in effect, there are certain forms of non-core data for which no fee is charged that potentially might not have to be filed with the SEC?

But when a fee would be charged, there's a recognition that it would have to be filed with the SEC regardless of the level of review?

Mr. Ketchum:   I say this less because I think it necessarily is something that the committee needs to parse down to than just to avoid the opposite.

I do think that in instances where exchanges or markets act as a pass-through from one party to another where those parties voluntarily choose to have their information disseminated as opposed to globally disseminated data that, in fact, that is much more analogous to a private service and a non-core exchange function that at least should be treated as effective on filing and preferable should be outside the rule definition.

Having said that, I don't really argue that the committee out to start dealing with what is really tertiary issues of interest to maybe three or four of us around the table.

But I do think there are situations, Joel, I wouldn't want to have simply a statement that there never is a situation where we disseminate data if, indeed, it simply is facilitating the voluntary dissemination of data that we can do more easily or universally than any particular participant?

Mr. Seligman:   Rick, there's another way to get to that point which is -- we could offer some generalizations but largely leave it, if you will to common-law experience -that is to develop over time as the SEC sees more types of these filings, rather than specifying a hard and fast standard?

Mr. Ketchum:   Well, we'll at least try to give some examples and some attention to your request on the core, noncore data and try to be more specific than I just was there.

But it may be that the right thing here is for the committee to focus on the basic key issues of universal data things like a limit order book, or the information with respect to orders handled by any registered market and leave the other issues to the SEC.

And that may be, indeed, the right thing to do to not get us outside of our core area.

Mr. Seligman:   Anyone who would take a different position than Rick is suggesting?

Okay, let me then focus on the third question, should market makers and ECNs be permitted to sell their data directly to vendors and others?

And obviously we are not dealing with display rule data. We're dealing with everything else. Who would like to make the argument that they should?

I need you, Ed.

Mr. Nicoll:   Should market makers and ECNs be allowed to sell their data?

Mr. Seligman:   Directly to vendors?

Mr. Nicoll:   Directly to vendors.

Mr. Seligman:   Without going through the exchanges or the SROs?

Mr. Bradley:   Is that exclusive of the first consideration we had where they might both provide it to the common utility and also separately? Or just separately?

Mr. Seligman:   I think that's a legitimate question, as well. Harold, what's your view on it?

Mr. Bradley:   Oh, nobody else is looking up, huh? (Laughter.)

Mr. Seligman:   We didn't realize we had to look up to see you.

Mr. Bradley:   My view would be that -- to the earlier issue of multiple consolidation and the display rule that the provision of that data under the rules of display rule are important to investors and I would like to see that continue.

But I don't see why there couldn't be -- as in our first or second meeting -- the existence of alternative sources for them to sell that data supplementarily to what they're required by law to provide -- or by regulation to provide.

Mr. Nicoll:   Let me just take this from a practical point of view. If the -- and let me just take it from an ECN's point of view for the moment -- if the ECN was required to deliver the data without cost to its SRO, and actually one could make the argument right now that it's actually being charged to deliver the data to its SRO, because in fact, ECN's pay a fee to report their trades to their SROs.

But if the ECN was required to deliver the data to their SRO and there was an NBBO and their SRO therefore was required, then that information was required to be incorporated into the national best bid and offer, then the only market that the ECN would have would be if it could sell data -- if it could distinguish the data that it sold to other parties.

And I would think, for instance, from Island's point of view that there may be a market because they could deliver the data faster, directly -- without putting it in any pejorative terms at all -- than the process takes to go through the SRO and get consolidated through all of that process that we talked about.

We talked about the dwell time, for instance, before. And then that would be an interesting question whether or not it's a good policy decision to allow an ECN to deliver data to one group of people prior to everybody else receiving that information.

And it's kind of an interesting question which is complex and we're in a mixed environment in which I'm not sure that we would favor even though we might benefit from it. I would have to think it through a little bit.

But I can't imagine that is a viable regulatory environment that the SEC would allow to occur.

And from a practical point of view what our opinion about it is, is probably not meaningful. Is Island going to be able to sell data to one part so that they get it before everybody else, in an environment in which we all still believe that an NBBO is an important regulatory foundation, I don't think so. It seems like a moot question to me.

Mr. Seligman:   Ed, let me ask you permutation on that. And that would be, if you focus not on the NBBO but on other --

Mr. Tellini:   But you do. You do today, right? You put it up on Island, don't you? I mean, you may not sell it, but it's out there. It's faster, it's free.

Mr. Nicoll:   Right. But it exists because it's out there. It's free. It's available to everyone.

If we were in a regime where we were restricting that information and then preferring particular people and selling it, eliminating the access, do you think that the SEC's posture would be the same?

Mr. Tellini:   We can ask them. But you are in a sense selling it, too. Because you probably don't put it up there without requiring them to advertise on your behalf?

Mr. Nicoll:   Not true.

Mr. Tellini:   Okay, all right.

Mr. Nicoll:   We're selling it in the sense that it is an advertisement in and of itself which then attracts volume. I mean, to that extent there's a sale in the broader sense.

Mr. Seligman:   Okay, I saw Bill, I saw Eric, I saw Michael. Bill.

Mr. Harts:   I think you asked if market makers and, I guess, by extension broker-dealers should be able to sell data independently of the SROs and the answer, of course, from me would be, yes.

I think there's a very slippery slope that you go down when you start to try to figure out what is market data and what isn't.

I think at one of the early meetings of this committee I talked about indications of interest and advertisements and so on who -- this type of data is currently distributed outside of the SROs through some thirdparty vendors.

And I wish we could sell it them right now. We don't. But I don't want to rule out anything for the future. And I think that by forcing it through an SRO that it might have a some type of dampening effect on what would get sold and what products could be developed.

Mr. Seligman:   I think I saw Eric.

Mr. Roiter:   I really had just a fact question. The statute and rules now do they contemplate the ability of somebody denied or restricted access by a non-exclusive securities information processor to have recourse? The SEC? Or are those denial or restriction of access proceedings limited to exclusive SIPs?

Ms. Nazareth:   It's limited to exclusive process.

Mr. Seligman:   Excuse me, I have Michael.

Mr. Dorsey:   Mike Dorsey, Knight Trading Group. We certainly take the position that we ought to be able to sell it whomever we want to sell it to.

We view it as our intellectual property -- for how much intellect our traders may have -- but that it's our property and that certainly we have to turn it over to Nasdaq under the Work Station II agreement and they gain a proprietary interest for their database.

Quite frankly, I don't know how much value there is in my bid, offer, last sale in and of itself. It seems to me the value is with the database -- the completeness of that database.

But certainly, we think we should be able to turn it over. And as a matter of fact, a little over a year ago we sat in this same room and we talked about opening up limit order files.

So certainly when I open up my limit order file -which we just signed an agreement with Yahoo! -- we'll be turning it over to Yahoo! here shortly -- when I'm at the top of the book, and I'm part of the NBBO, I'm turning it over at that point in time, am I not?

Mr. Seligman:   Okay, so And then Michael and Ed, I take it you're both assuming we're just dealing with the same data you would be providing through -- whether it's the Nasdaq -- or whatever the relevant SRO would be -- that is the question is, can you sell it to someone else? Can you sell it faster is that way you framed it? There's no other category of data you would be thinking about in responding to this question?

Mr. Nicoll:   I think we would like to retain and do take the position that all the data is ours to sell -consistent with our business model.

And it's just that we're in a particular regime which requires us to give the data to our SRO, and you're asking me within that context, how important is our ability to sell to third parties.

You know, it just doesn't seem like much -- it's not something that I've given a lot of thought to. Despite you're looking to me for -- obviously our posture would be that there ought to be as much freedom as possible. But it doesn't seem like a very fruitful line of inquiry to me.

Mr. Seligman:   Mark?

Mr. Tellini:   I think I'm trying to understand exactly what Ed's position on this was, but I fear we moved down the slippery slope of another display rule, this time for augmented data, and if, to the extent someone has faster access to the same data that's available through public sources, through consolidated sources, if they have alternative data products that they would venture to make available, we say all power to them.

It's that innovation that's actually going to get the customers what they need, which is what we would be focused on today, especially in light of decimals.

Mr. Nicoll:   I just have to say, you know, I mean, I'm not sure that we should allow any slippery slope arguments at all, but is it not a slippery slope the other way?

I mean, we are for abolishing the display rule and allowing free competition to occur.

To the extent that -- but it seems to me, in the spirit of the way the question was asked, where we have a regime in which there's a display rule, do you then allow, as good public policy, the people providing that data through the consolidator to then sell that same data beforehand to another party?

It seems to me to train the rule of all of its purpose, and you might as well do away with the display rule.

Mr. Dorsey:   Well, we wouldn't say beforehand, Ed. It's the same time you turn it over at the consolidator you're turning it over to somebody else who bought it from you, so they get it at the same time.

I wouldn't advocate that there would be a delay to one party or the other.

Mr. Nicoll:   To the extent that that's the case, then you're not going to get very much for your data, right?

Mr. Dorsey:   I don't see the value in my data alone, my bid offer. It seems like when it's combined with everybody else's --

Mr. Nicoll:   The only time that it makes sense to do it is when you're doing it so that it has value. To the extent it has value, it's to the extent that it calls into question the very validity of the consolidation in the first place. That's my only point, I guess.

Mr. Colby:   But I think Yahoo sees the value in it, because if I put my data up there and it keeps people on their web site, their eyeballs there, they're the ones putting the value on it. I don't have to.

Mr. Seligman:   Jim, I guess I might have to disagree with that and say that it's possible to add value with it without doing very much.

Just the fact that it's an interesting trade to us, and that we declare it interesting, that in and of itself might make that information valuable to somebody else and might make them worth paying for it.

Mr. Nicoll:   Fair enough. I'm all for it.

Mr. Bradley:   I can't hear whoever is speaking.

Mr. Nicoll:   It's Ed Nicoll. I'm not -- I guess my answer to it s that the participants ought to be allowed to sell the data to third parties, is where I come down on it, to -- so that I don't disappoint all of my supporters around here.


Mr. Nicoll:   But I just, to the extent that it is -- that there's any value to the enterprise, it's the extent to which it threatens the value of the display rule, the central consolidator, et cetera, et cetera.

Mr. Seligman:   Bernie?

Mr. Madoff:   There is a rule now, I don't know whether it's enforced or not, but my recollection was that there is a rule that you can't put out two different quotes, you can't post a quote in one medium that's different than the other. Wasn't it 11A, something or other?


Mr. Madoff:   Every rule is 11A something or other. You know, but I think that, and I think we're all coming to same conclusion, that you do not want to restrict anybody from providing this data to be able to sell it, for whatever we decide that, you know, the advantage might be.

I think that most people, not most, but certainly there are firms now that are selling -- that are providing this data.

Whether they're selling it or not is a definition which, you know, is open to question, but I think that what you want to do, and I think it's very easy to do, is you want to make sure that the data goes to the consolidator certainly no later than it would be going to anybody else.

And that's easy enough to do, so I don't think anybody here would say, "Okay, I want to give my data to somebody else or I'll sell it at a faster speed than I'm going to provide to the consolidator," because then you undermine the validity and the credibility of the consolidated quote, which is not what we want to do.

But I think that you certainly do not want to restrict, say that somebody, for whatever their reason, can't, you know, can't provide their, sell their quotes or their size or any information, because I think it's -- first of all, I think it's probably unenforceable.

I mean, we're all broker dealers, you know. I don't know how you would -- or, you know, in ECN, how you would possibly say to them that they can't supply that data.

Bob's smiling. He loves the idea that he can tell you something, that you could restrict them, right?

Mr. Colby:   No, I hate rules that can't be enforced.

Could I just -- the rules as they exist now, one of those rules says -- the quote rule says that you've got to give your data -- if you've given your data to the SRO, you can give it to vendors.

You can't give it to vendors unless you've given it to SROs, and I think we would say you can't delay the data to SRO after you've given it to the vendor.

For reasons that I don't know, and maybe others do, the tape rule, the tape rule says you can't give the trades out at all, you can only give them out through the SRO.

I don't know if others here know why. I don't.

Mr. Ketchum:   I think it was taped -- I think it was exactly Ed's point, of the ability to follow the data more quickly than -- particularly during the time frame when it was put in, where you didn't have a high speed line, and the tape data was regularly slower.

Mr. Bradley:   What's the distinction again, one is quotes and one is trade?

Mr. Colby:   Right. I don't know if those distinctions make sense anymore.

Mr. Seligman:   All right. Mark?

Mr. Tellini:   Can I just ask a question?

So if you're going to provide data to a vendor, and let's go beyond NBBO, if you're going to provide data to a vendor, you actually have to provide that data to your SRO?

Mr. Colby:   No.

Mr. Tellini:   Okay.

Mr. Colby:   And Mike's point, I think, also has to be retained.

It's going to be very difficult to give out enhanced data without at some points giving out best quote and trades, as well, so if you have any thought of restricting that, you're going to restrict the ability to give enhanced data, also.

Mr. Dorsey:   I'm sorry, I was going to say limit order forms.

Like I said, 15 months ago or so, we sat at a round table on limit order display with the last chairman, Chairman Levitt, and he was prompting everybody to just open up and let everybody see.

So it took us a year, or 15 months. We finally got around to doing it.

But like I said, every time we're at the top of the book before the NBBO or part of the NBBO, we're giving out the bid offer that I think is of any value.

Mr. Seligman:   Let me see if I can articulate where I believe the committee is.

With respect to what's in the display rule, I don't hear that there's any objection to that information being provided to other than the relevant SRO, as long as there's not quote or tape racing.

That is, it would either simultaneously or first have to go to the relevant party under the display rule.

Does anyone have problems with that concept?

Mr. McNelis:   Yeah, Joel, I just wonder about, as Tom Demchak was pointing out this morning, everybody's system has certain dwell times, and generally, a second or slightly more than a second is what people perceive. Even if you give it to the SRO and to an independent vendor simultaneously, since it's got to go through the SRO system and then back out to the vendors, and then through their systems, there's a second advantage going directly to the vendor.

So I'm not sure what that means, but it's not straightforward.

Mr. Seligman:   Well, that's a good point and, you know, it would suggest you shouldn't be giving the data that's covered by the display rule to anyone else. Is that really where you want to come out?

Mr. McNelis:   It's not where I wanted to come out, but it seems to be a fact of physics, that's all.

Mr. Seligman:   Anyone want to add further facts of physics?

Mr. Harts:   Joe, I would agree with your statement, provided that you're limiting the type of data to what is currently required to be provided to an SRO, it's not more than what we're talking about today.

Mr. Seligman:   No, we're not talking about ratcheting it up.

Now, just again to try to proceed with a scalpel here, for a moment, with respect to data that's totally outside of what's covered by the display rule, is there any objection to that being directly sellable to vendors?

You don't have the dwell time issues. You don't have the requirement to provide it to vendors. Is there anyone who would question whether or not that should be permissible?

Mr. Harts:   Nope.

Mr. Seligman:   Nope? Then I get to the tough question, which is with respect to data totally outside of the display rule.

Is it the view of this group that that should also not be subject to any SEC filing, or is it the view of this group that it should be subject to an SEC filing if there's a fee involved?


Mr. Harts:   Meaning from a SRO or from other than SRO?

Mr. Seligman:   No, we're talking about market makers and ECNs.

Mr. Harts:   Then, as I said before, I think that should be outside of the Commission's purview.

Mr. Seligman:   All right.

Mr. Tellini:   Can I just clarify that?

Mr. Seligman:   Sure.

Mr. Tellini:   So market makers and ECNs, so this is not by exchange rule, not by SRO rules, it's completely independent?

Mr. Seligman:   If there's any, if you will, residual category of data, not subject, as you say, to either the SRO or exchange or the display rule, basically what we're saying is it's free play.

You can sell it. You don't have to file with the SEC.

No one -- everyone is comfortable with that formulation. We're not quite sure what it is, in terms of what the data would be, but the point is that no one wants to suggest a regulatory mode?


Mr. Ketchum:   The only clarification I would make it that without putting to the side SRO's obligation to file the information, I think it should also be clarified that, in exactly the same way, information outside of the consolidated best bid and offer, SROs should have the authority to put that out.

Mr. Seligman:   I think that's a fair point.

And again, with these points, which we're perhaps speaking with less precision than we will write with, you'll get a chance to see them again on paper, you'll get a chance to think about them as you review the drafts.


Mr. Nicoll:   Can I just maybe make this real, for everybody to understand?

I mean, I totally agree with where we are, but I just want to make sure we all understand this.

I mean, what we're talking about then in the real world, it would seem to me to be that if we don't change the definition of what data needs to be consolidated and displayed, then the book could be sold separately to anybody that an exchange or an ECN or broker dealer chose to sell that data to, as long as it complies with the -- by delivering the top of their book to, you know, to their SROs, to put together the NBBO.

Mr. Colby:   I thought you were distinguishing between ECNs and market makers and SROs for the question of outside the BBO. Was I wrong?

Mr. Ketchum:   I did respond to say it ought to include SROs, that SROs, as well, should be able to disseminate information as long as they're meeting their obligations to disseminate a consolidated best bid and offer.

Mr. Colby:   But you're reserving the question that we talked about earlier on what terms --

Mr. Ketchum:   Reserving the question of --

Ms. Nazareth:   And then the question was would they have --

Mr. Nicoll:   Well, I mean, it seemed to me that that's what you had said, that you had lumped everybody together and included them, without having to file. Am I mistaken?

Mr. Seligman:   I don't think you can not have the SROs file, and correct me if I'm wrong on that.

The question is, and let me see if I can frame it precisely, with respect to data not subject to the display rule -- and the way I amended it, in part in response to Mark -- and not subject to a filing requirement of an SRO, can a market maker and an ECN sell it and deliver it totally outside of filing requirements with the SEC? That's how I framed the question.

Then Rick made, I think, what we should view as a separate but related point, which is with respect to data not subject to the display rule, can an SRO, in effect, sell it separately?

And there's a complication here that we should recognize, which is the SRO would presumably still have to have a file with the SEC, but potentially could sell the data outside of the display rule.

So I think that's where we are at this point.

Mr. Nicoll:   And there's general consensus, certainly, that, it seems, that ECNs and market makers ought to be able to sell that data.

Mr. Seligman:   So far as I can tell, there has been no objection.

Mr. Nicoll:   And is also true that there's just unanimity here that exchanges and SROs ought to be able to sell that data also, whether with or without a rule filing?

Mr. Seligman:   No, think you have to have a rule filing.

Mr. Nicoll:   But with a rule filing, at the moment?

Mr. Seligman:   Yeah. And the practical question is, what level of review, whether it be immediate effectiveness.

Mr. Colby:   Right, but also without consolidation.

Mr. Seligman:   Certainly without consolidation, yeah. And I think I had to in, in there --

Mr. Joyce:   Is this data that we're referring to in this context, not to add another level of complexity to the question, but is it data that's intended to supplement the NBBO data?

Said differently, someone who is not receiving NBBO data, could they get this data as an alternative, thereby using this approach to go around the NBBO requirement?

Mr. Seligman:   I think our intent, and hopefully I'll speak accurately, is that if you retained the display rule, the notion would not be that this was an alternative to the requirements there, but certainly could be a supplement.

Mr. Joyce:   So that this data could be sold to someone who can demonstrate that they have the other data that is required? Am I reading into that?

Mr. Seligman:   I think that's fair.

Mr. Joyce:   Otherwise, you've just dismantled the requirement.

Mr. Seligman:   No, I understand that, and I don't think that's what we're trying to do.


Mr. Roiter:   I just wanted additional clarification on the exclusive SIP status for exchanges.

Is it true that even though it's non-core information or outside the NBBO and outside the vendor display rule, that if an SRO sells some or any kind of market data, that it does so in the capacity of an exclusive securities information processor?

Because then that would mean that anyone who felt that it had been prohibited in getting access to that data or restricted in some way, including perhaps unfair discrimination in pricing, could have recourse to the SEC.

Mr. Colby:   I didn't bring the statute with me, but I think the wording is "information relating to transactions in quotations and securities."

That's the language that keys off whether something is an exclusive process or not.

Mr. Roiter:   Will that be interpreted like 10B5, anything relating to the purchase or sale of a security, in which event, it would be a very broad scope?

Mr. Colby:   Did I get the wording right?

Mr. Bernard:   Actually, it's "with respect to," but I think the idea is the same.

Bob and I have a little disagreement about that issue. Congress, I know what they were doing with the book in 1975.

They were telling us that the specialist couldn't show it to anybody unless they showed it to anybody else who walked up, so I happen to be of the personal view that 11A does not reach anything but that quotation which has standing on the New York floor, and of course, buy-sell prices are easy.

However, there's also, in Section 6, and I presume in 15A, additional language about limiting access to the services of an exchange, so while you might not be operating under the 11A provision, you might very well be under the general limitation, and I'm sure that applies to members. I don't know if it goes beyond members.

If I could make one other observation, you know, when we were having the discussion about the display rule, we were thinking about quotes and last sale prices, and recognizing that if you got rid of the display rule it has profound implications for competitive pricing and that sort of thing.

Having not gone to consolidation in the limit order books, which we, of course, patently agree with, we shouldn't go there, the nature of the filings that's to be the discussion of this round robin changes profoundly as well.

The case for a higher level of intervention on pricing, for example, that exists today as to listing fees or transaction fees, goes away, by and large, because if the SRO starts trying to exercise -- well, it doesn't -- part of it is, it no longer has the same level of market power, because while the SRO may be the one normally getting all the orders, at least those that people are willing to send to a particular SRO, Schwab can decide to send those limit orders all kinds of places, and a vendor who goes out and picks up Schwab and Merrill Lynch and Solomon Smith Barney and the others will actually have a more complete database of limit orders than by going to the New York Stock Exchange or NASDAQ.

So it really changes that whole discussion about not so much as whether there's a filing, but what has to be filed, what procedures apply, what are the standards for rates and that sort of thing.

Mr. Colby:   We don't necessarily see eye to eye with New York on this point.

Were you speaking for Britz or for Bernard in that context?


Mr. Bernard:   Mr. Britz takes his legal advice from Mr. Bernard.

Mr. Colby:   Because the phrase, "with respect to transaction quotations," I think can be read more broadly than the trade report.

Mr. Seligman:   I had Bill, and then I had Mark.

Mr. Harts:   I wanted to ask for some clarification, also, along the lines of what Eric mentioned.

Should we assume that if the Commission has to review a rule filing by an SRO, that the data that was reviewed and hopefully approved for sale would be made available on a non-discriminatory basis, whereas if a -- I believe that's the case -- whereas if a market maker wanted to make data available outside of the SEC review process, that that could be made available on a discriminatory basis; is that correct?

Mr. Colby:   It gets complicated, if you'll bear with me.

The statute sets its standards that say that market -- this information with respect to transactions in quotations and securities, the Commission has the authority -- and I think it's a standard that was meant to prevail with review -- rulemaking authority to make sure that securities information processors make available information to all persons on terms that are not unreasonably discriminatory. Securities information processor is defined to exclude a broker dealer with respect to their traditional broker dealer activities.

So I think there's an open question whether, if a broker begins selling data out, whether they have now stepped beyond their traditional broker dealer duties and have thus become a securities information processor that is subject to the not unfairly discriminatory standard.

Was that perfectly murky?

Mr. Seligman:   It's conceptually clear. It really is.

Mr. Harts:   And that's exactly the line that I think has to be drawn very clearly here, because broker dealers do make money by selling information, maybe not in the context that we think about it here, maybe not pricing information, but there's a very fine line there that should definitely be taken into account.

Mr. Seligman:   You know, it's a truism that you don't try to legislate on the floor, and we're getting down to a level of precision which is hard to discuss orally.

I again want to state it will probably be easier to see these things when we're quoting statute, quoting rule, citing case, and so forth, but I think we've identified the problem we're going to have to wrestle with.

I think I saw Mark.

Mr. Tellini:   So to follow up on where we've been going, if we talk about the standard of review, while we are obviously wary of the exercise of market and regulatory power by Rick and Bob, for example, we nevertheless see a goose and gander issue here.

Mr. Colby:   Is that Bob Britz?

Mr. Tellini:   Yeah. Excuse me.


Mr. Tellini:   We're wary of yours more than others. But to the extent a broker dealer can put up data and an SRO has to jump through certain hoops raises questions in many people's minds.

We are fairly consistent in our philosophy that the standard of review should be applicable to both, and goes to sunshine and non-discriminatory principles around mostfavored-nation pricing, an issue that I guess was discussed here two meetings prior.

But in any event, with --

Mr. Seligman:   Forgive me, Mark, but when you say to both, who are the both? The SROs and the ECNs?

Mr. Tellini:   And the broker dealer.

Mr. Seligman:   Okay. Fair enough.

Mr. Tellini:   To the extent you have competition, it has to be competition on a level playing field, and I think that's the objective behind those principles.

Mr. Seligman:   Unless I see other people who want to discuss this cluster, I think we're moving towards our finale today.

We've covered a lot of territory that these first five meetings. We've obviously spent a great deal of time on the display rule, and we're moving towards a world where it seems reasonably clear that under all the permutations that we're going to propose, that if the Commission chooses to retain the display rule, they will not broaden it. There will be greater freedom in dealing with information outside of it.

We spent a lot of time talking about what kind of consolidator model we should have, and clearly opinions were split between trying to make certain reforms in the current unitary consolidator model, which would include such concepts as competitive bidding, advisory committees versus moving towards a multiple consolidator system.

It was striking to me today that the two most intriguing conclusions from our first meeting or first session today where, on the one hand, more of you favored retention of the display rule and more of you favored a multiple consolidator system, and clearly that will be reflected in the ultimate report.

It was clear that there were some issues, to use Rick's phrase, that we might characterize now as more of tertiary significance, but questions as to how pilots might be addressed, that we'll discuss, but perhaps not at great length, in the ultimate report. That didn't seem to be where our energy was spent.

This may be your last chance to address market information issues with respect to equities. My intent is certainly, at the next meeting, to focus perhaps exclusively on the options markets.

Before we close the record, if you will, for the oral part of our discussion with respect to equities, let me give everyone who wishes a chance to supplement the record, offer any concluding thoughts, perhaps any advice to those of us who are going to be working on the initial draft of the report that will soon be circulated to you.

Let me start with Michael. We'll go around the room. You don't have to speak, but if you would like to, this is a good time to be sure we've got the complete record.

Mr. Atkin:   The only question I have, Joel, is what about the concept of separating out processing efficiency questions from market data management and administration questions in a consolidated model?

Mr. Seligman:   Single consolidate or multiple --

Mr. Atkin:   Either model. It doesn't really matter.

Mr. Seligman:   Yeah. I think -- let me give you a thought.

A question can be posed, if we move to a multiple consolidator model, how would it happen?

And one simple way it might happen, for example, the New York Stock Exchange, which has already indicated an interest in so doing, might make a filing with the SEC that it wishes to withdraw from the CTA/CQ consortium.

If it wishes to withdraw, there would be a series of questions that they would have to address in the withdrawal release, and some of these we may be suggesting in our ultimate report.

But one of the practical issues that we're dealing with is there is that distinction, and it may well be because of the need for what we might call uniform standards and protocols, that there would have to be some sort of committee that would address these, even if the New York were not part of the consortium, while there would not be the kind of revenue sharing you currently have and other aspects of governance would not be there.

I think that's something that will clearly be at least touched upon in the ultimate report that we file.

It may be touched upon at the level of, you know, if the Commission decides to support a multiple consolidator environment, one way to get there would be through a review of withdrawal petitions or filings, however they're so phrased. In so doing, we would urge the Commission to analyze the following types of questions, or to consider the following types of questions.

Mr. Atkin:   How about, upon further reflection, the Commission decides that having a single point of consolidation is a good idea, still, but we want to make sure that that's separate from, you know, contract -- ability to contract, you know, independently with, as opposed to contract as a total -- break up a consortium, but keep the processing capability?

Mr. Seligman:   Keep the what, Michael?

Mr. Atkin:   Processing capability. You know, the single consolidator of data, but break up the consortium for everything else.

Mr. Seligman:   That might evolve. In a sense, if you broke up the consortium, there might be multiple aggregators of data working through a single processor. That's theoretically possible.

Ms. Baker:   So you're saying the administration would all take place as it does today?

Mr. Atkin:   No. I think that one of the options that's been talked about is to still have a single consolidation of data, but separate out everything else, so you don't do administration together, you don't do contracts together, you don't get together and set fees.

In a lot of ways, that's many of the things that were behind the NYSE's recommendation to withdraw from the consortium. Is that right?

Mr. Seligman:   Yeah. Again, that is something that expressly or implicitly will be touched on, it would seem to me, in the report, and if for any reason you don't think we've touched on it sufficiently, you should prompt us. Michael, do you have other?

(No response.)

Mr. Seligman:   Kerry?

Ms. Baker:   Just a summary, once again, of our position. It really hasn't changed.

We think that the system as it exists today has worked quite well for the last 25 years. There are inefficiencies, there are problems with the current system that can be corrected within the current structure.

So our opinion would be that we should keep the current structure and make subtle changes within that structure.

Now, this is just pertaining specifically to the vendor display requirements. Anything over and above, we really believe, you know, that's a place where competition really can sequence, innovation and then competition.

Mr. Seligman:   Thank you. Rick, or Rich?

Mr. Bernard:   Well, I think that Mr. Britz has been uncharacteristically loquacious today, so I yield my time. (Laughter.)

Mr. Seligman:   Thank Mr. Britz for us. Michael? I'm sorry. Harold, are you still there?

Mr. Bradley:   Still, here. I'm going to go ahead and yield, as well.

Mr. Seligman:   Thank you, and let's just, in fairness, Matt DeSalvo?

(No response.)

Mr. Seligman:   No late returns. Michael.

Mr. Dorsey:   Mike Dorsey, Knight Trading Group. Supplementing the record, there's been a lot said. I don't know what else could be said, other than what I found maybe most disconcerting is, we keep talking about a national market system.

I know personally, more and more, my job is dealing with the London office, trying to build a global market, a global footprint is what we call it, within the global trading village. That all sounds good in an annual report to your shareholders.

So we're looking very locally, while I know I'm spending a lot of time trying to build things on a global basis, so how does all this fit within competing trading venues around the world?

I know NASDAQ Europe is building furiously, and should be up by about June 8th. There could be overlapping of trading, and I guess there will be overlapping of trading for a few hours, anyway, and there's nothing to prevent them from trading, you know, eight to eight, and overlap maybe the complete day here in the U.S.

So I would urge this committee, even though it's late in the time here, to think more globally as we think of our national market system, maybe a global market system.

The other thing to say is, I struggled with an earlier comment that you had about a complete free market approach. My knee-jerk response, of course, is to say yes, because I do believe that the database belongs to the trading venue. That is probably the only thing they produce and can sell.

They certainly produce a form in which buyers and sellers can come together, but the thing that they produce and can sell to whomever is the bid offer last sale.

I mean, with that said, though, I do think it is myself and other market makers that create that data and put it into that database.

I was only half joking when I talked about my traders and their intellect. It -- a lot of what they do is, of course, reactive. They're reacting to things. They don't really have time to think, necessarily, when they're trying to trade, but it is their desire to be high bid/low offer and there is a lot of value to that.

So we should be able to sell that, or pass that data on to whomever. Certainly, we should pass it on to NASDAQ, but we should be able to pass it on to whomever we think.

The last thing, I guess, to say is the thing that bothers me or concerns me most is not so much fees. We were talking about the fees that these market centers and trading venues may charge.

I really don't think the fees would go up. I think they would go down. Order flow is king.

We spend all our time and effort trying to bring more order flow into the Knight Trading Center, and I would think any market center that is doing things that would inhibit flow into that center is going to create a lot of ire in their issuers and their market makers, and whoever else is depending on trading for a living.

With that said, though, I do think there is a concern about discrimination, and that discrimination would be that we complete against many of these market centers, but we still need to get our hands on their market data.

So maybe the thing to consider is the separation of the producer of the database from the seller of the database.

In other words, maybe they shouldn't be able to be the vendor of their own database, and they have to sell it to a vendor who then could resell it into the marketplace, and they wouldn't be able to control to whom it is sold.

It reminds me of the very first ticker case, I guess, about 90 years ago, where the New York Stock Exchange, I think, was trying to prevent Western Union from selling the data to a bucket shop, and I think they won that case on the basis of it's akin to a trade secret, but I'd certainly like to see them sell it to a vendor who then would sell it to whomever would want to purchase that data.

Thank you.

Mr. Seligman:   Thank you, Michael. Jim?

Mr. Doughan:   Michael made the case very well for those of us who are in the liquidity providing business. I just would take one issue with him. Our traders are encouraged to think when they trade.


Mr. Dorsey:   The option markets go a lot slower than the NASDAQ market.


Mr. Doughan:   Our NASDAQ traders, too.

Mr. Seligman:   Rick?

Mr. Ketchum:   I'm not sure what to add to that conversation except to thank Michael for the reference to NASDAQ Europe.

Mr. Chairman, I won't say anything more than I think you've properly characterized where we've gotten a few minutes ago.

I think with the sole restriction of the necessity of a consolidated best bid and offer, what strikes me is that there seems to be a plurality for encouraging competition outside of that, vis-a-vis giving people the ability to make available their information in different ways and multiple consolidators.

I think that's the right cut, that the consolidated best bid and offer is an important thing to preserve, and outside of that, we ought to encourage as much competition as we can.

Mr. Seligman:   Thank you, Rick. Bill?

Mr. Harts:   Pass.

Mr. Seligman:   Simon?

Mr. Johnson:   I think we should try to clarify as much as possible our agreement on the issue of what is the current situation, how do we evaluate the current system.

I actually think that Ed and I agree, probably, that the system has done well in terms of innovation, it's done well in terms of quality, it's done well -- perhaps it could have done better -- it's done well in terms of bringing down costs.

There is, however, a very important question that Ed put firmly on the table, and I think it should remain on the table, and we should think about it and quantify it and discuss it in the final report, which is market power under the current system.

He used a figure of, I think, half a billion dollars for the rents. I think that's something we should try and measure and figure out exactly who has that market power, who has those rents.

Under the current system, I think you also acknowledge the very point that, however we change the system, there will remain some market power, and there will remain some rents.

So the question is what is the total amount of rent, who gets them, what is the mechanism through which those rents are allocated, how does that affect small investors?

I think those issues are really central to everything that we do and everything we've talked about, and I think it's great we've reached the point where we're discussing these things openly.

I find that very helpful.

Mr. Seligman:   Thank you, Simon. Ed?

Mr. Joyce:   No?

Mr. Seligman:   Don?

Prof. Langevoort:   No.

Mr. Seligman:   Bernie?

Mr. Madoff:   I would just like to say that I think there's a method to your madness. I was -- well, I -- today I thought was very -- we moved the ball very far down the court. I think we reached a consensus which was pretty overwhelming.

I know that the devil is in the details and the drafting of this, so it's going to be interesting to see how it plays out, but I, for one, was encouraged with the way the conversations went, and so I give you credit for accomplishing that.

Mr. Seligman:   I appreciate that, Bernie, and I presume that you didn't mean the madness comment exactly literally.


Mr. Madoff:   No.

Mr. Seligman:   Brian?

Mr. Minister:   I just wanted to restate that we are very much in favor of an open and competitive environment and, you know, the multiple consolidator environment does appeal to us.

One of the things, though, that continues to be a thorn in that as I see it is the idea of the display rule. It I believe creates economic impediments when people go to negotiate contracts if they are absolutely mandated to have certain data. And that that could be a problem.

In addition, it imposes on the distribution side a requirement to send to people who don't need it information that they just don't require.

One of the -- I guess one of the assumptions I think has been around this table that people buying market data are necessarily going to trade immediately on that data. We know that there are customers who have no intention of immediate trading and I don't mean in the sense that I think Bob Colby expressed the fear that people would withhold the information and then at the last minute provide the true information.

What I am talking about is customers who are in different roles within the business and don't trade pretty much as a general rule and, yet, they have need for market information but not necessarily display rule type of information. So we would very much like to see a relaxation of that, actually doing away with the display rule as it stands now and allow customers to determine how they meet their various obligations, whether it be best execution or other obligations within their business and purchase the data that they need.

Mr. Seligman:   Thank you, Brian.


Mr. Minister:   Yes. I wouldn't add a lot to what has been said. We certainly are encouraged, I think as everyone here is, about the idea of a competitive environment. We do support a mandatory minimum of albeit a minimum mandatory minimum with certainly redistribution and the idea and what we're hearing in terms of people wanting to distribute more data I think is very encouraging for the US markets and certainly will make them more competitive.

Mr. Seligman:   Ed?

Mr. Minister:   I don't want to waste anybody's time, but there are just a couple of things here that I want to make sure people are focused on. Number 1, we started out by saying on our first meeting that the NBBO as its constituted today is increasingly less meaningful. The numeric decimalization, for instance, that the quote is going to be increasingly more important than the person who happens to be the high bid and low offer does not necessarily define the market in the way that it did when stocks were trading in eighths.

Yet, I would say that one of the little noticed developments here is that there seems to be absolutely no consensus here or any kind of will to actually strengthen the display rule to mandate additional information beyond that which we have already -- which we're already delivering.

And so it ought not to go unnoticed that we are in effect sort of mandating an attenuation of the protections that we thought were necessary in the past. If the NBBO today is not as meaningful as the past, yet, we kind of want to keep it because of the risks of doing away with it, but we don't have any appetite to actually strengthen it.

And in that regard, that is a deliberate policy decision that we're making and the SEC will have to face that, in effect, keeping the status quo attenuates any protection that they perceived that the display rule provides.

The other thing that I would like to just sort of make a plea about and I'm not sure this is the point to do it, but if in fact there is a consensus to keep the display rule -- and it seems to me that that certainly is the gist that I walk away with, that there is a lot of work to do about how to distribute the rents that result from that. And that is a difficult problem that needs to be faced by everybody.

Mr. Seligman:   Thank you, Ed.


Mr. Roiter:   If the proposition that we're talking about is to maintain the NBBO and allow for competition among the consolidators, it seems to me that we haven't gotten any further than our first meeting on the subject. There are a variety of market power issues that flow for keeping the NBBO in an environment where there is multiple consolidators. And they are hard ones to address and so we note them and then we move on to the next point.

I don't know that we have solved these any more today than we did at the first meeting. Free competition sounds like a good idea. It is good idea; but I'm afraid what we're doing here is we're swapping out one set of issues under the current model for a new set of issues that we will have in the future and I'm afraid that the umpires in that case is going to be the SEC and I don't think they have any more desire to umpire our problems than we have a desire for them umpiring our problems.

Mr. Seligman:   Thank you, Paul.


Mr. Roiter:   Thank you. I'll try to be succinct, but I want to step back for a moment, also. Basically in this country we have had two different models for how the market operates.

You can have a market operate on the basis of competition and subject market participants to the discipline of the market and also to anti-trust law. Or, in the absence of the competition and in the absence of the applicability of the anti-trust laws, you can have a governmental regulator that closely regulates rates and fees.

In the context of the securities markets and market data we really had neither and I think this is an exceptional case. We don't really have full-blown effective competition; but, yet, there is limited immunity at least, if not near total immunity, from the anti-trust laws.

True fees are filed with the SEC, but are not subject to a real rate-making review. In fact, I think it is fair to say that fees are not closely scrutinized unless there is a protest raised by someone who will have to pay those fees or would have to try to compete against them.

Now, there have been practical reasons for this approach taken by the SEC. First, the SEC has never been staffed to be a rate-setting agency. Secondly, at least until recently, there have been technological limits and cost limits that probably have prevented the introduction of multiple consolidators; and, third, each market place, especially the primary market places have been not-for-profit organizations that are vested with quasi-governmental powers as self-regulators and they are owned by market professionals who have other sources of revenue to earn in their respect markets as market makers or brokers.

Now, only one of those three factors still obtains -- the SEC is still not staffed to be a rate-setting organization. And, as importantly, rate setting, a form of substantive regulation, is at odds with the philosophy underlying the SEC's core mission and that is to leave substantive decisions to market participants and to use government power generally to promote disclosure.

Technology now appears to exist to permit multiple consolidators and at least one of the two primary securities markets is moving to a for-profit-business model owned by investors who may or may not perform brokerage or marketmaking services.

As I indicated earlier, this suggests to me that the historic reasons for retaining the historical model have been undermined and suggests that the SEC must move either to more competition or to more regulation.

As I said earlier, I do favor multiple consolidation with a retention of the NBBO; but whether we go to multiple consolidators or retain a single consolidator, I think there were four points at least worth considering by the SEC and market participants.

First, there needs to be consideration of what it means when a market center, particularly, a primary market center goes private. To be sure, as Annette I think mentioned last time we met, not-for-profit market centers also have incentives to keep prices at non-competitive levels. But as I mentioned their member owners have other sources of revenues to look to deriving from their own activities as brokers and market makers. I think this has the tendency to constrain the incentive to price market data at non-competitive levels.

This is not the case with regard to a for-profit- privatized primary securities market. Such a market will have shareholders who are not members and are not market participants. Those shareholder owners will expect and are entitled to expect that the privately-owned market center will seek to maximize their returns as shareholders and, in part, to do so through the pricing of market data.

I think the SEC should give consideration when dealing with unfair discrimination and reasonable access not simply or maybe even not primarily to the fees, themselves, but to the structure of a market center, especially a forprofit market center's pricing. That is to say I think the SEC should look to whether, for example, a market center embeds economies of scale into their pricing of market data, taking into account the reduced costs that are inherent in providing market data in bulk to large consumers of market data.

This might mean break points in the pricing of market data depending upon level of use and it might and I think should probably also consider -- should include the concept of an enterprise fee. At one point the level of use reduces the cost to a de minimis amount to the provider of that data. And any pricing model that doesn't include an enterprise fee I think is subject to question, particularly, if it's one that is imposed by a primary market center that exists for profit.

The final two points I would mention that the SEC ought to consider and we haven't had much time to discuss them today go back to the question of participation in the decision-making body of each market center to allow for effective involvement by those who are not owners and are not members of that given market center. And I speak particularly of investors, both institutional investors and retail investors as well as representatives of the public at large.

And, finally, I think the SEC needs to give further consideration to how it might streamline its process for reviewing claims of denial or restrictions of access. I think if we are going to a more competitive model, giving the market centers greater flexibility to get to the market sooner with their new prices and their new data services that we need to deal with that at the back end and really have developed a more efficient and streamlined system for hearing complaints and for resolving them through perhaps arbitration or just through accelerated proceedings so that it becomes a real constraint on market centers if they know that unreasonable or unfair pricing or discriminatory pricing could carry with it a real direct risk of becoming involved in the denial of access proceedings that will be resolved in an efficient way. Thanks.

Mr. Seligman:   Thank you, Eric.


Mr. Tellini:   Well said, Eric.

So my thanks go to the rest of you here for ceding the rest of your time to me, an hour-and-a-half.

Seriously, though, we are embarking on I guess a new phase in the next phase of this committee's deliberations with the drafting of the report and other opinions. And that raises some concerns for us about process.

Discussions here have been just that. They have been discussions and to the extent there have been surveys and the like, it hasn't been in the sense of diligent factfinding in the true sense.

There are certain presumptions on which a lot of this dialogue have been based. We spoke earlier about one of them, the value of the NBBO in light of dramatic changes in market structure, especially with decimals.

We think a variety of these issues are issues that worthy further investigation by this committee. One of them relates to administration of the market data plans and I go back to an analogy that was made earlier about the negotiation process and at various stages in this committee's meetings there was discussion about how the standards are clear. There is no negotiation. It's a take it or leave it proposition. Some one said that it was more like picking choices off a menu than a negotiation. To that, I would respond that it's more like picking off an ala carte menu where you are told what looks like desert and an appetizer is actually based on main entre pricing, main course pricing.

It is very much a negotiation. If you go down into the bowels of your firms, for those of you that are broker dealers and talk to the people that are responsible for administering market data within your firms, you will find (1) that there is a lot of them; (2) that they will tell you that it's a very long and painful and arduous process and that there is nothing simple and clear about it.

We began this process by focusing on a central issue which I think should be remain the central focus of this committee's deliberations. And that is what's best for the customer.

It happens that given decimals we are faced with a vexing problem for the customer and it's -- I guess Harold is still on the phone and we'll have his say, but it's as much of a problem as for our customers trading 100-share lots as it is for Harold trading his multi-thousand and million-share lots.

So the question at the end of the day should be how do we deliver information to the customer as efficiently as possible? How do we make information as accessible to the customer? How do we inform the customer as best as possible how to make an informed trading decision in the light of all the relevant information out there about the market conditions.

We have spent some time on the display rule. We think the display rule is one of the -- the display rule is a principal impediment to competition in this area to the accessibility of innovative market data products, if only by virtue of the fact that we spend so much money on plain vanilla data and if there were other data available that we could pick and choose from.

For example, to put a very clear point on it, our customers would rather be told what their order would get priced at rather than what it is likely to get priced at, then what the prevailing market condition is. And, in any event, we think that is a choice they should have.

At the end of the day, we are struck by the painful irony that our markets are the envy of the world in terms of the most competitive in driving the price for security and, yet, the least -- among the least competitive for driving the price of the security when it's sold.

Mr. Seligman:   Thank you, Mark. This is a public meeting, would any member --

Mr. Tellini:   I think Harold --

Mr. Seligman:   Pardon?

Mr. Tellini:   Is Harold still here.

Mr. Seligman:   Harold has already spoken.

Would any member of the public like to pose questions? Make a statement?

(No response.)

Mr. Seligman:   All right. Seeing none, within we hope a few weeks we will circulate part or all of -actually, part of a draft of a document since we are not yet prepared to discuss options and we'll see whether or not we're going to try to give it to you in one chunk or in sequence.

I anticipate there will be more than one circulation of this. Sometimes slightly after July 1st, I'll circulate to all the members of the committee an opportunity to participate in a telephone call for the purpose of creating the agenda for the July 19th meeting which will focus on options.

I would be particularly grateful if the exchanges and information vendors who address options -- I should say also the broker dealers to whom this is an important part of their trading, would participate.

The options world, as we all know, is somewhat different than the equities and there will be some new issues we are going to take up then.

Let me personally thank all of you for your participation in person and through subcommittees and through a number of documents that have been forwarded. I think we've made some progress. I look forward to seeing you for our final meeting on July 10th.

With that, we're adjourned. (Whereupon, the meeting was adjourned at 3:46 p.m.)


Modified: 06/27/2001