From: []
Sent: Tuesday, March 04, 2003 9:40 AM
Subject: Liquidity Quote: Time Is of the Essence; Discussions with

Annette, I know you have been "snowed in" more than once and in more ways
than one.  But we need guidance as to your recommendation to the Commission
on our Liquidity Quote filing at the earliest possible moment.


We are now in our fifth week of production.  By the end of last week, we
were automatically calculating and publishing the inside quote from the top
line of our limit order books in 196 stocks, and calculating and displaying
on the Floor Liquidity Quotes in 35 of them.   We have seen an overall
increase of 30 percent in the number of inside quotes.  We have also seen
several instances of liquidity bids and offer of 500,000 shares or more,
and even a 1.1 million-share quote.  Moreover, if last week's meeting of
our Institutional Investors Advisory Committee is any indication, the "buy
side" demand for the product is unprecedented in our experience.

As I mentioned to Bob Colby at the IPO Committee meeting on Friday, subject
to your action, we can "launch" -- begin external dissemination of
Liquidity Quotes -- by mid-March.  Accordingly, we will send you separately
a letter extending the time for Commission to act on our filing through
Friday, March 15.

Recent conversations with your staff suggests that you may be under the
impression that the Exchange is prepared to disseminate Liquidity Quotes
without applying our requirement that precludes vendors from commingling
Liquidity Quotes with "retail"-size BBOs.  Please understand that this is
not, and has never been, the case.  Your staff has also suggested that you
may recommend that the Commission condition its approval of the filing on
the requirement not applying -- in effect, recommend that the Commission
institute disapproval proceedings.  If this is so, we need to know as soon
as possible.  This will allow Bob Britz and I to seek a meeting with Bill
Donaldson so we can bring him "up to speed".

I will give you a call after you have had a chance to review this email so
that we may discuss next steps.


As follow up to my February 14 email giving you the "state of play" on our
producer/distributor discussion with Bloomberg, I can report one piece of
good news.

You will recall that we had found all of Bloomberg's format solutions
acceptable, but one issue remained: Bloomberg's concern that Reuters,
leveraging its distributed software solutions, would market the commingling
of "retail-size" autoquotes with Liquidity Quotes in order to gain a
competitive advantage over Bloomberg.

To be more precise, Bloomberg fears that Reuters will provide its end-user
customers with the technical tools to insert Liquidity Quotes into the
Reuters' autoquote montage and to otherwise commingle the data in the
systems of Reuters' customers.  Bloomberg, which uses a different technical
platform, is unable to provide its customers with the tools to commingle
the data locally.  Thus, to complete with Reuters, Bloomberg's only choice
would be to deliver a display that includes commingled data.  However, our
requirement that vendors differentiate Liquidity Quotes precludes Bloomberg
from centrally disseminating commingled displays.

I noted in my February 14 email that, "Life teaches that real experience is
more likely to provide the best right answer ...."   I expected to have to
live longer than another week before that answer would fall into my lap.
But, as I mentioned to Bob Colby at last Friday's IPO Committee meeting, it
turns out that the answer did show up last week.

In the interview with Reuters CEO Tom Glocer in the attached article,
"Fast-Forwarding, Reuters to Focus on Single Distribution Architecture",
Reuters announces that it is moving away from its distributed datafeed
model to a more centralized, controlled distribution model (like
Bloomberg's), which Reuters characterizes as the "more advanced", "modern"
and preferable model:

   "For example, let's say you need to do a VWAP calculation.  The [current
   Reuters distributed] network works by pumping every single tick real
   time down to the desktop and then the desktop calculates the VWAP.  A
   far more coherent approach is to have the box sitting on the
   distribution LAN at the top of the network, calculate the VWAP up there,
   and then shoot the calculated result down."

In short, Reuters is on a trajectory to replace by next year its
distributed software model with a centralized one akin to Bloomberg's.
Moreover, Reuters will start with the very customer base that Bloomberg
fears is at risk:  "[W]here you need the absolute most efficiency in
distribution and where the customers will see the benefit of not having to
continue to scale up to take the data solely down the [current Reuters
distributed] infrastructure."

Bloomberg has asserted that Reuters could successfully induce end-users to
switch from Bloomberg's more modern, centrally-distributed service to
Reuter's more costly, outmoded distributed software model by offering to
commingle Liquidity Quote with "retail-sized" autoquotes.  But Reuters'
public announcement that it seeks to shift its customers to a
centrally-distributed model like Bloomberg's belies Bloomberg's hypothesis.
That is, the idea that Reuters would encourage its customers to demand
commingling so as to increase those customers' use of the very system that
it is abandoning "defies gravity".

(See attached file: Securities Industry News.htm)

Rich Bernard
212 656 2222
Webmaster Note: Attachment was "Fast-Forwarding: Reuters to focus on single distribution architecture" by Mary Schroeder, in Securities Industry News, vol. 15, No. 8, Feb. 24, 2003.