February 26, 2003
Ladies and Gentlemen:
Bloomberg L.P. ("Bloomberg") appreciates the opportunity to comment further on the proposed rule changes filed by the NYSE relating to autoquoting price improvement on the NYSE and the dissemination of liquidity quotations (the "Liquidity Quote Proposal").
In our comment letter of January 23, 2003 on the Liquidity Quote Proposal, we outlined a number of serious concerns. At the same time, we expressed some optimism on the basis of a meeting we had on January 21, 2003 with the New York Stock Exchange, Inc. (the "NYSE") that the NYSE and we could reach an accommodation on some of the commercial issues that concerned us. We also recognized that such an accommodation would lessen, but would not necessarily eliminate, the statutory concerns mentioned in our letter, concerns that go to the heart of investor protection and the congressional goals for a national market system.
On February 13, 2003, we met again with senior representatives of the NYSE. In an effort to facilitate resolution of this controversy, Bloomberg prepared mock-ups of screens to allow us to explore with the NYSE ways in which Liquidity Quote data could be used, so that any misunderstanding could be addressed. Attached are copies of the screens we presented to the NYSE. The NYSE was helpful in some respects and said they would allow us to do a number of things we believe the contract language itself would exclude, but the NYSE did not indicate a willingness to put the interpretation in writing or to reform the contract language on any schedule that would facilitate Commission review. They just said no, moreover, to the most important thing. While they did not object to screens that would have allowed an investor to view NYSE quotations in comparison to quotations from other markets; they objected to any screen that would arrange Liquidity Quote bids and offers among other exchanges' best bids and offers in price order. Of course, arranging competing quotations by price is the most important analytic there could be. Another basis on which they objected to certain of the screens was that, in their view, there was insufficient brand identification for Liquidity Quote.
The NYSE refused, in addition, to address our concern that the remaining prohibitions apply only to information vendors that employ a client-server technology configuration, as Bloomberg does. As we have stated, under the Bloomberg technology the computer software and storage capacity are housed at Bloomberg and the client is thereby relieved of having to build and maintain its own redundant computer capacity. As a result, the NYSE prohibitions effectively apply only to clients who rely on vendor economies of scale but not to clients of vendors whose technology involves end-users receiving the data directly for on-site manipulation and analysis. Thus the NYSE refused to eliminate the advantage their rules give to larger market players who have the resources to make substantial in-house investments over mid-tier and smaller players who do not have those resources and who rely on vendors like Bloomberg for their efficiencies. That, as we noted in our January 23 letter, will promote the competitive inequality and unfairness of a "two tier" market in which the haves will have significant advantages over the have nots. We must therefore advise the Commission that the anticompetitive and other deleterious effects of the Liquidity Quote Proposal mentioned in our letter of January 23 remain essentially unabated.
In evaluating a proposed rule change by the National Association of Securities Dealers, Inc. (the "NASD") concerning the TRACE program, the Commission very recently noted that it "does consider concerns raised in comments about the vendor agreements in determining whether the proposed rules will operate in a manner consistent with the statute." Securities Exchange Act Release No. 47302 (January 31, 2003) in text preceding n.21. We believe, as we stated in our letter of January 23, that the impact of the NYSE's vendor agreements is highly relevant to the Liquidity Quote Proposal. Unlike the vendor contracts relating to TRACE, the impact of the NYSE vendor agreements is sufficient to make the Liquidity Quote Proposal inconsistent with the Exchange Act. For these reasons, we continue to advise the Commission that the Liquidity Quote Proposal cannot lawfully be approved.
We also continue to believe the Commission should assert and enforce its power to review under Section 19(b) of the Securities Exchange Act of 1934 (the "Exchange Act") SRO actions that have regulatory impact and/or purpose, regardless of whether the SROs choose to call those actions contracts, interpretations or anything else. The labels the SROs use to describe their actions should not govern the Commission's use of the powers the Congress gave it in the Securities Acts Amendments of 1975 to review SRO rulemaking.
While we recognize that, as a practical matter, the Commission should apply a rule of reason and should not consider every SRO vendor contract to be a rule, we believe it should treat as rules, and require filing under Section 19(b), any stated policy, practice or, interpretation, including one embedded in a vendor contract, that meets the definition of "rule" in paragraphs (b) and (c) of the Commission's own Rule 19b-4 under the Exchange Act and that appears to be inconsistent with the statutory standards applicable to the SRO's rules. Rule 19b-4 implements the power the Congress expressly granted to the Commission in Section 3(a)(27) of the Exchange Act to determine by rule which stated policies, practices and interpretations of an SRO should be treated as a rule. Paragraph (b) and (c) of Rule 19b-4, would define as a rule, among other things, "any standard, limit, or guideline with respect to the rights, obligations, or privileges of specified persons . . ." that is not reasonably and fairly implied by another rule of the SRO. It clearly would encompass the NYSE vendor agreements at issue here.
In this instance, the fact that the NYSE has to obtain Commission approval of its Liquidity Quote Proposal gives the Commission a sufficient jurisdictional "hook" to catch up the vendor contracts in its analysis, as apparently was the case with the NASD's TRACE vendor agreements. In other situations, however, the Commission may not have such a convenient basis for review and may have to assert its right to treat vendor agreements and other SRO actions as rules regardless of whether the SRO consents to such treatment, either because the SRO does not tie the contracts to rules that require Commission approval or because they are tied to rules, such as fee rules, that may become effective upon filing without Commission action of any kind. The alternative, which we think does not comport at all well with the Commission's statutory mandate, is to express negative views about the SRO actions without taking any effective action to curb their use or proliferation.1
cc(w/att.): The Hon. William H. Donaldson