From: Gene Finn [glrfinn@worldnet.att.net]
Sent: Monday, May 17, 2004 5:28 PM
To: rule-comments@sec.gov
Subject: S7-10-04

                                                    Gene L. Finn
                                                    Finn Associates
                                                    1236 Battery Ave.
                                                    Baltimore, Md. 21230
                                                    E-mail glrfinn@att.net


Jonathan Katz, Secretary
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC

May 16, 2004

RE: S7-10-04

Dear Mr. Katz;

My background as a former Chief Economist and Senior Economic Advisor for the 
SEC (1969-1982), former Chief Economist for NASD (1983-1995), a former outside 
Director on the Boards of Ameritrade Holding Corporation and Knight Trading 
Group and as a current online investor qualifies me to comment on the subject 
release (The Release). 

This comment focuses on the Market Data System proposal. It expands upon 
repeated requests for action by the SEC since July of 1997 requesting 
elimination of the discriminatory "nonprofessional" exclusive processor access 
fees charged exclusively to online investors. Exclusively means that no other 
nonprofessionals are charged a subscriber access fee. 

Online investors are those accessing market data from their brokers using their 
personal computers for use in managing their own accounts. These 
"nonprofessional fees" discriminate against those who would access such data 
from their brokers electronically (as compared to access over the telephone). 
Such fees have unnecessarily restrained competition and are not necessary for 
purposes of the Exchange Act.

I request that those prior submissions and letters to the SEC be incorporated in 
the current record by reference. 

Market Data Proposal

Need for Department of Justice and Federal Trade Commission comment on Market 
Data System proposed rule.

The Release ignores the existing discriminatory nonprofessional subscriber fees 
that NYSE and NASDAQ exclusive processors force online brokers to impose upon 
online investors. More important, the proposed rules appear to permit exclusive 
processors to continue to extend the reach of their pricing power past the 
brokers to the brokers' customers in ways that are unrelated to distribution 
costs. This is equivalent to retail price maintenance and violative of 
anti-trust and Fair trade laws. Indeed the NMS market data system is laced with 
such anti-competitive practices. 

Consequently, The Commission should obtain the comments of the Department of 
Justice and the Federal Trade Commission on the proposed market data rule. While 
both the Commission and the SRO's have a legal obligation to avoid unnecessary 
anti-competitive and discriminatory practices, that are violative of Anti-trust 
statues, the SEC does not have a division of competition and investors would 
benefit from such intervention.

Moreover, the facts and evidence demonstrate a failure of SRO's to restrain, as 
would be appropriate, the undoubtedly strong corporate instincts to maximize 
monopoly profits, thereby enhancing top officer compensation and SRO market 
share through use of enhanced payments for orderflow and promotional spending. 

Similarly, The Commission's belief, that there is justification in permitting 
the charging of discriminatory, monopolistic, above cost fees to make more 
revenues available for self-regulation, places The Commission, itself, in a 
conflict of interest position. If the normal Congressional appropriations 
processes can be bypassed by just shifting more and more of the cost burdens of 
regulation upon individual investors through SRO fees, then The Commission's 
ability to extend the SEC regulatory scope is virtually unrestricted by the 
normal appropriations review processes. 

Online Investor Access Fees 

When it comes to online investor access fees, one would have to conclude that 
The Commission has just not enforced the fairness provisions of the Exchange 
Act. 

Obstructed access---The "nonprofessional fee" not only discriminates against 
online investors it also obstructs their access to real-time quotation and last 
sale information. 

The NYSE, Amex, and NASDAQ "nonprofessional" subscriber access fees, which are 
imposed exclusively upon individual online investors account for at least $ 60 
mil. of the $ 424 mil. total 2003 exclusive processor market data revenue 
reported in The Release. That is equivalent to 14.2% of total revenue and 158% 
of the total exclusive processor costs.

The nonprofessional fees with a $1 per month cap for unrestricted access to each 
of the three markets' data or $36 per year per full access subscriber would 
suggest that total online investor electronic access is limited to a full time 
equivalent of 1.7 million ($60mil. divided by$ 36) out of a possible 20.0 
million full time equivalents for the estimated 20 mil. online investors. This 
is an access rate of 8.5% of full access, with a 91.5% obstruction of access. 

If online brokers do not administer the access fee rigorously and do not limit 
access to investors for whom fees are not paid, their own access can be shut off 
and they themselves can be put out of business by the exclusive processors and 
the SRO's. In reality, competition frequently forces online brokers to pay the 
fee cap for access for large active investors. The use of real-time quotes by 
smaller inactive accounts is minimized by serving up real-time information only 
on the pre-trade screen to meet best execution obligations. Delayed information 
is served up for other inquiries. 

Excessive Fees---"Nonprofessional" fees that are 158% the total cost of the 
exclusive processor are excessive. When combined with other market data fees 
from professional and commercial users, The Release data show that processor 
total revenues yield a 91% profit that is shared among the SRO cartel. 

Discriminatory Fees---More important, 100% of the "nonprofessional" fees are 
paid by online investors. Other nonprofessional investors pay no fees. This 
discriminates against the online investors. 

Just think, if, to remove obstructed access, all online individual investor 
accounts paid a fee of $36 per year, revenue from the nonprofessional fee would 
mushroom to $720,000,000. If, to remove the discrimination, the same fee were 
charged the other estimated 20 million non-online individual direct investors, 
the nonprofessional fee would generate $1.44 billion in revenue that could be 
shared among the cartel.

This is the "fee rate" being charged selectively to online investors and/or used 
to obstruct their access to real-time information. Obviously, Congress never 
intended this result when they passed the 1975 amendments to the Exchange Act.

Fairness and Reasonableness---The "nonprofessional" fee should be eliminated 
because it is unfair and it is unreasonably discriminatory ---If it were 
extended to all individual investor accounts and limited to the costs of the 
exclusive processor, a reasonable fee would be about 2.64 cents per month for 
each market data set or 95 cents per year. Clearly, administration costs applied 
to customers of brokers would dwarf the fee itself and it makes no sense, except 
to a monopolist , who is not restrained by reasonableness or cost considerations 

Moreover, Online brokers should be permitted to eliminate the horrendous 
administrative costs required of online brokers by the SRO cartel to implement 
the current price discrimination and anti-competitive regime. The need for 
online brokers to maintain two market data systems, one for real-time and one 
for delayed prices, for their customers is costly; and the administrative costs 
of the non-professional fee add millions to the cost of this discriminatory 
system. 

Fee is not Necessary For Purposes of the Act----

The Release reports a $386 million exclusive processor profit in 2003 to be 
shared among cartel members. Elimination of the nonprofessional fee and 
provision of 100 percent access to nonprofessional clients of brokers would not 
compromise the NMS market data system.

Indeed, online investors would be able to monitor on a real-time basis the best 
execution performance of their brokers, market transparency would be greatly 
enhanced, and SEC/SRO "best execution" enforcement costs would be reduced. 

By default, through inaction, The Commission supports exclusive processor 
nonprofessional fees, that help to produce a 91 percent profit, that 
incentivizes exorbitant SRO executive compensation, SRO governance problems, 
PFOF rebates and wash sales. This suggests that the SEC finds such fees fair, 
not excessive, and not unreasonably discriminatory. 

Before The Commission adopts more rules sprinkled with "fair and reasonable" and 
"not unreasonably discriminatory" the Commissioners should define what they 
mean. A good place to start would be to explain to online investors why a unique 
nonprofessional fee, unrelated to cost and applied solely to online investors, 
is not discriminatory and/or excessive but rather is fair and reasonable. 

New Market Data Rule May Worsen Obstruction of Data Access  

The fact that The Commission has not acted to eliminate this discriminatory 
pricing behavior against online investors and that the problem is not even 
mentioned in The Release suggests that such anti-competitive behavior would 
still be permitted.

Indeed, The Release states directly and/or by inference that: 

1) Fees need not be cost-based 

2) The Commission has not yet decided whether regulation of access fees is 
necessary; but the SEC would find such rate regulation distasteful

3) The Commission has approved and continues to approve the fees as proposed by 
the SRO cartel on the grounds that the cartel has obtained an undefined 
consensus.

4) The Commission's Advisory Committee expressed an SRO concern that the SRO 
cartel members may be exposed to anti-trust liability

5) The Commission fears that absent the proposed rule or current NMS 
restrictions, single SRO's or market centers could charge monopoly gouging rates 
for market data. 

The only conclusion that can be drawn from these apparent contradictory 
rationalizations is that The Commission proposes the rule, not to protect 
investors, but rather to further insulate SRO's from anti-trust and to extend 
the scope of regulation of securities information distribution to include all 
potential future Internet competitors of the SRO cartel. 

The Commission, with the power in past to prevent the unfair, unreasonable and 
unreasonably discriminatory pricing behavior, reflected in the nonprofessional 
fees, has not acted to protect online investors from the SRO cartel. The new 
rules do not appear to change that policy. Moreover, they may worsen the online 
investor's access to real-time market data by restricting the distribution of 
such data over the Internet outside of the control of NMS plans. 

The proposed new rule states:

"... that a national securities exchange or national securities association may, 
by means of an effective transaction reporting plan, condition such 
retransmission upon appropriate undertakings to ensure that any charges for the 
distribution of transaction reports or last sale data in moving tickers 
permitted by paragraph (d) of this section are collected." 

and 

"Nothing in this section shall preclude any national securities exchange or 
national securities association, separately or jointly, pursuant to the terms of 
an effective transaction reporting plan, from imposing reasonable, uniform 
charges (irrespective of geographic location) for distribution of transaction 
reports or last sale data." 

Thus the exclusive processors can continue to extend pricing control to retail 
brokers' customers and as noted above the new rule will protect them from new 
Internet competition. 

New Market Data Rule Not Needed

The Commission does not need a new rule to prohibit anti-competitive 
restrictions imposed by exclusive processors on data providers that prevent them 
from selling or otherwise providing the identical information to other Internet 
information distributors. 

To the contrary, the rule, through new display requirements, ties the retail 
brokerage community to the use of exclusive processor data because their 
websites provide for trade execution as well as retrieval of market data for 
information purposes only.

The Commission merely needs to write a letter to the SRO's and the Exclusive 
processors stating that NMS market data plans must be brought into compliance 
with the already existing statutory language below cited in The Release:

'The "fair and reasonable" and "not unreasonably discriminatory" requirements 
are derived from the language of Section 11A(c) of the Exchange Act. Under 
Section 11A(c)(1)(C), the more stringent "fair and reasonable" requirement is 
applicable to an "exclusive processor," which is defined in Section 3(a)(22)(B) 
as an SRO or other entity that distributes the market information of an SRO on 
an exclusive basis. The proposed amendment would extend this requirement to 
non-SRO market centers when they act in functionally the same manner as 
exclusive processors and are the exclusive source of their own data. Applying 
this requirement to non-SROs is consistent with Section 11A(c)(1)(F), which 
grants the Commission rulemaking authority to "assure equal regulation of all 
markets" for NMS Securities.

If the Commission believes its own release, then they will not make online 
investors wait another six months or a year for relief from these discriminatory 
fees.



Sincerely,

Gene Finn