From: []
Sent: Tuesday, February 11, 2003 9:45 AM
To: Harris, Lawrence E.
Cc: atkinsp@SEC.GOV; camposr@SEC.GOV; glassmanc@SEC.GOV;
goldschmidh@SEC.GOV; pitth@SEC.GOV; ameels@SEC.GOV; delatorrel@SEC.GOV;
headm@SEC.GOV; sternb@SEC.GOV; traegerh@SEC.GOV; nazaretha@SEC.GOV;
ColbyR@SEC.GOV; adkinsA@SEC.GOV; williamsst@SEC.GOV; preziosog@SEC.GOV;;;;
Subject: Branding NYSE Liquidity QuoteSM: Network Externalities and
Market Power

Damn.  A whole graduate economics course in eight lines!   I'm glad you are
on the government dole and cannot bill me.  Thanks for connecting the dots.

Since years of toiling in the antitrust vineyards cause Harvey Goldschmid
to thing about these issues in much the same way that you do, you'll be
interested in our interchange with him about "network externalities" (not
that he used those two words).  Bob Britz took Harvey through the Bloomberg
slides so that he could see how unintrusive our requirement for Liquidity
Quote's independent display turns out to be once a vendor works with
windows, lines, colors and other design techniques to optimize the dual
goals of utility and distinguishing Liquidity Quote.

At the end of our meeting, when Bob asked Harvey to articulate what was
really at the bottom of the staff concerns, Harvey also replied with two
words: "market power".  I responded by extending my little finger and
perform a finger curl (to be contrasted with an arm curl), saying in
effect, "If requiring our distributors to expend a little ingenuity to
display our firm, executable "where's the beef" quotes independently from
the fleeting, out-of-the-money, 100-share "best" autoquotes is an exercise
in market power, it's an awfully modest one."

Rich Bernard
212 656 2222

      Lawrence E."         To: "''"     
      <HARRISL@SEC.GO      cc: 
      V>                   Subject:  RE: Branding NYSE Liquidity QuoteSM: One Thin Line    
      02/11/03 08:10           


You give me more credit than I deserve.

A network externality exists when the value of your business to your
increases with the number of clients that you have.  Telephone service, all
forms of brokering including social matchmaking, Internet chat service, are
other examples of industries that have network externalities.  Free market
competition in such industries often results in a single or dominant large
provider.  The biggest economic problems in such industries appear where
networks interface with each other.  Regulating access and pricing
interfaces is difficult.

- Larry

From:     []
Sent:        Tuesday, February 11, 2003 7:52 AM
To:          Harris, Lawrence E.
Subject:           Branding NYSE Liquidity QuoteSM: One Thin Line

You were doing such a good job of tracking down unintended consequences
yesterday that I never got the chance to ask you to explain your statement.
I think I know what a "network externality" is, but in this context it's
"inside baseball" to me and I cannot connect the dots.  Can you help me


Rich Bernard
212 656 2222


      Lawrence E."         To: "''"
<>, "Atkins, Paul"
"Campos, Roel" <CAMPOSR@SEC.GOV>,
      V>                      "Glassman, Cynthia"
<GLASSMANC@SEC.GOV>, "Goldschmid,
      02/10/03 09:46       cc: "Pitt, Harvey"
<PITTH@SEC.GOV>, "Ameel, Susan"
      AM                      <AMEELS@SEC.GOV>,
"Delatorre, Luis" <DelatorreL@SEC.GOV>,
"Head, Mary S."
<HeadM@SEC.GOV>, "Traeger, Heather L."
"Nazareth, Annette L."
"Colby, Robert LD" <ColbyR@SEC.GOV>,
"Adkins, Alden"
<ADKINSA@SEC.GOV>, "Williams, Stephen L."
"Prezioso, Giovanni P."
"Harris, Lawrence E."

  Subject:  RE: Branding NYSE
Liquidity QuoteSM: One Thin Line


Thanks for the note.

The Coca-cola analogy doesn't fit exchange markets well.  Coke does not
compete with Pepsi in a market characterized by strong network

We look forward to seeing you and hearing your presentation.

- Larry

From:     []
Sent:        Friday, February 07, 2003 4:48 PM
Subject:           Branding NYSE Liquidity QuoteSM: One Thin Line

 << File: LIQUIDITYQUOTELETTER020703.doc >> << File: quote montage.doc >>
<< File: Quoted Depth Comparison - NYSE Top 100.pdf >>
To enhance the efficiency of the meetings that Bob Britz, Harry Day, Ron
Jordan and I have scheduled with each of you separately on Monday, under
the icon immediately below is a letter addressed to Annette on the
captioned topic.

(See attached file: LIQUIDITYQUOTELETTER020703.doc)

At the end of this email are the various documents to which the letter

Lest the nine pages it takes our letter to cover the business and policy
issues "lose the forest for the trees", Bob asked me to briefly summarize
the letter's key ideas in this covering email:

As the Seligman Committee recommended, we seek to compete by producing and
making available an enhanced data product, NYSE Liquidity Quote
(superscript: SM).  Liquidity Quote will provide a firm, executable, size
bid and offer several cents below and above the BBO.  It will enhance
pre-trade transparency and foster fair competition among orders, markets,
data products and data providers.

These benefits can only be achieved if we can place our product in its own
package (window) and brand it.  Customers can then differentiate our data,
consider our reputation and judge us on the basis of the utility and
quality of our data product.

But if the Commission allows vendors to "homogenize" our liquidity quotes
with other exchanges' data, it will destroy our ability to present
differentiated, enhanced quality data to the point of order entry.  By
definition, it will remove our brand: something called "NYSE Liquidity
Quote(superscript: SM)" cannot include data from a periphery market.

That is why Coke does not allow bottlers to tamper with its ingredients and
why you will not find a can of Pepsi in a Coke vending machine.  Coke seeks
to be judged by consumers on the basis of its own differentiated
formulation, and wishes to ensure, through quality control, a consistent
experience for every consumer.

We seek the same opportunity.  That's what brands are all about.

If we deliver a differentiated, useful product of consistent quality, we
believe our customers will reward us with their business.

*     *     *

We look forward to meeting with you and your staffs on Monday.

Vendor screen shots for NYSE-listed stocks: (See attached file: quote

Matrix of quoted spreads for NYSE-listed stocks across markets (December
|Un       |          |             |   |Trade    |          |             |
|weighted |          |             |   |Weighted |          |             |
|Exchange |      # of|      Average|   |Exchange |      # of|      Average|
|         |    Quotes|       Spread|   |         |    Quotes|       Spread|
|B        |12,265,924|         0.30|   |B        |   980,134|         0.22|
|C        | 1,024,295|         0.41|   |C        |   211,704|         0.28|
|M        |16,888,676|         0.31|   |M        | 1,118,219|         0.18|
|N        |69,590,357|         0.06|   |N        |23,058,838|         0.04|
|P        | 8,141,119|         0.22|   |P        |   171,387|         0.13|
|T        | 9,856,977|         0.78|   |T        | 3,112,277|         0.24|
|X        |19,014,891|         0.58|   |X        |   162,429|         0.37|

Graph comparing quote depths for NYSE-listed stocks across markets: (See
attached file: Quoted Depth Comparison - NYSE Top 100.pdf)

Rich Bernard
212 656 2222