The innovation and new technology developed by ECNs and non-traditional market participants that is promoting the rapid and sweeping democratization of the markets, have not reached the last bastion of protectionism in our financial markets, the national market system. NexTrade agrees with the Commission that new technology has made the market data fee structure "archaic." NexTrade, however, respectfully disagrees with the Commission on several important issues. First, NexTrade does not believe that the 1975 Amendments to the Securities Act grant the Commission the power to create a centralized pricing mechanism for the compilation and dissemination of market data.³ In enacting the 1975 Amendments, Congress envisioned competition rather than regulation as the guiding force in the development of a national market system.⁴ NexTrade agrees that the national market system plans and exclusive processors of securities information that are owned and operated by certain exchanges and the Nasdaq (collectively the "exchanges"), (collectively, the "exchanges"), are monopolies and should be opened to competition and innovation. NexTrade, however, rejects the Commission's notion that the national market system plans are public utilities and should be treated as such supposedly "for the public good." Congress instructed the Commission to facilitate the development of a national market system, not to attempt to act as its chief architect or as an "economic czar."

A. The Commission should open the national market system to greater participation by new exchanges, broker-dealers, issuers and the public.

In 1936, Congress noted that a major responsibility of the Commission in the administration of the securities laws is to "create a fair field of competition."⁵ The current national market system structure does not create a fair field of competition. Rather, the current national market system protects antiquated participants from competition, while subsidizing its members' operations.

The consolidated, real-time stream of market information has been an essential element in the success of the America's equities markets. It is the principal tool for enhancing the transparency of the buying and selling interest in a security, for addressing the fragmentation of buying and selling interest among different market centers, and for facilitating the best execution of customers' orders by their broker-dealers.⁶ The consolidation of quotations and last sale information was an important goal of the Securities Acts Amendments of 1975.⁷ Congress believed that the need for market effectiveness and efficiency required that a neutral central processor be organized and responsible for collecting and distributing market data to market participants. Section 11A called for the Commission to use its authority to facilitate the establishment of a national market system which has, as one of its objectives, the availability of quote and transaction information for brokers dealers and investors. Section 11A(a)(1).

The national market system that Congress meant to promote equal access, market transparency, and fair competition, is now attainable because of twenty-first century technology. However, the governance structures and technology that modernized our markets in 1975 are ill suited to achieve the goals of the national market system for the next century. Market data that was once the property of a few and was only available to market participants, is now in the hands of the public. This liberation of information has been the result of the development of the Internet. Over the last decade, the Internet has revolutionized the way people access and use information.

The goals of the 1975 Amendments, however, are still as important as ever. In 1975, Congress instructed the Commission that in developing a national market system, "competition, rather than regulation, should be the guiding force."⁸ The Commission is mandated by Congress to facilitate the development of a national market system not to be its chief architect. The two paramount goals of the national market system are the "centralization of all buying and selling interest so that each investor will have the opportunity for the best possible execution of his order, regardless of where in the system it originates," and "the maintenance of stable and orderly markets."⁹ In establishing this mandate, Congress identified five criteria that should guide the Commission's role in the establishment of a national market system:

1. promotion of the development of mechanisms that allows for economically efficient execution of securities transactions;

2. promotion of fair competition;

3. promotion of transparency;

4. improvement of investor access to the best markets; and

5. the development of mechanisms that allow for investors' orders to be executed without the participation of a dealer.¹⁰

The current national market system no longer serves to promote the development of mechanisms that allow for economically efficient executions of securities transactions. The current national market system impedes fair competition and reduces market transparency. The current national market system prevents large pools of liquidity contained in ECN order books from interacting with other market participants. These deficiencies result in decreased investor access to the best markets.

The reason the national market system fails to meet its Congressional mandate is because the governance structures of the national market system are in need of significant reform. Currently, the boards of these plans are composed of representatives from each exchange. Any change to the rules governing the operation of the national market system systems, such as the very rule changes necessary to accommodate new electronic exchanges, require the unanimous consent of the participants. Consequently, the national market system is unable to effectuate the necessary changes because any member can block changes that threaten its antiquated market or technology.

1. The national market system plans should be opened to new constituencies, including ECNs, broker-dealers, issuers and the public.

In order to ensure that the national market system meets its Congressional mandate, the governance structure of the national market system should be amended. The national market system governing boards should be eliminated and replaced with a new national market system board. This new national market system board should include representatives from the existing exchanges, new electronic exchanges, ECNs, broker-dealers, issuers and the public. The new national market system board should be structured in such a way as to ensure that at least 50 percent of the representatives are not industry participants. This structure is similar to the structure endorsed by the Commission in recent years with respect to public representation on the boards of self-regulatory organizations.¹¹ Broker-dealer representatives of various sizes could be selected by industry associations such as the Securities Industry Association and the Security Traders Association.¹²

This approach is consistent with the legislative intent of the 1975 Amendments. In framing the 1975 Amendments to the Act, Congress noted:

that if economics and sound regulation dictate the establishment of an exclusive central processor for . . . the national market system, provision must be made to insure that this central processor is not under the control or domination of any particular market center.¹³

At the time of the 1975 Amendments, only the exchanges were capable of compiling and disseminating the data that is the product of the national market system. Accordingly, Congress deemed "[a]ny exclusive processor . . . a public utility . . . [that] must function in a manner that is absolutely neutral with respect to all market centers, all market makers, and all private firms."¹⁴

Congress was also concerned that "serious antitrust questions would be posed if access to this facility and its services were not available on a reasonable and nondiscriminatory terms to all in the trade or if its charges were not reasonable."¹⁵ In order to foster efficient market development and operation and to provide a first line of defense against anti-competitive practices, Congress granted the Commission broad powers under Sections 11A(b) and (c)(i) over any SIP to ensure the SIP's neutrality and the reasonableness of its charges in practice as well as in concept.¹⁶ While Congress did not grant the Commission unfettered power over the national market system, the Commission was given the authority to remove barriers to competition that would unjustifiably hinder the market's natural economic evolution, while ensuring fair competition and investor protection.¹⁷ Only when competitive forces cannot, for whatever reason, be relied upon, should the SEC assume a special oversight and regulatory role. The current national market system represents an artificial barrier to competition. Democratizing the national market system in the manner discussed above is consistent with the intent of the 1975 Amendments, specifically, the Commission's duty to ensure that all market participants are granted access to the national market system.

Two of the current national market system plan participants through their ownership of the Securities Industry Automation Corporation ("SIAC"), develop and operate the computer systems behind the national market system. SIAC operates all of the national market system technologies, other than the Nasdaq Unlisted Trading Privileges plan, which is administered by the Nasdaq. The New York Stock Exchange and the American Stock Exchange, a subsidiary of the National Association of Securities Dealers, own SIAC. In 1997 SIAC's revenue from affiliates and others equaled $271.5 million, with net income of $7.1 million. In 1998, SIAC's revenues equaled $303 million with net income of $9.2 million.¹⁸

These SIPs rely on technology that should be subject to competitive pressures and innovation. However, due to the current structure of the national market system and the monopoly granted to these two SIPs, such change and competition is not possible. Coupled with the anti-competitive governance structure of the national market system plans, Nasdaq and SIAC's administration of the national market system technologies allows two exchanges to effectively impede the integration of new electronic markets and the implementation of new technologies into the national market system. The failings of the current national market system are exemplified by the failures of the two major SIPs, Nasdaq and SIAC, to be ready for decimalization.

On January 28, 2000, the Commission ordered the securities markets to begin trading in decimals on July 3, 2000.¹⁹ The transition to decimals will save investors anywhere from $300 million to almost $2 billion annually. A recent study conducted by SRI Consulting projected that message traffic for stock and options quotes would likely rise dramatically when decimal trading begins.²⁰ The SRI Study projected that options trading in decimals could lead to a 3,000 percent increase in peak message traffic by December 2001. According to SRI, the transition to decimals will mean that Nasdaq message traffic could rise as much as 700 percent by December 2001.

The transition to decimals, however, must be delayed because SIAC and Nasdaq have failed to invest in technology that will enable them to handle the increased quote traffic resulting from the switch to decimals from fractions. One of the systems not ready for decimalization is a system operated by SIAC for the Options Price Reporting Authority ("OPRA"). The OPRA System is operated pursuant to the plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information ("OPRA plan"). OPRA disseminates market information options contracts traded in a securities market maintained by a party to the OPRA plan.²¹

According to the Government Accounting Office, OPRA will face considerable difficulties as it attempts to handle the increased message traffic.²² OPRA is currently incapable of handling the increased volume levels that will result from the transition to decimals. OPRA officials have admitted that upgrading their systems to handle the increased options traffic expected from decimalization is a major challenge. In order to address the current and projected message traffic volumes, OPRA and SIAC intend to begin increasing system capacity. OPRA plans to increase system capacity by December 2000 from its current maximum of 3,000 messages per second to 12,000 messages per second. It is unclear if this additional capacity is sufficient to accommodate the volume levels projected in the SRI study.

OPRA, however, is not alone in its failure to be ready for decimal trading. Recently, Nasdaq officials informed the Commission that their market would not be ready until the first quarter of 2001 to accommodate the increased message traffic expected from decimal trading. Nasdaq's failure to take the necessary steps to ensure that it would be ready for the implementation of decimalization will more than likely delay the implementation of decimal trading by Nasdaq market participants that are ready for decimal trading, such as Electronic Communications Networks.

The costs to the public of our antiquated national market system are sizable. The delays requested by the Nasdaq and SIAC because they are not ready for decimalization will cost the public between $1 million to $3 million per day or roughly $300 million to $2 billion per year. The market structure that has resulted in the delay in the implementation of decimal pricing is in need of fundamental restructuring. The opening of the national market system to new constituencies including, ECNs and the public, will promote innovation and greater competition. Such competition and innovation will result in more efficient markets that benefit the public.

NexTrade, however, opposes the suggestion that the Commission should designate a third party that will operate the new national market system. Rather, by opening the national market system to new participants and by consolidating the functions of the national market system plans into a single plan, market forces would ensure that such a structure could not be used to protect antiquated markets from competition while promoting transparency. Finally, such a structure would force SIAC and Nasdaq to compete with new firms that are interested in developing the technologies that drive the new national market system.

2. The new national market system board should have the authority to create new committees.

The new national market system board should have the authority to create committees comprised of representatives from each of the respective constituencies. Currently, each of the plans provides for the delegation of its operational functions to individuals, entities, or committees.²³ The power to create committees would be an extension of the current national market system. In selecting the members of these committees, the national market system board should strive to ensure that the purposes of the committee are of concern to the members of the committee.

For example, a national market system technology committee would be comprised of industry participants that have expertise with regard to the development of technology for the financial services industry. The national market system technology committee would also include issuer and public members with demonstrated technology expertise, such as representatives from technology firms listed on any exchange and academics in the relevant fields. In order to ensure the national market system board and the national market system committees do not become the tools of specific constituencies, the Commission should maintain a supervisory role and possibly serve as an ex officio member of the national market system board and on any national market system committee its believes to be necessary to meet the purposes of the national market system.

3. Members of the new national market system board should be selected by their constituency. Members of new national market system committees should be selected by the new national market system board.

The industry members of the new national market system board should be selected by their respective constituencies. The non-industry members of the new national market system board should be selected by means of a process that ensures the objectivity and neutrality of these representatives. The industry representatives of the national market system board should be selected by industry associations such as the Securities Industry Association or the Security Traders Association subject to Commission oversight. Members of new national market system committees could be nominated by a national market system Nominating Committee and confirmed by the national market system board. The Commission should maintain an oversight role in the selection process.

4. All members of the new national market system board and committees appointed by the board should have the right to vote on all issues.

All members of the national market system board or a national market system committee should have an equal vote on all issues.

5. Market fragmentation will be effectively addressed by opening the national market system.

The Commission recently issued a release on market fragmentation.²⁴ In that release, the Commission identifies price transparency as the best way of preventing fragmentation. NexTrade agrees. The best way to prevent fragmentation would be for the Commission to restructure the national market system plans which are responsible for compiling, transmitting and processing orders between each of America's equities markets. The democratization of the national market system plans will ensure that the plans are administered in a fair and impartial manner that promotes transparency. The opening of the national market system will also ensure exchanges relying on antiquated technologies cannot effectively block the admission of new members and technologies that will promote market efficiency and transparency.

B. The national market system plans and self-regulatory organizations should provide greater public disclosure concerning their fees.

Market data fees are currently a substantial part of America's regulatory scheme. Market information revenues represented 21% ($410.6 million) of the SROs' total revenues.²⁵ This percentage has remained constant over the last five years, despite the rapid growth in market information revenues. The growth in market information revenues has merely kept pace with the growth of other SRO revenues during a period of pronounced expansion in trading volume. The question is whether the exchanges should be allowed to generate such revenues with minimal public disclosure.

In enacting the 1975 Amendments, Congress addressed the issue of funding for national market system facilities. Sections 6(b)(4) and 15A(b)(5) require that the rules of a national securities exchange or national securities association "provide for the equitable allocation of reasonable dues, fees, and other charges among members and issuers and other persons using" the exchange's or association's facilities. Congress intended that the fees collected from persons using a self-regulatory organization's facilities could be directed to funding the "costs associated with the development and operation of a national market system."²⁶

While the exchanges have not fully disclosed how they use these market data fees, it is apparent that the majority of the market data fees charged today are not related to the exchanges' cost of providing market data. It is also apparent that these fees are not necessary to fund self-regulation. The Concept Release recognizes that the exchanges do not currently direct the majority of the market data revenues generated to fund their self-regulatory operations. According to the Concept Release, as a group, the exchanges earned over $300 million in net revenues in 1998 alone.²⁷ However, costs attributable to the collection and distribution of market data only amounted to roughly $37 million. This discrepancy demonstrates that the exchanges, the national market system plans and the SIPs are monopolies earning monopoly profits.

Congress granted the Commission the authority to ensure that market data revenues from the exchanges and the national market system do not subsidize the exchanges' competitive activities. By requiring the national market system plans and the exchanges to disclose information regarding market data revenues and regulatory costs, the Commission will reduce the ability of these market participants to obfuscate the issue. Disclosure will also make it harder for the exchanges and the market system plans to pass these fees on to the public. The exclusionary practices of the national market system participants were the type of anti-competitive practices Congress feared when it mandated the creation of a national market system.

C. The Commission was not authorized by Congress in the 1975 Amendments to act as an "economic czar" and impose a cost-based solution to market data fees.

Congress, however, did not grant the Commission unfettered authority over the national market system. The 1975 Amendments did not authorize the Commission to undertake a cost-of-service (or "ratemaking") approach to its review of market information fees. Instead, Congress granted the Commission flexibility in evaluating the fairness and reasonableness of market information fees. The two "paramount objectives" of the national market system were "the maintenance of stable and orderly markets" and "the centralization of all buying and selling interest so that each investor will have the opportunity for the best possible execution of his order, regardless of where in the system it originates."²⁸ To achieve these objectives, Congress recognized that "communication systems . . . designed to provide automated dissemination of last sale and quotation information with respect to securities, will form the heart of the national market system."²⁹

Congress, however, did not instruct the Commission to dictate the specific elements of a national market system. Rather, Congress chose to rely on an "approach designed to provide maximum flexibility to the Commission and the securities industry in giving specific content to the general concept of the national market system."³⁰ Congress implemented this approach by adding Section 11A to the Exchange Act. Section 11A(a) directs the Commission to facilitate the establishment of a national market system in accordance with specific congressional findings and objectives. Among these findings were that new data processing and communications techniques created the opportunity for more efficient and effective market operations, and that the linking of all markets through such data processing and communications facilities would increase the information available to broker-dealers and investors.

NexTrade opposes the Commission's proposal to impose a cost-based approach to setting market data fees with a cost limit cap for two reasons. First, such a structure is beyond the scope of the authority granted to the Commission in the 1975 Amendments. Congress clearly stated in 1975 that the Commission would not have:

either the responsibility or the power to operate as an "economic czar'' for the development of a national market system. Quite the contrary, for a fundamental premise the bill is that the initiative for the development of the facilities of a national market system must come from private interests and will depend upon the vigor of competition within the securities industry . . .³¹

This is not to say that the Commission does not have an important role in the national market system. As Congress recognized in 1975:

Although the SEC's basic role would be to remove burdens to competition which would unjustifiably hinder the market's natural economic evolution and to assure that there is a fair field of competition consistent with investor protection, in situations in which natural competitive forces cannot, for whatever reason, be relied upon, the SEC must assume a special oversight and regulatory role.³²

Second, NexTrade opposes the Commission's proposal to impose a cost based approach to market data because such an approach is unnecessary. The anti-competitive nature of the current national market system requires the intervention of the Commission because it hinders the market's natural economic evolution. This market inefficiency can be corrected by opening the national market system to new participants and by restructuring the national market system board. By opening the national market system to new participants, the Commission will restore a level playing without having to act as an "economic czar." The Commission can also correct the anti-competitive environment by making it easier for new SIPs to obtain approval to operate and provide the technology for the national market system. With a new national market system board and competing SIPs, the national market system will be transformed into a network of service providers that compile and disseminate information without the Commission having to impose a cost based approach on the markets.

CONCLUSION

New technologies have made the development of a more efficient national market system a reality. Non-traditional market participants like ECNs can now create a web of networks that will satisfy the goals of the national market system and the 1975 Amendments without the Commission having to act as an "economic czar." These innovators can ensure that markets are more transparent than ever and that data costs are subject to competitive forces for this first time. However, the only way to open the national market system to new technologies is by opening the boards that govern the system to new constituencies. A national market system that is open to ECNs and other new constituencies will promote competition, while enhancing market transparency and innovation.

NexTrade applauds the Commission for reviewing the issue of market data fees and the national market system responsible for compiling and disseminating such information. Addressing the issue of market data fees and the national market system is the first important step in restructuring America's financial markets in order to ensure their continued preeminence. By addressing this issue, the Commission will effectively address issues such as market fragmentation and market linkages. NexTrade encourages the Commission to take this opportunity to ensure that the national market system is democratized and opened to all market constituencies. Opening the national market system will ensure that competition and innovation drive the development of America's financial markets in the future, and bring to an end the hegemony of traditional market participants with no economic incentive to innovate.

Very truly yours,

John M. Schaible
President NexTrade Holdings, Inc.
and NexTrade, Inc.

1	Exchange. Act Release No. 42208 (Dec. 9, 1999), 64 Fed. Reg. 70613 (Dec. 17, 1999) (the "Concept Release").
2	"Dynamic Markets, Timeless Principles" - Remarks of Chairman Arthur Levitt at Columbia Law School, New York, N.Y., September 23, 1999.
3	Pub. L. No. 94-29, 89 Stat. 97 (1975).
4	H.R. Conf. Rep. No. 94-229, 94th Cong., 1st Sess. 92 (1975) (noting that "[i]t is the intent of the conferees that the national market system evolve through the interplay of competitive forces as unnecessary regulatory restrictions are removed.").
5	Pub. L. No. 94-29, 89 Stat. 97 (1985).
6	See 64 Fed. Reg. 70613 (Dec. 17, 1999).
7	Pub. L. No. 94-29, 89 Stat. 97 (1985).
8	See H.R. Rep. No. 94-229, 94th Cong., 1st Sess. 92 (1975).
9	See S. Rep. 94-75, 94th Cong., 1st Sess. 7 (1975).
10	Section 11A(a) of the Securities Exchange Act of 1934.
11	See, e.g., Report Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding the NASD and The Nasdaq Market (August 8, 1996); Order Granting Approval to Philadelphia Stock Exchange Proposed Rule Change, Exch. Act Rel. No. 38960 (Aug. 22, 1997) (requiring 50 percent board representation by public governors).
12	This approach was also discussed in the SIA Report on Market Data Pricing, which noted that SIA would also like to explore/encourage an alternative governance structure for market data that would include a broader exchange, industry, and public representation. See Report on Market Data Pricing, Prepared by Arthur Andersen, LLP (June 1999).
13	Pub. L. No. 94-29, 89 Stat. 97 (1975).
14	Id.
15	Id.
16	Id.
17	Id..
18	SIA Report on Market Data Pricing, Prepared by Arthur Andersen, LLP 6-7 (June 1999).
19	Order Directing the Exchanges and the National Association of Securities Dealers, Inc. To Submit a Decimalization Implementation plan Pursuant to Section 11A(a)(3)(B), Exchange Act Release No. 34-42360, 65 Fed. Reg. 5003 (Jan. 28, 2000).
20	Securities Pricing: Progress and Challenges in Converting to Decimals, Hearings Before the Subcomm. Finance and Hazardous Materials, House Committee on Commerce, 106th Cong. 2d Sess. 1 (2000) (statement of Davi M. D'Agostino, United States General Accounting Office) (citing study by SRI Consulting (the "SRI Study")).
21	OPRA plan Section III(a). The parties to the OPRA plan are the American Stock Exchange, the Chicago Board Options Exchange, the New York Stock Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange.
22	Id.
23	See, e.g., CTA plan, Section IV(a).
24	Exchange Act Release No. 42450 (Feb. 23, 2000), 65 Fed. Reg. 10577 (Feb. 28, 2000).
25	See Concept Release.
26	H.R. Rep. No. 94-229, 94th Cong., 1st Sess. 92, 93 (1975). See, e.g., S. Rep. No. 94-75 (1975), reprinted in 1975 U.S.C.C.A.N. 179 (SEC "must assume a special oversight and regulatory role" to remove burdens on competition caused by exclusive processors and other SRO projects "which enjoy an effective monopoly, or which are merchandised to members on a basis other than cost and quality of services."). H.R. Rep. No. 94-229, 94th Cong., 1st Sess. 93 (1975).
27	64 Fed. Reg. 70613, 70615 & n.6, Tables 9-17 (Dec. 17, 1999).
28	S. Rep. No. 94-75, 94th Cong., 1st Sess. 7 (1975).
29	H.R. Rep. No. 94-229, 94th Cong., 1st Sess. 93 (1975).
30	Id. at 92.
31	S. Rep. 94-75, 94th Cong., 1st Sess. 7 (1975) (emphasis added).
32	Id.