Annette L. Nazareth, Director, Division of Market Regulation
Before the House Subcommittee on Finance and Hazardous Materials,
Committee on Commerce, Concerning H.R. 1858,
The Consumer and Investor Access to Information Act of 1999
June 30, 1999
Chairman Oxley, Congressman Towns, and Members of the Subcommittee:
I am pleased to testify on behalf of the Securities and Exchange Commission ("Commission") concerning H.R. 1858, the "Consumer and Investor Access to Information Act of 1999." This testimony will focus specifically on Title II of the bill, which relates to securities market information.
In many important respects, a market can be defined most simply as the exchange of information about the buying and selling interest in a product in particular, quotations as to the price and size at which buyers and sellers are willing to trade, the interaction of individual buy and sell interests, and the price and volume of transactions that are taking place. A market's quality depends on the extent to which this information is timely, comprehensive, and reliable.
In the U.S. securities markets, on an average trading day in 1998, reports of more than 12 million transactions and quotations were disseminated on a real-time basis.)1 This information was made available pursuant to joint securities industry plans for collecting, verifying, and distributing consolidated market information as mandated by the Securities Acts Amendments of 1975.2
The real-time stream of information is then taken by vendors and broker-dealers and distributed, through a myriad of different delivery devices, to the millions of retail investors, institutions, securities firms, traders, derivatives markets, and other participants in the U.S. securities markets. The end result is that, regardless of where investors may be geographically, they are in the midst of the exchange of information concerning buying and selling interest and therefore are part of the market itself. The worldwide exchange of consolidated, real-time information concerning transactions and quotations on the U.S. securities markets must be considered one of the great regulatory and technological achievements of our era, as well as one of our national resources.
It is this resource that H.R. 1858 is designed to protect. The bill would prohibit the misappropriation of real-time market information and would provide new remedies against those who would violate this prohibition. The bill also is carefully crafted to address the new problem of information theft from high-technology systems without disturbing the regulatory and contractual regimes that are responsible for producing the benefits we already have. The Commission therefore supports the bill as a balanced and reasonable legislative approach to continue the widespread availability of real-time market information.
Genesis of Consolidated Market Information
The seemingly ever-expanding flow of information produced by innovative technology has become so much a part of modern life that we perhaps have begun to take it for granted. The need for H.R. 1858 cannot be fully appreciated, however, without pausing, at least briefly, to consider the value of what we have and the extent to which consolidated real-time market information did not just happen by chance. Rather, it was the result of planning and concerted effort over the last 30 years by the Congress, the Commission, the self-regulatory organizations, and the securities industry as a whole. Moreover, these plans and efforts were brought to fruition only through an enormous investment of capital by the self-regulatory organizations and the industry.
The New York Stock Exchange first published reports of trades, by teletype, in 1867. Other markets later published trade reports also, but no central source of information on trading in a security existed. Exchanges also began making quotes known beyond their floors, but only market by market, and only to their members.
In February 1972, the Commission issued a "Statement on the Future Structure of the Securities Markets" in which it emphasized the central role that consolidated information would play in the development of a national market system. Although the markets at that time were described as "scattered" and the technology for a communications system to link the markets was merely "said to be available," the goal for the future was clearly enunciated: "to make information on prices, volume and quotes for securities in all markets available to all investors, so that buyers and sellers of securities, wherever located, can make informed investment decisions."3
Three years later, as part of the Securities Acts Amendments of 1975, Congress created the legislative framework that was necessary to make this goal a reality. Emphasizing the critical importance that investors have access to "accurate, up-to-the-second" market information,4 Congress greatly expanded the Commission's authority over the processors and distributors of securities information by adding Section 11A to the Securities Exchange Act of 1934 ("Exchange Act."). Specifically, the Commission was authorized to require the self-regulatory organizations to act jointly to develop the systems necessary to provide consolidated market information. In addition, Section 11A granted the Commission rulemaking authority to assure the prompt dissemination of market information on terms that are fair, reasonable, and non-discriminatory.
Using its authority under Section 11A, the Commission has adopted a number of rules that require the collection and dissemination of consolidated information concerning transactions and quotations in equity securities. In addition, the rules create a framework under which the self-regulatory organizations are encouraged to act together to expand the availability of consolidated market information for equities. Pursuant to these rules, the self-regulatory organizations have designed and funded the technology systems that now put real-time market information on equities and options in the hands of investors around the globe.
Recently, the Commission has encouraged efforts to increase transparency in the debt markets. The Municipal Securities Rulemaking Board, with the approval of the Commission, has developed next-day reporting for active municipal securities. Industry efforts, with the support of Congress and the Commission, developed GovPX, enhancing market information on government and agency securities. The Commission has asked the National Association of Securities Dealers to develop a reporting and surveillance system for corporate bonds, an initiative supported by this Committee in hearings and subsequent legislation, which passed the House earlier this month.
The benefits of this information stream are as important as they are familiar. Consolidated market information increases transparency, addresses fragmentation, and facilitates the best execution of customer orders. In sum, the success of the U.S. securities markets over the last three decades in providing efficient sources of capital is due in no small part to the quality and timeliness of market information, and this market information is provided pursuant to the legislative framework Congress established in Section 11A of the Exchange Act.
Of course, success in the past does not ensure continued success in the future. The non-stop change associated with innovative technology can produce problems, as well as benefits. Recently, some aspects of the current system for collecting and disseminating market data have been questioned. In particular, the rising number of on-line investors has focused attention on their need for information that is easily available on terms that are fair, reasonable, and non-discriminatory. In addition, new technologies for trading securities have created pressures on market structure that may have implications for the current system of providing market information.
To address these developing issues, the Commission has undertaken a review of the structures for obtaining market data and the role of data revenues in the operation of the markets. As part of this review, the Commission intends to issue a release describing existing market data fees and revenues, as well as their relationship to the funding of the self-regulatory organizations. While we have gathered a significant amount of data on these subjects, we are just in the preliminary stages of our analyses. Unfortunately, without the benefit of completing this review, we are unable to make judgments on specific issues regarding data collection and distribution costs or on any suggested structural improvements.
Nevertheless, it is clear that the extensive system for collecting and disseminating real-time market information must be protected from those who would "pirate" the information without contributing to the costs of supporting the system. It therefore is important to protect real-time market information against misappropriation and outright theft. The Commission supports H.R. 1858 as a reasonable means to help achieve this objective.
Strengths of H.R. 1858
Section 201 of the bill adds a new paragraph (e) to Section 11A of the Exchange Act. It prohibits the misappropriation of real-time market information and provides a variety of remedies for market information processors against persons who violate this prohibition, including monetary damages, disgorgement of ill-gotten gains, and injunctive relief. The bill thereby provides important new remedies to address a serious new problem the vulnerability to theft of information distributed through high-technology systems.
Moreover, H.R. 1858 preserves the two principal attributes of the current system for providing market information that have produced the benefits we have secured over the last thirty years (1) the Commission's regulatory authority over the collection and dissemination of market information, and (2) freedom of contract for self-regulatory organizations and market participants to structure their business relations.
The bill expressly provides that it is not to be construed to either limit the application of the federal securities laws or to impair the authority of the Commission. As noted earlier, Congress' decision in 1975 to direct the creation of a unified, national market system and to grant the Commission plenary authority to achieve this goal was perhaps the single most important decision that led to the current widespread availability of consolidated, real-time market information. The bill reaffirms the authority of the Commission in this regard.
H.R. 1858 also would grant rulemaking authority to the Commission to prescribe the extent to which market information is considered to be "real-time" market information for purposes of Section 11A. If necessary, therefore, the Commission would be empowered to ensure that, on the one hand, a narrow definition did not threaten the integrity of current systems for providing real-time information, and, on the other hand, that an overly broad definition did not unnecessarily restrict the free flow of information.
The bill enumerates three factors that the Commission is to consider in defining real-time information the present state of technology, the different types of market data, and how market participants use the data all of which would be important if the Commission found it necessary to exercise its rulemaking authority. In exercising this authority, the Commission of course would consider the goal of preserving and expanding the availability of real-time market information.
Another important strength of the bill is that it does not disturb the ability of market information processors, information vendors, and information users to fashion their own arrangements for distributing real-time market information. The freedom of parties to choose the terms on which they contract and the remedies available for breach, as well as the highly-developed law of contracts that supplements these agreements, is a tested regime for implementing efficient commercial arrangements.
H.R. 1858 wisely leaves these arrangements intact. It preserves the rights of parties freely to enter into licenses or other contracts with respect to the dissemination of real-time market information. The bill also does not allow a market information processor to substitute the bill's remedies for contractual remedies in actions against those parties with whom the processor has chosen to enter into contractual relations. Instead, by focusing on the peculiar nature of market information, and its susceptibility to misappropriation and theft by parties that have no contractual relationship with a market information processor, the bill provides new remedies that are tailored to respond to new problems.
In conclusion, the Commission believes that Title II of H.R. 1858 represents a balanced and reasonable legislative approach to address the problem of information theft.
1Sources: American Stock Exchange; Nasdaq Stock Market; New York Stock Exchange; Options Price Reporting Authority.
2 Pursuant to rules adopted by the Commission under Section 11A of the Securities Exchange Act of 1934, the self-regulatory organizations jointly have filed plans providing for the consolidated dissemination of market information.
3Securities and Exchange Commission, "Statement on the Future Structure of the Securities Markets," at 9 (February 2, 1972).
4S. Rep. No. 75, 94th Cong., 1st Sess. 9 (1975). Commission Study of Market Data Fees and Their Role in Funding the Self-Regulatory Organizations