December 14, 2001
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Attention: Mr. Jonathan G. Katz, Secretary
Re: File No. SR-NYSE-2001-42
Ladies and Gentlemen:
Bloomberg L.P.1 ("Bloomberg") is submitting this comment in response to Securities Exchange Act Release No. 45138 (December 7, 2001) in which the Securities and Exchange Commission (the "Commission") has published an order (the "NYSE OpenBook Order") approving the NYSE OpenBookTM fees in the proposed rule change filed with the Commission by the New York Stock Exchange, Inc. (the "NYSE") in Securities Exchange Act Release No. 44962 (October 19, 2001) for (the "NYSE OpenBook Proposal").
We note that in the NYSE OpenBook Order, the Commission has approved only the fee portion of the NYSE OpenBook Proposal. The Commission has not acted on the NYSE's proposed vendor or subscriber agreements. We are writing in support of the Commission's conclusion that the NYSE's proposed restrictions on vendor redissemination of OpenBook data, including the prohibition on providing the full data feed and providing enhanced, integrated or consolidated data, are on their face discriminatory. We agree with the Commission that those elements of the proposed rule change raise fundamental issues of fair access under the Securities Exchange Act of 1934 (the "Exchange Act"). We request that the Commission require the NYSE to address these matters in an amendment to its filing.
I. Summary of the NYSE OpenBook Proposal.
NYSE OpenBook is a new service that would permit subscribers to view limit orders contained in the NYSE limit-order book. The NYSE will charge two fees for the NYSE OpenBook service, $5,000 a month for each entity that receives the NYSE OpenBook data feed and an end-user fee of $50 a month for each terminal through which an end user displays the NYSE OpenBook. For at least the immediate future, pursuant to the proposed subscriber/vendor agreement (the "NYSE OpenBook Agreement"), the NYSE would prohibit data-feed customers from retransmitting the NYSE OpenBook data feed. In addition, the NYSE would prohibit a data-feed recipient that redistributes the NYSE OpenBook outside of its organization from integrating the limit orders of other markets or trading systems with the NYSE limit orders. At all times, data-feed recipients that redistribute the NYSE OpenBook would have to display the NYSE's compilation of its limit-order data in a separate window marked "NYSE OpenBookTM".
II. The NYSE OpenBook Proposal is Unfair, Discriminatory and Anticompetitive.
The NYSE OpenBook concept responds to the need of investors for a broader range of market data following the advent of decimalization. It has the potential to increase transparency, to eliminate the monopoly of the NYSE specialists over key market data and to decrease the informational advantages of being on the exchange floor. As discussed below, however, the NYSE OpenBook Proposal is unfair, discriminatory and anticompetitive and thereby undercuts the significant benefits it could otherwise bring to investors and to the markets.
Section 11A(c)(1)(C) of the Exchange Act requires that all securities information processors be able to obtain information with respect to quotations and transactions for purposes of distribution and publication on fair and reasonable terms. The terms the NYSE proposes to impose on vendors restricting the use and redistribution of NYSE OpenBook are neither fair nor reasonable. They provide that recipients of the data feed that externally redistribute the NYSE OpenBook display must do so only in the window format prescribed by the NYSE. In addition, they expressly prohibit vendors and broker-dealers from making any enhancements to the content or format of the NYSE OpenBook display, including better priced orders available in other markets, to create a more useful product. In effect, the NYSE's terms and conditions for NYSE OpenBook would turn vendors and broker-dealers into captive distributors.
Section 11A(c)(1)(B) of the Exchange Act requires an SRO to distribute information with respect to quotations in such a manner as to assure the prompt, accurate, reliable and fair collection, processing, distribution and publication of information with respect to quotations for and transactions in such securities and the fairness and usefulness of the form and content of such information. Section 11A(c)(1)(D) of the Exchange Act requires that exchange members, brokers, dealers, and securities information processors be able to obtain information with respect to quotations for and transactions in securities on terms that are not unreasonably discriminatory.
The NYSE OpenBook Proposal would permit certain subscribers to enhance and adapt NYSE limit-order information by consolidating NYSE OpenBook information with limit-order information available from other market centers for internal distribution. At the same time, as noted above, the NYSE OpenBook Agreement would expressly prohibit comparable adaptations and uses for other classes of subscribers. There is no reasonable basis for depriving one class of investors of a level and quality of market data needed by all investors to make fully informed investment decisions. The difference in treatment of the classes of subscribers under the NYSE OpenBook Proposal contravenes Section 11A(c)(1)(B) in that it impairs both the usefulness and fairness of the form and content of the NYSE OpenBook data for users and contravenes Section 11A(c)(1)(D) in that it is unreasonably discriminatory.
The NYSE OpenBook constitutes a facility of an exchange as defined in Section 3(a)(2) of the Exchange Act2 and therefore a review of the NYSE OpenBook Proposal by the Commission is subject to the standards of Section 6(b) of the Exchange Act. The NYSE OpenBook proposal is unjustifiably anticompetitive, in contravention of Section 6(b)(8) of the Exchange Act. The requirement in the NYSE OpenBook Agreement expressly prohibiting data-feed recipients from retransmitting the NYSE OpenBook data feed means the data feed will be available solely from the NYSE. The attempt to justify the prohibition because of concerns that certain vendors and other subscribers may have inadequate technology is unconvincing. If the NYSE OpenBook product is not ready for distribution over the full range of available subscriber platforms, it may be that the product is not yet ready for release; it does not provide a justification for restrictive and anticompetitive practices. If the NYSE OpenBook product is not ready to go live, rather than delay the introduction of a service providing such essential market data or release it partially, it would be more beneficial to the markets and investors for the NYSE to provide its limit-order data to those market-data vendors capable of providing state-of-the-art data distribution services. Instead, the NYSE would impose restrictions whose net effect would be to protect the NYSE's monopoly over market data it collects and disseminates as an SRO. The restrictions would ensure that the NYSE is the sole source for the NYSE OpenBook data by controlling both the initial distribution of the data and any subsequent redistribution.
The NYSE does not adequately explain why the redistribution of the NYSE OpenBook data feed should be prohibited. Perhaps the NYSE's unstated concern is that other exchanges, dealers, ECNs or market venues might find the NYSE OpenBook a useful tool for making markets in NYSE-listed stocks. The NYSE might also fear that these potential competitors would prepare a quotation montage that would diminish the time-and-place advantages NYSE floor members enjoy and would provide for comparison shopping of NYSE prices against the prices available elsewhere. These possibilities suggest that one purpose in prohibiting retransmission of the data feed is to limit the potential diversion of order flow in NYSE-listed securities to any market venue other than the NYSE. Further support for this analysis is provided by the NYSE OpenBook Agreement,3 Exhibit C of which states, in relevant part, that vendors "shall not cause, or permit any other Person to cause, the displays of OpenBook Information that Customer provides to Subscribers to be integrated with limit orders or other market information [from] any source other than NYSE makes available. This means, for instance, that Customer shall not permit the displays of OpenBook Information that it provides to Subscribers to be consolidated with limit orders that any other market, or any electronic communications network or broker-dealer, makes available."
Efforts by the NYSE to prevent "leakage" of order flow are by no means a new phenomenon. Almost 60 years ago, in the Multiple Trading Case, the Commission held that the public policy under the Exchange Act voided a rule of the NYSE that purported to prohibit NYSE members from routing orders in NYSE-listed securities to the regional exchanges.4 Later, when the NYSE tried to impose a "Public Limit Order Protection Rule" (the "PLOPR") that would have required its members to clear limit orders on the NYSE specialists' books before taking orders to regional exchanges, the Commission once again objected and entered disapproval proceedings under the Exchange Act.5 In the latter case, the Commission was unpersuaded by the favorable market impacts the NYSE argued would arise from its proposed rule. In the order commencing proceedings to consider disapproval of the PLOPR, the Commission stated that the fact that an NYSE proposed rule change would limit the ability of member organizations to effect transactions on other market centers within the United States was, per se, a ground for disapproval of the proposed rule change.6 As in the Multiple Trading Case, the NYSE's arguments about the need to have the PLOPR to promote market integrity and customer protection were irrelevant to that basic statutory issue.
More recently, in connection with its consideration of proposed amendments to NYSE Rule 92, the Commission determined that the NYSE should not be allowed to apply its rule to other marketplaces, which the NYSE had sought to do to prevent other markets from adopting more liberal trading standards than the NYSE was prepared to allow.7 Finally, it was only very recently that the NYSE rescinded its longstanding, anticompetitive Rule 390, which sought to stem the erosion of order flow to the third market.8
If the Commission were to approve the remaining portions of NYSE OpenBook Proposal, it would permit the NYSE to put ECNs, the regional exchanges and other market venues at a competitive disadvantage for establishing a third market in NYSE-listed securities. Putting roadblocks in the path of competing market centers would restrict their ability to attract order flow and would have anticompetitive market effects similar to those the Commission previously condemned in the cases referred to above.
III. The NYSE Fails to Provide an Adequate Statement of Burdens on Competition in the NYSE OpenBook Proposal.
Section 6(b)(5) of the Exchange Act provides that NYSE rules must "remove impediments to and perfect the mechanism of a free and open market and a national market system . . . and [must] not [be] designed to permit unfair discrimination between customers, issuers, brokers, or dealers . . . ." Section 6(b)(8) of the Exchange Act provides that an NYSE rule must "not impose any burden on competition not necessary or appropriate in furtherance of the purposes of [the Exchange Act]." In the NYSE OpenBook Proposal, the NYSE states that "[t]he Exchange believes that the proposed fee change will not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act."9 That rote incantation of the statutory standard in Sections 6(b)(5) and (8) is unsupported by any discussion or any demonstration at all. The NYSE's formulaic response does not satisfy the requirements of the Commission's Form 19b-4 that such burdens be explained and justified in detail.10 As the Commission is aware, moreover, the courts have applied strict scrutiny to rule filings that do not meet statutory standards. The scope of this obligation is explained in Timpinaro v. SEC,11 in which the U.S. Court of Appeals for the District of Columbia Circuit remanded an SEC-approved rule to the Commission for failure to substantiate its belief that the rule would achieve the desired objective.12
In a context where the competitive impacts of an NYSE rule proposal are certain to be trivial, an elaborate discussion is not warranted. That is not the case here, however. The NYSE's statements do not elucidate the issue and, as a result, the NYSE's filing does not provide a sufficient basis for the Commission or the public to evaluate the rule change.13 In this case, the NYSE has submitted a proposal that would have substantial impacts on the capacity of market-data vendors to compete with the NYSE in the provision of market data and the development of market-data applications. It would also adversely affect the ability of brokers, ECNs and other market venues to compete with the NYSE for order flow in NYSE-listed securities. Given the significance of the issues raised by the NYSE's OpenBook proposal, it is particularly important that there be a meaningful opportunity for public comment to guide the Commission in determining whether to allow these rule changes. The NYSE OpenBook Proposal enhances the monopoly power of the NYSE over the dissemination of market data by imposing significant restraints on the ability of market-data vendors with whom it contracts to modify or redistribute the NYSE's limit-order data in useful and innovative formats. Accordingly, we believe that the Commission should not approve the NYSE's OpenBook Proposal as submitted and should require the NYSE to resubmit the proposal for public notice in full compliance with Sections 19(b)(1) and 19(b)(2) of the Exchange Act, particularly since a valuable franchise is being affected.14
The anticompetitive aspects of the NYSE OpenBook Proposal are of particular public importance in light of the market power the NYSE has as a de facto exclusive processor of securities information with respect to its limit-order data. In evaluating the NYSE's proposed rule, the Commission should apply the standards of Section 6(b) with the same rigor as it would evaluate fees by exclusive securities information processors regulated as such. 15 The Congress, in enacting the Securities Acts Amendments of 1975, warned particularly against possible abuses of market power by exclusive processors:
The Committee believes that if economics and sound regulation dictate the establishment of an exclusive central processor for the composite tape or any other element of the national market system, provision must be made to insure that this central processor is not under the control or domination of any particular market center. Any exclusive processor is, in effect, a public utility, and thus it must function in a manner which is absolutely neutral with respect to all market centers, all market makers, and all private firms. Although the existence of a monopolistic processing facility does not necessarily raise antitrust problems, serious antitrust questions would be posed if access to this facility and its services were not available on reasonable and nondiscriminatory terms to all in the trade or if its charges were not reasonable. Therefore, in order to foster efficient market development and operation and to provide a first line of defense against anti-competitive practices, Sections 11A(b) and (c)(1) would grant the SEC broad powers over any exclusive processor and impose on that agency a responsibility to assure the processor's neutrality and the reasonableness of its charges in practice as well as in concept [emphasis added].16
Bloomberg respectfully recommends that the Commission not approve the remaining portions of the NYSE OpenBook Proposal and that the Commission direct the NYSE to revise its proposed rule change to resolve the problems referred to above.
* * *
We appreciate the opportunity to make our views known to the Commission and the staff and we hope that our letter is helpful. If members of the Commission or the staff believe we may be of further assistance in these matters, please let us know.
Kevin M. Foley by R.D.B.
Kevin M. Foley
cc: The Hon. Harvey L. Pitt, Chairman
The Hon. Isaac C. Hunt, Jr., Commissioner
The Hon. Laura S. Unger, Commissioner
Annette L. Nazareth, Esq., Director,
Division of Market Regulation
Robert L. D. Colby, Esq., Deputy Director,
Division of Market Regulation
Belinda Blaine, Esq., Associate Director,
Division of Market Regulation
Jack Drogin, Esq., Assistant Director,
Division of Market Regulation
David M. Becker, Esq., General Counsel
|1||Bloomberg is a worldwide, finance-oriented information and media company that provides data, news and analytics (the "BLOOMBERG PROFESSIONAL service") to investment firms and other professionals via more than 180,000 BLOOMBERG PROFESSIONAL terminals worldwide. Bloomberg is a Delaware (U.S.) limited partnership, headquartered in New York.|
|2||Section 3(a)(2) defines a "facility" of an exchange to include "its premises, tangible or intangible property . . . any right to the use of such premises or property or any service thereof for the purpose of effecting or reporting a transaction on an exchange . . . and any right of the exchange to the use of any property or service."|
|3||The NYSE OpenBook Agreement is the standard NYSE Vendor Agreement with exhibits annexed that provide terms and conditions expressly applicable to NYSE OpenBook. Exhibit C of the NYSE Vendor Agreement is available on the NYSE OpenBook web site (www.nysedata.com/openbook).|
|4||Matter of The Rules of the New York Stock Exch., 10 SEC 270 (October 4, 1941) (NYSE rule prohibiting dealings on other markets declared to be against public interest and illegal).|
|5||Matter of New York Stock Exch., Notice of Proceeding to Consider Disapproval of Proposed Rule Change, Securities Exchange Act Release No. 12249 (SR-NYSE-76-5) (March 23, 1976), 1976 SEC LEXIS 2116.|
|6||Id., in text following n.8.|
|7||See Securities Exchange Act Release No. 44139 (March 30, 2001).|
|8||See Securities Exchange Act Release No. 42758 (May 5, 2000).|
|9||Securities Exchange Act Release No. 44962 (October 19, 2001), Section II(B).|
|10|| As the Commission is aware, the General Instructions to Form 19b-4, 5 Fed. Sec. L. Rep. (CCH) ¶ 32,356, are explicit on the point. They provide, with respect to "Information to be Included in the Completed Form," as follows:
4. Self-Regulatory Organization's Statement on Burden on Competition
Id. at p. 22,318.
|11||2 F.3d 453 (D.C. Cir. 1993).|
|12||See also Section 3(f) of the Exchange Act.|
|13||To assist the Commission in its adjudicatory proceedings under the Exchange Act, the NYSE must provide an adequate basis for comment on its rule proposals and, where significant competitive issues are involved, must provide an opportunity for the public to comment meaningfully on the issues involved. Perfunctory recitals do not provide that basis. See Connecticut Light and Power Co. v. NCR, 673 F.2d 525, 530-31 (DC Cir. 1982).|
|14||Cf. Home Box Office, Inc. v. FCC, 567 F.2d 9 (1977).|
|15||Section 3(a)(22) of the Exchange Act excludes from the definition of "securities information processor" national securities exchanges in view of the Commission's other regulatory powers over exchanges. But for that exclusion, the NYSE would be the exclusive securities information processor with respect to transactions on its market.|
|16||Securities Acts Amendments of 1975, Report of the Senate Comm. on Banking, Housing and Urban Affairs to Accompany S.249, S. Rep. No. 94-75, 94th Cong., 1st Sess. 11-12 (1975).|