U.S. GOVERNMENT PRINTING OFFICE

71–311 PS WASHINGTON : 2001

PUBLIC ACCESS TO MARKET DATA:

IMPROVING TRANSPARENCY AND COMPETITION

HEARING

BEFORE THE

SUBCOMMITTEE ON

CAPITAL MARKETS, INSURANCE, AND

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON

FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MARCH 14, 2001

Printed for the use of the Committee on Financial Services

Serial No. 107–5

(

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington DC 20402–0001

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missiouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND

GOVERNMENT SPONSORED ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

ROBERT W. NEY, Ohio, Vice Chairman

CHRISTOPHER SHAYS, Connecticut

CHRISTOPHER COX, California

PAUL E. GILLMOR, Ohio

RON PAUL, Texas

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

BOB BARR, Georgia

WALTER B. JONES, North Carolina

STEVEN C. LATOURETTE, Ohio

JOHN B. SHADEGG, Arizona

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

VITO FOSSELLA, New York

JUDY BIGGERT, Illinois

GARY G. MILLER, California

DOUG OSE, California

PATRICK J. TOOMEY, Pennsylvania

MIKE FERGUSON, New Jersey

MELISSA A. HART, Pennsylvania

MIKE ROGERS, Michigan

PAUL E. KANJORSKI, Pennsylvania

GARY L. ACKERMAN, New York

NYDIA M. VELA ́ ZQUEZ, New York

KEN BENTSEN, Texas

MAX SANDLIN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

FRANK MASCARA, Pennsylvania

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

BRAD SHERMAN, California

GREGORY W. MEEKS, New York

JAY INSLEE, Washington

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

STEVE ISRAEL, New York

MIKE ROSS, Arizona

(V)

C O N T E N T S

Page

Hearing held on:

March 14, 2001 ................................................................................................. 1

Appendix:

March 14, 2001 ................................................................................................. 55

WITNESSES

WEDNESDAY, MARCH 14, 2001

Bell, Stuart, Bloomberg Financial Markets ........................................................... 16

Britz, Robert G., Group Executive Vice President, Operations Group, New

York Stock Exchange, Inc. ................................................................................... 7

Dwyer, Carrie E., General Counsel and Executive Vice President, Charles

Schwab Corporation ............................................................................................. 9

Knight, Edward S., Executive Vice President and General Counsel, NASDAQ

Stock Market ........................................................................................................ 14

MacDonald, Randy, Chief Financial Officer, Ameritrade Holding Corporation . 5

Putnam, Gerald D., Jr., Chairman and Chief Executive Officer, Archipelago

Holdings, L.L.C. ................................................................................................... 11

APPENDIX

Prepared statements:

Oxley, Hon. Michael G. .................................................................................... 63

Crowley, Hon. Joseph ....................................................................................... 56

Kanjorski, Hon. Paul E. ................................................................................... 59

Ney, Hon. Bob ................................................................................................... 61

Bell, Stuart (with attachment) ........................................................................ 178

Britz, Robert G. (with attachments) ............................................................... 74

Dwyer, Carrie E. ............................................................................................... 126

Knight, Edward S. (with attachments) ........................................................... 133

MacDonald, Randy ........................................................................................... 65

Putnam, Gerald D., Jr. (with attachment) ..................................................... 208

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Fossella, Hon. Vito J.:

Question for the record .................................................................................... 58

Bell, Stuart:

Written response to questions from Hon. Doug Ose ...................................... 190

Written response to questions from Hon. Michael G. Oxley ......................... 192

Britz, Robert G.:

Written response to questions from Hon. Michael G. Oxley and Hon.

Doug Ose ........................................................................................................ 122

Knight, Edward S.:

Letter to Hon Richard Baker, April 20, 2001 ................................................. 172

Written response to questions from Hon. Michael G. Oxley and Hon.

Doug Ose ........................................................................................................ 174

Securities and Exchange Commission, written response to questions from

Hon. Richard H. Baker and Hon. Paul E. Kanjorski ........................................ 195

(1)

PUBLIC ACCESS TO MARKET DATA:

IMPROVING TRANSPARENCY AND

COMPETITION

WEDNESDAY, MARCH 14, 2001

U.S. HOUSE OF REPRESENTATIVES

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE,

AND GOVERNMENT SPONSORED ENTERPRISES,

COMMITTEE ON FINANCIAL SERVICES,

Washington, DC.

The subcommittee met, pursuant to call, at 10:02 a.m., in room

2129, Rayburn House Office Building, Hon. Richard H. Baker,

[chairman of the subcommittee], presiding.

Present: Chairman Baker; Representatives Oxley (ex officio),

Ney, Shays, Royce, Barr, Shadegg, Weldon, Fossella, Miller, Ose,

Hart, Rogers, Kanjorski, Bentsen, Mascara, S. Jones of Ohio, Sherman, Meeks, Inslee, Moore, Ford, Lucas, Shows, Crowley, and

Israel.

Chairman BAKER. I would like to call this hearing of the Capital

Markets Subcommittee to order, and welcome everyone here this

morning. This hearing is the result of interest by many in the explosive growth of our markets and the concurrent growth in the

supply of information to literally millions of investors across the

country on a daily basis who are now, even despite the morning

news about the activities in the market, are still investing heavily,

with working families providing significant contributions to our

economic growth.

At the core of the hearing this morning is the discussion relating

to the delivery of market data, that material on which every investor bases an investment decision and on the mechanisms by which

that data is collected and delivered, and associated charges related

to the delivery of that product for the educated investor.

I think it important to recognize the enormous growth in revenue

that this product has provided to the exchanges, not that that in

itself is any indicator of whether this is a good thing or a bad

thing, just the significance of it to the performance of the markets.

Anywhere from 20 percent to 40 percent of an individual exchange’s net revenues now is generated by the sale of this information.

Up rather dramatically, despite the fact that over the course of

recent years, reductions in fees have been very significant.

The subcommittee is here this morning to better understand the

function of the markets, how market data is provided, the benefit

to consumers it presents, and to ensure the 75 amendments to the

2

Securities Act provided that the charges associated with the distribution of this information are fair, reasonable, and non-discriminatory.

To that end, we will have a panel of witnesses this morning who

can speak directly to how this system functions and better help the

subcommittee move forward with a careful examination of this subject matter over the coming months.

I am particularly appreciative that the Chairman has taken such

an interest in this topic and has done good work in his former capacity in the committee on Commerce on this very subject.

At this time, I would like to recognize the Ranking Member, Mr.

Kanjorski, for any opening statement he would choose to make. Mr.

Kanjorski, it would be my intent, with your agreement, to recognize

you and then the Chairman for opening statements, and then move

to our witnesses, if there’s no objection.

Mr. KANJORSKI. No objection.

Chairman BAKER. Thank you, Mr. Kanjorski.

Mr. KANJORSKI. Mr. Chairman, thank you for the opportunity to

comment on market information issues before we hear from our

witnesses today. The securities industry presently faces few issues

as important or as complex as those surrounding the ownership

and distribution of market data.

In short, the wide distribution of market information remains a

fundamental component of our Nation’s securities markets. A regulatory framework that promotes the transparency of market data— especially the real-time, public dissemination of trade and quote information—helps to make certain that all market participants have

access to prices across our national market system. This access, in

turn, helps to provide for efficient price discovery and the best execution of investors’ orders.

Congress first addressed the issue of market information when

it enacted the Securities Acts Amendments of 1975. This statute,

among other things, charged the Securities and Exchange Commission with establishing a consolidated, real-time stream of market

information for securities in order to make transaction and

quotation information widely available. As a result of this law, millions of investors worldwide now have easy access to market data.

But the world has changed substantially since Congress enacted

the legislation governing market information, and we may now

need to refine our approach on such matters. For example, we

passed the law and the Securities and Exchange Commission developed the regulations governing market data before the advent of

technological and communication advances like the internet, electronic communications networks, and alternative trading systems.

This new technology has greatly expanded the opportunities for retail investors and interested individuals to obtain access to realtime market information.

Additionally, critics of the current system for distributing consolidated market data have raised a number of questions about the

present system in recent years. For example, some contend that although market data fees for retail investors have fallen by 50 to

80 percent since 1998, they remain unusually high because no competition exists in the field of market data collection and distribution. To address this problem, some argue that we should allow

3

competing entities to provide consolidated information and/or permit the exchanges to provide their own data outside the

consolidator. By providing investors with more complete market information, we would promote the goal of greater transparency and

thereby improve competition.

Although the Securities and Exchange Commission has recently

begun to examine these difficult issues and other related and complicated questions through its concept release and advisory committee on market information, it is appropriate for us to begin to

educate the Members of our subcommittee about these complex

subjects. Accordingly, we will hear today from a variety of witnesses about their views on market data. I want each witness to

know that I approach the issue of market information with an open

mind.

For me, one can distill the complex debates surrounding market

data into three key questions: First, who owns market information?; Second, how much should we charge for market information?;

and third, how should we distribute market information? The answers of our panelists to these questions will help me to discern

how we can maintain the efficiency, effectiveness and competitiveness of our Nation’s capital markets into the future, and what further legislative action, if any, we should take to address the issue

of market data.

In closing, Mr. Chairman, today’s hearing is just the beginning

of a discussion in the 107th Congress about market information. I

anticipate that we will hold additional hearings on this issue in upcoming months, especially after the Securities and Exchange Commission’s Advisory Committee on Market Data publishes its report

in September. I therefore look forward to working closely with you

and with others to address this multifaceted, complicated and important matter. Finally, I think we are indeed fortunate, on the Financial Services Committee, to have the new Chairman with his

wealth of information that carries over from his former service on

the Commerce and Energy Committee, so I look forward to his

opening statement today also, Mr. Chairman.

Thank you.

[The prepared statement of Hon. Paul E. Kanjorski can be found

on page 59 in the appendix.]

Chairmaan BAKER. Thank you, Mr. Kanjorski.

Chairman Oxley.

Mr. OXLEY. Thank you, Mr. Chairman.

I want to commend you for holding this hearing on an issue that

is fundamental to the health of our capital markets and, indeed,

this issue is quite new to I suspect the vast majority of Members

on the subcommittee.

This morning, we will examine how stock market data is provided to the public, how it is paid for, what information is available

to the public about market data fees, and how competition might

improve the way investors get market data.

While the regulatory structure we will examine is complicated,

our goal is simple: to ensure that investors are getting the best possible information about stock prices in the most efficient way.

As one observer put it last year, following a hearing I held on

this subject, stock market data, that is the quotes at which people

4

are willing to buy and sell stock, and the information showing the

price of the last sale of a stock is oxygen to investors.

Indeed, the transparency of our marketplace is the backbone of

its success. Unfortunately, the regulatory structure that exists

today was put in place back in the 1970s when the only person

using a cell phone was George Jetson, and Al Gore hadn’t even

thought about the internet yet.

That outdated regulatory structure, which may have made sense

before the advent of modern communications technology, put into

place a system that prevents competition and the provision of consolidated market data, and impedes innovation in the way market

data is presented to investors.

The cost of market data is significant and those costs are passed

on to investors, just like the transaction fees this subcommittee

heard about last week.

Competition is always a better way to set prices than regulation.

With no competition in the provision of consolidated market data,

the only check on the fees is regulation.

One important question we will consider is whether market data

fees are fair, reasonable, and not unreasonably discriminatory,

which is the statutory requirement established by the Congress in

the 1970s.

Of course, the alternative is to actually introduce competition

into the market for consolidated market data.

We’ll also hear from our witnesses today about what new competition in this field would mean for investors and the markets.

We’ll also be seeking to learn how investors might benefit if more

information about market data, costs and fees were made public.

While the SROs publish a great deal of information about market

data fees on their websites, some information, for example, certain

information about pilot programs is not so readily available.

Today, we will examine the implications of increasing the transparency of market data terms and conditions. No discussion of market data can ignore the fact that market data fees play an important role in funding the activities of stock exchanges in the

NASDAQ market, but some critics of the current system question

how market data revenue should be used.

Should they subsidize the cost of regulation? Should they be limited to the costs of providing market data?

If they are reduced by competitive forces or otherwise, will investors be subject to new fees to replace that lost revenue?

Some suggest that the governance of market data plans, which

set market data fees in the first place, should be expanded to include all market participants like ECNs and the public, as opposed

to only the SROs that receive market data revenue.

These are some of the issues we will examine today.

In addition to the cost of paying for market data, the current regulatory structure imposes administrative costs on the marketplace.

Market participants who purchase consolidated market data face a

maze of different types of fee structures and contract requirements.

Reducing the administrative burdens associated with the purchase of market data would bring greater efficiency to the marketplace and ultimately save investors money.

5

I thank each of our witnesses for coming today to inform the subcommittee on the very important issue that we have before us, and

look forward to your testimony.

I yield back the balance of my time.

[The prepared statement of Hon. Michael G. Oxley can be found

on page 63 in the appendix.]

Chairman BAKER. Thank you, Mr. Chairman. I do very much appreciate your past work on this subject, your interest in participating in our hearing this morning, and understand clearly the interest that you have in this important issue.

Today, there are literally millions of individuals investing today

who were not even participants in the economic process a few years

ago, primarily as a result of technology.

And it is important that this subcommittee examine the delivery

of this information to those individuals to ensure that whether a

person is investing $200,000 or $200 million, that they get access

to the same information in the same timeframe as all other participants.

This morning, we are fortunate to have with us a distinguished

panel of witnesses representing the various interests from the markets, and I’ve been presented with the order for recognition this

morning with Mr. Randy MacDonald, Vice President and Chief Financial Officer, Ameritrade Holding Corporation being our first

witness this morning.

Welcome, Mr. MacDonald.

We, in all cases—I should give this brief explanation—we limit

opening statements of the subcommittee because of the number of

individuals on the subcommittee today, we strongly recommend

that each witness present his or her thoughts within the 5-minute

window.

All witnesses’ statements will be incorporated and made part of

the official record in their entirety.

And with that request, Mr. MacDonald, I will recognize you and

welcome you to our subcommittee.

STATEMENT OF RANDY MacDONALD, CHIEF FINANCIAL

OFFICER, AMERITRADE HOLDING CORPORATION

Mr. MACDONALD. Thank you very much, Mr. Chairman Baker,

and Chairman Oxley. I appreciate you inviting Ameritrade today.

Ameritrade has always represented the small investor, and I’d

like to talk to you about our concerns. We have four concerns.

Let me first start off by saying, with our pending acquisition of

Tradecast, we’re one of the largest brokers in the world, Charles

Schwab, in our estimation, the largest.

We are completely agnostic about our order flow. That is, we are

not an ECN, we are not a marketmaker, we do not benefit from

internalizing our order flow; we strictly act as an agent for the

small investor.

The first point I want to make is, the present practice of distributing quotes is discriminatory to the individual investor, and I’ll

elaborate.

The second point is that the costs, the administrative costs to us,

are spiraling out of control. We are at a competitive disadvantage

because of the present monopoly.

6

The third point I wanted to make is that the tape revenue in fact

should belong to those people who actually contribute the orders,

and that is the customers out there.

And the fourth point I wanted to make is that the SROs have

been unchecked. It’s a case of the fox being in charge of the hen

house. They are taking these excess profits and creating competitive systems, systems that will compete with other market participants.

The first question is what are the regulatory impediments? I

would say that one thing that is going well, one of the benefits is

that, in fact, people are getting information real-time.

But let me start off with the discrimination. Today, I cannot deliver real-time quotes in a cost effective way to all 1.4 million customers of Ameritrade.

There is an onerous subscription agreement. There is the cost of

either per quote or a subscription fee. My average customer, about

half of them trade less than once every two months. The fee that

I have to pay to the four SORs are $1 a month, and if I have one

customer who is paying me a commission of $8 every 2 months, I’ve

done nothing but recover my cost for market data distribution.

So 1.4 million customers are not getting real-time quotes. I think

they’re disadvantaged.

The second point is on what I perceive to be the abuses by the

SROs in distributing this information and causing administrative

nightmares.

In the past week, we’ve had three instances that kind of illustrate this point. One is we were trying to change our methodology

for distributing real-time quotes, and we were obtaining subscription agreements from customers who were getting real-time quotes,

and we were told by one of the SROs they would not approve that,

because they didn’t like the method of distributing the subscription

agreement, so we have to go back to the planning board.

The second thing is they told us that the sign-on had to be because we do not allow for a single sign-on to the website that we

could not obtain subscription agreements, that we would have to

pay on a per-quote basis.

So to the extent that someone is calling in to a broker, that quote

would be free to that customer. But to the extent that they are

using the web, they have to pay for that quote and that’s the discrimination.

The fact that there is dual sign-on, my wife and I can both sign

on to my account, that is an impediment to allowing us to distribute real-time quotes, and I think that’s arbitrary, I think that’s

capricious.

And the third point I want to make is, in dealing with these entities, they reflect their monopolistic attitude, and we’ve had an incident where the chief technology officer, last week, was put on the

speaker phone by one of these SROs and she said, ‘‘I will be doing

other work while you’re speaking. If I like what you’re saying, I’ll

listen; otherwise, I will just ignore you.’’

And so we’re opening the window, we’re shouting out, ‘‘We’ve had

it and we’re not going take it anymore.’’

We paid a million dollars in market data fees last month. This

is an enormous competitive disadvantage for us.

7

Thank you very much.

[The prepared statement of Randy MacDonald can be found on

page 65 in the appendix.]

Chairman BAKER. We will have significant questions from all the

Members for you to have a further opportunity to comment on this.

We do appreciate your direct testimony.

Our next witness is Mr. Robert Britz, Group Executive Vice

President representing today the New York Stock Exchange.

Welcome, Mr. Britz.

STATEMENT OF ROBERT G. BRITZ, GROUP EXECUTIVE VICE

PRESIDENT, OPERATIONS GROUP, NEW YORK STOCK EXCHANGE, INC.

Mr. BRITZ. Thank you, Chairman Baker, Vice Chairman Ney,

Ranking Member Kanjorski and certainly Chairman Oxley.

I am Robert Britz. I am here representing the New York Stock

Exchange and we appreciate the opportunity to be before you this

morning.

There is much to say on this subject and not a great deal of time,

so I will get straight to it.

Markets, such as the New York Stock Exchange, exist to manufacture securities prices, and basically only to manufacture securities prices. We tell the world what a fine slice of ownership—a single share of the global enterprise that is Exxon Mobil, for example—is worth on a moment-to-moment basis.

We take raw material, investors orders that they have entrusted

to their brokers, and from that raw material, we create valuable

market data without which markets could not operate.

Markets like the NYSE create their value through a combination

of this information on the one hand, and fast, secure, reliable delivery systems on the other.

So think of the New York Stock Exchange as being in the business of producing market data, manufacturing securities prices. At

the end of the day, the price is our only product.

The CTA, the Consolidated Tape Association, on the other hand

is an SEC-sponsored joint venture among national and regional

stock exchanges. It doesn’t produce data—the markets produce

data—so much as it consolidates and collects and redistributes the

data to the next level, the information vendors.

So with that as broad background, admittedly there’s been a fair

amount of discussion about this subject over the past couple of

years, and I must say much of it is a surprise to us.

In truth, it’s never been obvious to us what the noise has been

about. It’s clearly not about investors’ access to the data. Individual

investors and the general public, for that matter, have access to

unlimited real-time data through a variety of delivery systems;

telephones, television; PCs, personal digital assistants, pagers,

automated teller machines, and so on.

Market data is available in the home and in many public places;

schools, libraries, airports, even on the plane itself, restaurants,

train stations, shopping malls, and literally on the street.

In contrast to some commentators who have, in the past, suggested that investors are struggling for access to real-time market

data, in fact they can barely avoid it.

8

Simply stated, the data is pervasive and I believe the best is yet

to come.

So it is not about availability. It can’t be about the cost of the

access to the data for investors, because it’s free from an endless

number of sources.

Indeed, the data is so inexpensive to information vendors that

many purchase it, give it away, and still profit handsomely.

It shouldn’t be about brokers’ cost of market data for a couple of

reasons. Brokers themselves establish the prices they will pay for

the market data.

Given that fact, it’s not at all surprising that the cost of market

data has come down dramatically over the past 25 years to the

point where U.S. market data, CTA, NYSE market data is among

the least expensive of any market in the world.

It’s hard to see how this discussion can be about control or governance of market data since all the power rests in the customerladen boards of the self-regulatory organizations. Simply put, those

who establish market data fees are the ones who pay those fees.

They can raise or lower any fee any time they care to.

Most recently, this discussion has morphed into being about

transparency of market data processes. But even that’s hard to follow.

The SEC literally gave birth to the Consolidated Tape Association. It attends all meetings. It reviews, publishes and approves all

significant initiatives. It has the power to override any action. It

has the power to unilaterally amend the Consolidated Tape plan.

So CTA hardly operates in a closet.

Additionally, it’s very important to realize CTA is a conduit. The

discussions and the decisionmaking that end up at the Consolidated Tape Association begin and actually take place again at the

constituent-laden boards of the self-regulatory organizations.

CTA’s initiatives begin at the grass roots level with customers.

To the extent an idea gains some traction, it then moves through

various industry organizations. If it continues to have some consensus, it goes to our board, it then goes, coming out of the board,

to the Securities and Exchange Commission. The SEC publishes it

for public comment, they review it, ultimately they approve or disapprove nonetheless a very rigorous and transparent process.

All CTA fees contracts are both standard in terms of the terms

and are publicly available on NYSE.com among various other distribution channels.

The CTA annually publishes audited financial statements and

issues those to the Securities and Exchange Commission for public

review. The NYSE and the markets do likewise.

It’s not clear what more we could do, viz a viz, transparency, but

we are open to suggestions.

Mr. Chairman, you asked a very important question in your letter, which is, how does market data recover its costs and subsidize

other areas of the SROs.

At the NYSE, market data does not recover its cost and it is

therefore in no position to subsidize anything else. You should understand that the New York Stock Exchange gets a much smaller

percentage of its revenues from market data than do other markets.

9

I would never suggest it’s not an important part of our funding,

however, and in that regard there’s a very important point to be

made. We must be careful not to do anything that hinders markets’

abilities to make technical infrastructure investments to maintain

and enhance their operational stability.

To the extent that markets like the NYSE don’t make infrastructure or order processing network upgrades on the front end, which

run to the hundreds of millions of dollars, there is no market data

on the back end.

One online discount firm recently was quoted as saying, it would

be unprofitable and therefore unthinkable to invest for peak utilization.

The NYSE not only invests for peak utilization, it invests for

multiples of peak utilization. It’s by no means a prescription for

great profitability, it’s simply the best way we know how to operate

a market which has zero tolerance for down time, and whose operating performance is the standard around the world.

Because underinvesting and capacity reliability is simply not an

option for the New York Stock Exchange.

Thank you, Mr. Chairman.

[The prepared statement of Robert G. Britz can be found on page

74 in the appendix.]

Chairman BAKER. Thank you, Mr. Britz. I appreciate your appearance here this morning.

Our next witness, representing Charles Schwab, is Executive

Vice President, Ms. Carrie Dwyer.

Welcome, Ms. Dwyer.

STATEMENT OF CARRIE E. DWYER, GENERAL COUNSEL AND

EXECUTIVE VICE PRESIDENT, CHARLES SCHWAB CORPORATION

Ms. DWYER. Thank you, Chairman Baker, Vice Chairman Ney,

Congressman Kanjorski, and Chairman Oxley, distinguished Members of the subcommittee.

I am Carrie Dwyer. I am General Counsel and Executive Vice

President of Charles Schwab, one of the world’s largest financial

services firms. I’m pleased to be here today to present Schwab’s

views on market data.

As you may be aware, in many ways, the dialogue we are having

today was launched in June of 1999 when my firm submitted a formal petition to the SEC to review and correct what we believed to

be an unreasonable and discriminatory market data fee structure.

The process since then, which has included an SEC concept release, and formation of the SEC Advisory Committee on Market Information, on which I sit, has seen an emerging consensus that the

current system is flawed, but deep divisions over what the appropriate solution should be.

For that reason, I am pleased that Congress, this subcommittee

in particular, is taking an active interest in monitoring this issue.

We believe that the need for reform of the market data system is

driven by two things, and they’ve been referred to already in this

hearing:

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The advent of technology that lets us give more information to

more people in more ways, and the simple change in the end user

of market data since the system was created 25 years ago.

The exchanges do not manufacture data. The source of that news

is not the stock markets, themselves, but the investment decisions

of millions of people trading around the world in a diverse group

of markets.

Yet, despite the increased breadth of participation, all the information about prices is still funneled through the same small group

of markets that were in place 25 years ago.

This group still controls the format, the speed, who can receive

it and how much it costs. From them, investors must buy back

their own information at a market not subject to competition.

As more Americans have invested in the stock market, more people check their portfolios more often. The internet has facilitated

this. No longer required to have a conversation with a broker, an

individual can hit the ‘‘refresh’’ button on his computer 10, 20, 50

times a day to see the latest information.

With automated access to brokerage firms by wireless internet,

a customer can check her IRA while walking down the sidewalk,

if she chooses.

Our own internal research found that in the days when our customers relied primarily on telephone orders, they asked for and the

firm bought about ten quotes for every trade.

With online trading, Schwab buys in the range of 75 quotes per

trade. While we encourage this trend, because it gives investors

more knowledge, it also makes clear the dramatic impact online investing has had on market data revenue.

Market data fees represent such a significant amount of revenue

for the exchanges, that discussions about opening the system to

competition become, understandably, very difficult.

Certainly cost is important, but there are other problems with

the monopoly structure. The rules are made by exchanges alone;

other participants don’t really have a say. There is nowhere else to

buy market data so market incentives don’t apply.

Under the current structure, market data is available in only a

few limited formats. The creation of value-added data products has

been slow and marked by competitive battles.

In addition, the exchanges impose onerous administrative burdens on vendors and brokers. We must count every customer quote

request and count for each type of end user to the exchanges.

Every one of our millions of customers with web access must

click through a different subscriber agreement for each exchange.

We must seek and obtain prior approval of any new or innovative

way to deliver market data.

Pricing changes are often made through pilot programs that can

circumvent SEC’s and public scrutiny.

I’m not here today to propose a specific remedy, either legislative

or regulatory. I do believe, however, that a plan for market data

reform must have at its core four guiding principles:

First, any reform must promote competition. Competition at all

levels of the market data system will foster innovation leading to

the creation of market data products that better serve the needs of

today’s investors. That competition should be fair. Anyone wishing

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to compete to provide market data should ensure that access is on

fair, reasonable, and nondiscriminatory terms.

Second, reform must ensure that no one has ownership over market data. The last several years, the exchanges have been advocating database protection legislation on Capitol Hill that would

give them an historical property right over data. But market information is a set of facts, plain and simple: bids, offers, limit orders,

last sale prices. No one can own these facts. Granting market data

ownership or copyright protection to any one party would be antithetical to the very purposes of the National Market System.

Third, the market data system must become more transparent.

Market data fees should be set in the sunshine. Greater transparencies of the fees, costs, contracts, policies relative to the collection and dissemination of market data is essential to creating a fair

and open system.

Yes, the basic contracts of fee schedules are freely available on

the websites, but each of us negotiates our own contracts with the

exchange, one by one. We worry about side agreements, especially

negotiated rates, offsets of other exchange fees, and pilot programs.

We’ve been the beneficiary of some of these, but that doesn’t

make it fair. Transparency is the hallmark of our markets; so

should it be the hallmark of our market information system.

Finally, reform must result in a level playing field, ensuring the

broadest possible access to market data is essential to the protection of investors and the fairness of our markets.

Individual investors must be able to access critical market information at the same time and on the same terms as large institutional investors and other market participants.

One way to ensure fairness would be most-favored-nation pricing.

If you sell it, everyone must get the best price.

Mr. Chairman, the debate over market data is a complex one,

but the reality is this; our markets have changed. It’s time to reevaluate the entire framework by which market information is

made available to investors, end the monopolies and create a new

system based on fairness and competition.

Thank you very much for the opportunity to testify, and I’d be

happy to answer any questions later.

[The prepared statement of Carrie E. Dwyer can be found on

page 126 in the appendix.]

Chairman BAKER. Thank you, Ms. Dwyer.

Our next witness is the CEO of Archipelago Holdings, Mr. Gerald

Putnam.

Welcome, Mr. Putnam.

STATEMENT OF GERALD D. PUTNAM, JR., CHAIRMAN AND

CHIEF EXECUTIVE OFFICER, ARCHIPELAGO HOLDINGS, L.L.C.

Mr. PUTNAM. Good morning, Chairman Baker, Chairman Oxley,

Vice Chairman Ney, and Ranking Member Kanjorski.

Chairman BAKER. And you’ll need to pull that mike pretty close.

They’re not that sensitive.

Mr. PUTNAM. OK.

In late 1996, I founded Archipelago, along with software developers MarrGwen and Stuart Townsend.

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Today, it’s a leading electronic communications network or ECN,

whose owners include Goldman Sachs, E*Trade, J.P. MorganChase, Instinet, Merrill Lynch, and CNBC.

Archipelago serves a diverse client base and executes upward of

140 million shares per day or roughly 6 percent of NASDAQ’s volume.

Late last year, Archipelago entered into a business alliance with

the Pacific Stock Exchange to create the Archipelago Exchange, the

first fully open, electronic national securities exchange for both listed and over-the-counter securities.

The Archipelago Exchange will be fully integrated into the National Market System and will compete toe-to-toe with the New

York Stock Exchange, the American Stock Exchange, and

NASDAQ.

Our trading rules, which reflect market structure of the exchange were published in the Federal Register by the Securities

and Exchange Commission in December of 2000, and we recently

submitted our responses to the SEC to comment letters on our

rules.

In the end, with plenty of elbow grease and some good fortune,

we trust the Archipelago Exchange will be the first for-profit, technology-driven exchange that levels the playing field for all investors by combining greater transparency, faster speed, and lower

cost.

Former SEC Chairman Arthur Levitt has called market data the ‘‘lifeblood of markets.’’ Today, market data in our equity markets

is governed and controlled by a Government-mandated, anachronistic, and static structure: the National Market System Plans. Although organized with good intentions and noble purpose, we respectfully submit that the NMS Plans, the CTA/CQ Plan for listed

securities and the OTC/UTP Plan for NASDAQ securities, must be

fundamentally improved.

Why? Because the plans are exclusive providers. Any vendor or

broker-dealer that supplies data to the investing public must contract with the plans. Further, the plans engage in ratemaking, albeit subject to SEC oversight. Surely, the words ‘‘exclusive’’ and

‘‘ratemaking’’ sound funny and out of place in a world that has so

benefited from prudent deregulation.

Market forces neither impact the plans nor provide incentives to

offer competitive rates. Instead, vendors and broker/dealers are

presented with the classic Hobson’s choice: doing business based on

monopolistic terms or not doing business at all.

In this sub-competitive environment, valuable market data is

sold to vendors and broker/dealers and then distributed to millions

of retail and institutional investors, forcing investors to pick up the

tab for non-competitive pricing.

Without competitive forces to discipline markets, economic distortions result. No one really knows if market data fees are too high

or too low.

What we do know is that they’re not tied to value. More troubling is that innovation within the market for data provision is not

rewarded. Exchanges have little incentive to bring innovative data

products to the market, because data dissemination is regulated by

the ‘‘Vendor Display Rule,’’ a one-size-fits-all mandate.

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The Archipelago Exchange is currently negotiating with the National Market System Plans, in essence, to join the fraternity. Absent initiation, Archipelago cannot do business as an exchange.

Ironically, the most difficult task about creating a new exchange

isn’t the enormous time and expense of drafting 700 pages of rules,

or responding to public comments or regulators and clients about

your market structure.

No, the most difficult hurdle or barrier to entry is the hazing

process that a new entrant must endure to join the NMS fraternity,

which is composed exclusively of competitors.

As with all frats, a single blackball veto right is part of the governing rules. And we have experienced dealing with the NMS recently.

A recent example: our staff was recently told by the staff of the

New York Stock Exchange that the exchange interprets the ITS

Plan to severely limit the ability of participants to use computers

to place its orders into ITS.

The New York Stock Exchange strongly suggested we change our

market structure to include a time probe, where the Archipelago

Exchange would delay accessing other markets to hold that order

up for a predetermined time, such as 15 or 30 seconds. The purpose

of this holdup would be to allow the marketmaker to manually

interact with the order.

We believe that we do probe our market, but we do it electronically. Think of it in these terms. Suppose American Airlines,

through the authority of the FAA, informed United Airlines that it

would no longer be in regulatory compliance if United’s pilots use

computer autopilot, because American’s pilots chose not to use it. ‘‘You’re out of business, United, unless you do it American’s way.’’ Can anyone name another industry with this type of never ending hell week initiation is imposed as a precondition of joining?

We respectfully suggest an overhaul to the current system where

sunshine is cast on ‘‘ancient fraternal rights’’ and competition is injected to allow market forces to play a central role in the collection

and dissemination of market data.

Some observations and suggestions:

First, competition among marketplaces must replace ratemaking

by a committee of competitors to provide value, and vendors must

be allowed to pay for data based on value. Instead for forcing vendors to contract with NMS utilities, allow vendors to contract with

any number marketplaces directly and let marketplaces sell data

to vendors at prices that the market will bear.

Second, the type of data that a marketplace can sell to a vendor

should not be regulated. Rules that prevent or disincent a marketplace from providing additional value such as full depth of book,

have no place in securities regulation.

Third, while we are true believers of competition in the data

market area, prudence suggests a transition period under which

the NMS utilities would continue to function. These utilities can

help ensure a soft landing as we move to a competitive model so

that consolidated information is not lost before new competitors

have had an opportunity to build their business.

We expect the NMS utilities to wither on the vine as more indepth competitors enter the marketplace.

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Finally, NMS Plan participants should be barred from using fraternity rules as a license to affect the business model or value proposition of new entrants. Such participants must be continually

mindful of their mandate in no way includes determining the market structure of new exchanges.

If necessary, the plan should take action to change their governance to reduce the potential for conflicts of interest. The SEC must

be vigilant in protecting against the misuse of NMS Plans to deny

investors innovative marketplaces. Thank you.

[The prepared statement of Gerald D. Putnam, Jr. can be found

on page 208 in the appendix.]

Chairman BAKER: Thank you, Mr. Putnam.

Our next witness is the Executive Vice President and General

Counsel of the NASDAQ Stock Market, Mr. Edward Knight.

Welcome, Mr. Knight.

STATEMENT OF EDWARD S. KNIGHT, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, NASDAQ STOCK MARKET

Mr. KNIGHT. Thank you, Mr. Chairman. It is a pleasure to be

here. And thank you Members of the subcommittee.

Obviously, this is a very complex subject. We could spend hours

describing the rules that apply here, how the market works.

What I’d like to do is just try to make a few basic points about

how NASDAQ approaches this issue.

In particular, I call your attention to a white paper that we attached to my testimony today which outlines, in some detail, the

recommendations NASDAQ has made to the Seligman Committee,

which is looking at this issue on behalf of the SEC. It’s chaired by

a distinguished professor of law who is considered one of the leading experts in securities law, and we and many on this panel have

been working with that committee to try to come up with new solutions to this issue.

In particular, though, the topic of this hearing today, Competition and Transparency, are two issues that we take very seriously

at NASDAQ and which frankly we believe are at the heart of the

success that we’ve had over the past few years.

I would like to focus on what we consider seven key issues and

facts, if you will, that frame our thinking in this area.

First, in terms of the history of our market, the NASDAQ Stock

Market is what it is today because of the very intense competition

between various stock markets and, because of our focus at

NASDAQ on transparency or the wide dissemination of information

to the public as the best method for us to compete.

Because of this single-minded emphasis on transparency, we believe that NASDAQ delivers the highest quality market to the investing public today.

Others at this table have other views.

We’re out there competing every day about our market. If we can

continue to deliver such transparency and quality, the investor will

return tomorrow. That’s the test, quality every day, and we focus

on it day in and day out.

Second, I need not remind you that just 30 years ago, we were

a tiny part of the U.S. economy, an insignificant part of the process

of price discovery.

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Today, we are the largest electronic, screen-based market in the

world, listing over five thousand companies. In the last 15 years,

we have facilitated the raising of over $480 billion for companies

with employees in each of your districts.

This has not been an accident that we grew. More than anything

else, our growth happened because we try to think first about the

individual investor and their needs.

That is why we get 40 million hits a day on NASDAQ.com, our

website. That is why the individual investor pays only one dollar

a month to get an unlimited number of real-time quotes and trade

information.

You only need to compare that with, for instance, your internet providers monthly bill of $21.95 to understand our commitment to

getting information to the American investing public.

Or compare our one dollar for an unlimited number of trans- actions to the $1.50 for a customer to get access to his or her

money through an ATM machine.

In fact, an investor need only click on NASDAQ.com or any of

hundreds of other websites and get 15-minute delayed information

for free. That is one reason why most investors pay nothing for

their market data.

Our belief in transparency can also be found in how we sell our

information products to the investing public. Just click on

NASDAQ.com, which I did last night and printed out what is on

that page.

It lists all our data policies, our pricing policies on data, the market vendors, the agreements. It is all there on our website on trader.com, and the list of prices have undergone a rapid reduction over

the last few years, a 50 to 80 percent reduction in our most critical

fees.

And, as I said, it’s right there on our website.

We understand that one of the critical reasons why so many individual investors have invested in NASDAQ stocks is the ease with

which they can access information about our market.

We’re not standing still with this. We are looking for ways to improve our market and in January, with the support of many Members of Congress, the SEC unanimously approved SuperMontage,

the next generation of the open access, fully transparent NASDAQ

stock market.

We’re making substantial new investments in this technology. It

won’t be easy to build. It will cost hundreds of millions of dollars.

But in the end, we believe the U.S. investor and the U.S. economy

will benefit.

Fourth, you need to focus, I would respectfully suggest, on the

fact that certain market participants have decided that to attract

more customers, they need to offer information from our market for

free. That is their choice, and they make up that cost in other services and fees.

But a choice of a particular business model by one or a group of

competitors should not drive important aspects of economic policy

or market structure in one direction or another.

Fifth, the value of our market data cannot be divorced from the

quality of our market and what the market delivers. Market data

value is inextricably tied to market structure, to our technological

16

efficiency of our market platform, to the quality of our surveillance

and regulation, the quality of the companies on our market.

Attached to my testimony is an exhibit which describes in detail

where we believe we add value to market data.

The SEC put it this way in its Market Data Concept Release,

and I quote: ‘‘Information is worthless if it is cut off during a systems outage,

tainted by fraud or manipulation, or simply fails to reflect accurately the buying and selling interests in a security. Consequently,

there is a direct connection between the value of a market’s information and the resources allowed to operating and regulating that

market.’’ Sixth, the process of establishing fees for market data is fair and

it protects the public interest. Let me just briefly describe it. There

is another chart which lays it out in detail in a graphic attached

to my testimony.

At a minimum, before we can charge a fee, we must submit our

fee proposals to an outside advisory committee and then to our

board, where I may point out that Schwab has an executive who

sits on NASDAQ’s board.

We must have at least one-half of its members drawn from representatives of the public or non-industry groups as a matter of

law. Once we have received these approvals, we then must submit

that to the SEC for approval, and they notice the public fully about

this, and the public has an opportunity to comment.

This is a time-consuming and difficult process.

Chairman BAKER. Can you begin your summation, sir?

Mr. KNIGHT. Yes.

Chairman BAKER. Thank you.

Mr. KNIGHT. Finally, I would point out what I started with,

which is that we are proposing significant changes in the current

system. We have described those in the Seligman Committee white

paper. We believe they will bring more competition to this process,

but we ask the subcommittee, look at what these markets have delivered to the American economy and the American public in terms

of growth over the last few decades.

Thank you very much.

[The prepared statement of Edward S. Knight can be found on

page 133 in the appendix.]

Chairman BAKER. Thank you very much, Mr. Knight.

Our final witness, representing Bloomberg Financial Markets, is

Mr. Stuart Bell.

Welcome, Mr. Bell.

STATEMENT OF STUART BELL, BLOOMBERG FINANCIAL

MARKETS

Mr. BELL. Thank you, Mr. Chairman.

Mr. Chairman and Members of the subcommittee, my name is

Stuart Bell and I’m pleased to have the opportunity to testify on

behalf of Bloomberg Financial Markets regarding the critical issue

of access to market data.

Bloomberg Financial Markets provides multimedia, analytical

and news services to more than 150,000 terminals used by 350,000

financial professionals in 100 countries worldwide.

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Bloomberg tracks more than 135,000 equity securities in 85

countries, more than 50,000 companies trading on 82 exchanges,

and more than three million corporate and municipal bonds.

Our clients include most of the world’s central banks, as well as

institutional investors and broker/dealers, commercial banks, and

U.S. Government agencies.

Bloomberg Financial Markets also provides the services of

Bloomberg Tradebook, an electronic agency broker serving institutional investor and other broker/dealers. Bloomberg Tradebook is

one of the largest electronic communications networks, regularly

matching orders in excess of 100 million shares daily.

In short, as both a vendor and an ECN, Bloomberg is acutely

aware of the critical importance to investors and the markets of access to market data.

And as Chairman Oxley reinforced today, this data is the oxygen

of the market. Like oxygen, it is essential; unlike oxygen, it is not

free.

It defies basic economics to argue in any business context that

in excess of $400 million in fees annually can be levied without the

lion’s share of those costs ultimately being passed on to the consumers and investors.

As you know, before the 1970s, no statute or SEC rule required

self-regulatory organizations, SROs, to disseminate market information to the public. Indeed, the New York Stock Exchange, which

operated the largest stock market, severely restricted public access

to market information, particularly its’ quotations.

Markets and investors suffered from this lack of transparency.

The Congress responded by enacting the Securities Acts Amendments of 1975, facilitating the creation of a national market system

for securities with market participants required to provide for each

security which in turn was to be consolidated into a single stream

of information disseminated to the public.

The Congress clearly recognized the dangers of data processing

monopolies. To protect the public, the Congress envisioned that securities information processors would be regulated in the same

strict way as public utilities are regulated, so as to avoid abuse and

undue expense, and to increase price transparency.

The potential for abuse of that monopoly status looms larger

today than it did in 1975. At present, most SROs are non-profit organizations. The NASDAQ, however, has largely completed its privatization of NASDAQ and it may well be that other privatizations

will follow.

Non-profit SROs have exploited the opportunity to subsidize

their other costs through market information fees. As for-profit entities, the incentive will be even stronger to exploit this Government sponsored monopoly over market data by charging excessive

rates and using those monopoly rents to subsidize their competitive

businesses.

This threatens to hurt investors and compromise the efficiency of

the markets in many ways. Investors will be forced to pay excessive

monopoly rents for market data. Investors will be denied a level

playing field that would otherwise exist in the absence of those monopoly subsidies.

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Investors will also lose as major market players, comfortable as

Government sponsored monopolies fail to innovate, leaving American markets vulnerable to future off-shore competition.

Recent regulatory developments in the corporate and municipal

bond markets underscore the absence of an economically efficient

policy on market data that would benefit markets and investors

and raise concerns regarding the possible resolution of these issues

in the equities market.

A little over a year ago, the NASD, operating through its’ whollyowned subsidiary, NASDAQ, filed a proposed rule change with the

SEC to create a corporate bond trading, reporting and comparison

entry service, the TRACE proposal.

As approved a few weeks ago, the proposal creates a Government

sponsored monopoly in bond data, just when NASDAQ has been

transformed into a privately owned, for-profit entity.

Under the TRACE proposal, the SEC has granted the NASD an

exclusive franchise by mandating, with only limited exceptions,

that all NASD members report their corporate bond transactions to

the NASD.

Is a de facto monopoly in this field necessary? The answer is a

resounding NO. Credible, highly capitalized market participants

are ready to consolidate bond market data if competition is permitted to replace a Government sponsored monopoly in this area.

Numerous market participants filed comment letters asserting

that open network technology has made it possible to collect and

disseminate price information without a central monopoly provider.

Indeed, Bloomberg and the Philadelphia Stock Exchange have

actually made such a proposal.

The current debate over the nationally recognized municipal securities information repository, or NRMSIR, raises similar troubling issues.

The Municipal Securities Rulemaking Board, the MSRB, recently

proposed, for example, that all the NRMSIRs give to the MSRB all

the data they had independently gathered, sorted, and analyzed.

While billed as a voluntary initiative, it is disconcerting that the

MSRB would argue that compilations of data gathered after enormous expenditures of private time and money should be considered

free for the taking.

In conclusion, the current market data policy in the United

States, on both the equity and bond sides, does not promote competitive market forces which would benefit investors and markets.

Bedrock changes in our markets over the past quarter century demand a thorough congressional re-examination of the 1975 amendments, including the provisions on market data.

We believe the competitive provision of market data should be

encouraged to the maximum extent possible. The greater the transparency, the greater the opportunity to unleash market forces for

the benefit of investors.

Thank you.

[The prepared statement of Stuart Bell can be found on page 178

in the appendix.]

Chairman BAKER. Thank you, Mr. Bell. We appreciate your participation.

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Mr. Britz, I will start my questions with you with a couple of

statements, one with regard to the reading of the 1975 Amendments and the requirement to provide information on a fair, reasonable, and non-discriminatory basis.

I understand there is considerable discussion as to whether the

intent of Congress at that time was to ensure that the information

was provided on a cost reimbursement basis to the providers or

whether, in fact, it was intended to be the significant revenue

stream which, in fact, it has become today to the various exchanges.

I tend to lean toward the side, given the importance of this technology, that it is something that should be provided at the lowest

possible cost without net loss to the exchange.

Second, in discussion with Chairman Greenspan a few days ago

in another committee hearing, I asked the question of the Chairman relative to the transparency of markets and disclosure of information. How should we view this commodity in the current construct of the market?

To which he responded, ‘‘I think with technology accelerating as

it has over the past 5 to 7 years, we’ve seen a more rapid response.’’ Indeed, that’s the issue which I was speaking to earlier, meaning

transparency.

The issue of disclosure gets down to the conflict between the obvious necessity of transparency, as you have put it, and the question of property rights.

Because one of the reasons why you get a lot of disinclination on

the part of various players not to want to disclose is they presume

that what they have is a vested property right, skipping over.

And I think it necessary to make the judgment, do they have the

right to that float, as he calls it, whether it’s information market

data, or otherwise.

And in most instances, I think you’re going to find that the answer is no.

In the course of your description of your activity, you indicated

that today it is your belief, I think—and I’m asking for clarification—that the net cost to the exchange in providing market data

today is a very expensive proposition.

Can you tell me that you have identified a cost allocation to your

operation for the provision of market data to customers, and if so,

what relationship does that cost basis have to the fee currently assessed?

Mr. BRITZ. Mr. Chairman, it’s very difficult to make some of

these arcane allocations and decisions when you have joint products.

Economists would describe the production of market data, on the

one hand, and the execution of two or more investors’ transactions,

as joint products.

What are we really doing? Are we executing investors orders and

the price is a byproduct?

Or is, in fact, the execution the byproduct and the price is the

real product?

What I can tell you, even being rusty viz a viz my old cost accounting days, is that when you look at the cost that the stock exVerDate 11-MAY-2000 13:43 Oct 04, 2001 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 71311.TXT HBANK1 PsN: HBANK1
20

change has in terms of both executing that transaction and the production of market data, which are very difficult to separate, the

cost of that activity exceed the revenues to the stock exchange of

both market data revenues and transaction charges.

So, as rusty as I am on cost accounting, even I can very quickly

come to the conclusion that market data at the New York Stock

Exchange—and I’m emphasizing NYSE—operates at a significant

loss.

In your comment, you talked about not operating at a net loss

to marketplaces. Today, we already operate at a net loss.

We actually have somewhat mixed feelings.

Chairman BAKER. Let me jump to that point. If we can’t allocate

a specific cost to the activity because it’s inherent with the transactional side, how can we state that we know we’re operating at

a loss if we haven’t got a cost center identified?

Mr. BRITZ. Because, first of all, you can make those allocations,

Mr. Chairman, but I would suggest to you that they would make

the current debate and discussion of market data pale in comparison.

Chairman BAKER. Let me do this, and I don’t want to cut you

off, but I have to, because I’m going to hold a 5-minute rule here

and I’m just about out of breath.

My point is, is you can’t specifically allocate the cost, what relevance is there then to the board’s consideration of fee reduction.

It would have to be to your overall revenue stream and not to the

fixed-base cost of the activity which creates this problem for me.

This subcommittee’s very intent on seeing a fee reduction on the

Section 31 side, because we’ve identified on the SEC side that the

charges related to service are far outstripped by the fees being generated.

So we’re going to take, I think, action on this subcommittee to

reduce fees, because it’s inappropriate to the level of charge, Section 6, 14, 15, 31, whatever we do, based on that presumption,

which I assume that New York and NASDAQ exchanges would

strongly support.

But at the same time, we’re looking at this issue and saying that

there’s no relevance between the fee being charged and the actual

cost of the operation, and therein is my difficulty with the subject.

Mr. BRITZ. What I meant to say, Mr. Chairman, is that if you are

to separate the joint products, order execution and production of

market data, it inevitably involves somewhat arbitrary allocations.

But there’s no question that putting the two together, the cost

of producing the execution and producing the market data in total

exceeds the cost recovery, so there’s no question but that each of

them independently operates at a loss and combined. The only difficulty is getting into making some of those arcane allocations.

Chairman BAKER. Well, I understand that there is arbitrariness

in the decision process. There may be information that could be

made available to us to help better understand, but at the moment,

it’s a difficult matter to sort out and I think I’ll have more to say

at a later time.

I recognize Mr. Kanjorski.

Mr. KANJORSKI. Thank you, Mr. Chairman.

21

Let me first understand this question of transparency. I guess it

is a 4-to-2 difference here as to those four witnesses that want to

be in a competitive situation of providing this information and the

two representatives from the exchanges.

The four of you, do you think you get all the transparency you

need? Is that what you are worried about? Or is it the contract

costs for acquiring it from the exchanges?

Ms. Dwyer, maybe you should take the first shot.

Ms. DWYER. OK. Let me just ask you to restate your question so

I make sure I understand it.

Mr. KANJORSKI. Is it a question of not getting adequate information in time, or is it a question of having to pay for the information

you are getting from the exchanges?

In other words, if we find another way to pay for it, are you satisfied that you will not want any other changes?

Ms. DWYER. I think that pricing is going to be a function of how

prices are set.

And our major concern over the past several years, due to a variety of experiences we, as a firm, have had with the cost of market

data, have led us to the belief that the setting of the prices, transparency of that process, the cost inherent in that process, is more

important to fix than the actual level of price of the data itself.

Mr. KANJORSKI. So, you basically want the data so that you can

analyze whether it is an adequate reflection of real price?

Ms. DWYER. We think sunshine, we think the whole industry

needs to see what each is paying for market data and why.

Mr. KANJORSKI. Make the assumption that none of you had to

pay for the data and that it was absolutely free. Would this be acceptable to you? Or is there a lack of transparency in the system

that now inhibits your activities individually?

Ms. DWYER. Well, if the data could be free, and I don’t believe

there is a free lunch anywhere, then I don’t suppose it would be

very relevant how the CTA collected and consolidated, as long as

they were doing a good job in ensuring accurate data.

Mr. KANJORSKI. In other words, with the standard out there by

the exchanges, you are getting adequate information. Your complaint is that you have to pay for it, and you have to pay by some

arbitrary contract that may not be equal to what your competitor

has to pay. Is that correct?

Ms. DWYER. I think we are not concerned that we have to pay

for it. We think there’s a cost to gathering the data and collecting

it. That’s never really been the issue.

The question is, what is the cost and how is the system administered.

Mr. KANJORSKI. Right. But you would not care about what those

costs would be if it were free to you?

Ms. DWYER. Free, there wouldn’t be a cost, so yes.

Mr. KANJORSKI. Well, it would still cost the exchanges.

Ms. DWYER. Well, we recognize that, or to anyone who consolidates data.

Mr. KANJORSKI. So you are really worried about getting this information free. Would that solve everybody’s problem, Mr. Bell?

Would that solve Bloomberg’s problem if we gave it to you free?

Mr. MACDONALD. I’d like to address that, if I could.

22

Mr. KANJORSKI. Go ahead.

Mr. MACDONALD. Let me give you an example. We do not have

transparency today and we need it. The individual investor is discriminated against.

Mr. KANJORSKI. So, getting the information for free would not

satisfy you?

Mr. MACDONALD. No.

Mr. KANJORSKI. What do you want?

Mr. MACDONALD. I would like to be able to give real-time

streaming quotes to my customers, but there are administrative

burdens to that. I mentioned in my testimony that the subscription

agreement—— Mr. KANJORSKI. Do you want to tap into the exchange’s computers to see exactly what transaction is being processed in realtime as they are apprising you of the information?

Mr. MACDONALD. Yes, I would like my customers to—— Ms. DWYER. We already do that.

Voice. We do that today, Congressman.

Mr. KANJORSKI. OK, then what I am trying to ask is what more

can they give you?

Mr. MACDONALD. I actually disagree with that, both on a delayed

quote basis. The New York does not, on a delayed basis, give us

quote, the bid and the asked. They will only give us the last sale,

so I respectfully disagree with that.

Mr. KANJORSKI. So, if you got the bid and the ask price, would

you be happy?

Mr. MACDONALD. That would be one thing that would make the

playing field level.

Mr. KANJORSKI. OK.

Mr. MACDONALD. The second thing would be, with the innovation

with the internet, there are clearly rules that are impeding the innovation, and I have a big problem with that.

Mr. KANJORSKI. So, if we were to lay down some system that

says it is free to anybody that wants it, and there are no contracts

that you have to enter into, because it is absolutely free and there

is no reason to have a contract, are you satisfied?

Mr. MACDONALD. No. There are other rules. I mentioned the way

that we have to then obtain subscriptions from customers because

there are still some rules in place.

Assuming they went away, all these rules.

Mr. KANJORSKI. Those rules would go away if you did not have

individual contracts.

Mr. MACDONALD. My goal is to get the best information to my

customers in the best way.

Mr. KANJORSKI. Now to the two exchanges: I know you cannot

give us an absolute cost estimate, but it does seem to me that the

end product here is a result of the business you are doing. If you

did not have the sale, you would not have the information, so there

is a way to recapture most of the cost here, and this is sort of an

add-on information that you are selling.

But assume that there is—and there is—some cost for it. Can

you provide me a ballpark figure on the real cost for the two exchanges on distributing this data information? One-hundred-million dollars? Two-hundred-million dollars?

23

Mr. BRITZ. No. The cost of production and transaction processing

at the New York Stock Exchange is in excess of $400 million.

Mr. KANJORSKI. Four-hundred-million dollars.

So if you had $400 million, you would be happy to give these

other four people everything they wanted?

Chairman BAKER. And if I can jump in here, Paul, to help on

that point, if it’s $400 million, I would hope you would ask him to

give us something that says how they allocate those expenditures,

and I’ll give you a couple more minutes.

Mr. BRITZ. Mr. Chairman, that’s in our annual report in the income statement that we produce every year.

Chairman BAKER. So Members of Congress could understand it.

Mr. KANJORSKI. OK. If we could get some sort of cost analysis

breakdown, that would be helpful.

Now, let us go to NASDAQ. Do you have an estimate of what it

is going to cost?

Mr. KNIGHT. I would answer the question this way, Congressman. We really believe the total operation of the market is, and its

integrity is tied directly to the value of the information.

We would allocate all of our costs. It is our market and the fact

that the people have interest in that market, that that information

has value. We drive orders together. We allow the execution—we

create liquidity. That is why the information is valuable.

And Congress requires us and the SEC to meet certain regulatory standards that bring integrity to that information.

Mr. KANJORSKI. But make the assumption that we have the

power or could find some way to say this is not your intellectual

property—that it is public information and that we can force you

to put it out.

What does it cost to distribute that information? What is the loss

to the NASDAQ if we do that?

Chairman BAKER. And that has to be his last question and sum

up, please.

Mr. KNIGHT. I really don’t know, Congressman. I would be guessing and speculating. I would say that all of our costs are focused

on delivering a quality market. A quality market is what creates

that information.

Chairman BAKER. And let me add on to Mr. Kanjorski’s point

with my question.

The subcommittee really wants to understand what the costs are

that are identifiable associated with this activity if we’re to be

making an informed judgment.

Mr. Chairman.

Mr. OXLEY. Thank you, Mr. Chairman.

Let me commend the panel for what I think is an excellent presentation and some very good give-and-take, both in their statements, as well as their response to questions.

Let me refer to Mr. MacDonald’s testimony, which I think makes

an interesting point, and one that I believe really gets at the heart

of the matter.

He stated—and I invite all of our witnesses to comment on this—

that, ‘‘SROs exercise governmental rights to collect market data

fees from market participants, and then fund for-profit operations

24

which compete directly with the market participants from whom

they have authority to collect the fees.’’

Very provocative, very interesting. I suspect that, Mr. Britz, you

may have a different cut on that.

But why don’t we go down the panel? I’m assuming that Mr.

MacDonald still believes what he said a few minutes ago, so we’ll

skip him and go right down the panel.

Mr. MACDONALD. Even more fervently. I would like to add one

other point to that, and there may be another revenue that we

have not considered that the exchange is getting when issuers list

with the exchange, one of their expectations is that the prices will

be shared. So, in fact, that is another contractual issue we should

look at and another revenue source.

Mr. OXLEY. Mr. Britz.

Mr. BRITZ. Mr. Chairman, I would go back to what I said earlier.

Market data at the New York Stock Exchange operates at a loss

and therefore it’s in no position to subsidize anything, much less

anything that might be competitive with our member firms.

I would add one other point, and I think it’s a large point that

perhaps is being missed. Market data fees are where they are because it is a consensus of the broker/dealer industry that they be

where they are.

We don’t see on this panel, Merrill Lynch, Smith Barney, Paine

Webber, Prudential Securities, and many, many other firms. I can

tell you that by definition, because those fees are where they are,

it is the consensus of the brokerage industry, through their representatives on the various SRO boards, that they are about right

and that this is an appropriate way to fund the operations of the

NYSE, in my particular case.

And they are free, back to the question that was asked earlier,

to change or indeed eliminate market data fees any time they care

to.

But the effect of eliminating market data fees, which at the New

York are at about the $130 million level, gives you $130 million

toothache that you then have to find a substitute for. So then the

consensus is about, ‘‘OK, how do we tax to recover that $130 million? Who are the winners and who are the losers?’’ And that’s a

consensus process.

Mr. OXLEY. Ms. Dwyer.

Ms. DWYER. Well, it’s absolutely correct that we are required by

statute and SEC rules to send all of our customers quote information to the exchanges, even quotes and trades that we do away

from the exchange go to the exchange.

Funding the exchange I don’t believe was one of the objectives

of the 1975 Act amendments. The discussion, as I recall from reading the legislative history around those Acts, were about breaking

open the exchanges’ single-source monopoly and providing consolidated data. Combining the data streams from all the exchanges,

which had been excluded from the kind of public view the New

York Stock Exchange had.

So there is language. The statute is ambiguous. There is language about whether the exchange needs to use a cost-based analysis to recover its fees.

25

But I do not believe you will find anything that indicates it was

intended to be a profit center, or that funding the exchange itself

was one of the objectives. It has always been a pretty robustly solid

financial institution on its own.

I think the point about requiring us to send the data, then marking it back up to us to display it to our customers, one point that

has puzzled us is that the exchange and the NASD have announced

that they are going to provide market data for free on their

websites, which is puzzling in that we need to pay for it. We compete with them on many fronts.

And, you know, we don’t understand under the SEC rules or the

statute, the ability to provide that data outside the confines of the

plan, which the SEC approves, and to give it away for free while,

you know, in order for us to provide it for our customers, we have

quite a high cost.

Mr. OXLEY. Thank you.

Mr. Putnam. Let’s try to make this brief, because we’re running

out of time.

Mr. PUTNAM. OK. You know, it’s funny. We think a big part of

the problem is the plans themselves, the plans that were designed

to protect investors.

And we strongly support the New York Stock Exchange’s effort

to break away from the plans and to get into a competitive environment where you can start to get the expenses and revenues in line

like a business would, and to allow some other competitors into the

marketplace.

What I mean by a problem with the plans, the ECNs, which are

very much like exchanges, are providing data for free to Yahoo and

Three-D Stock Charts, for example, on the internet, and those bids

and offers are made again available for free.

But the plans prevent us, or prohibit us, from actually providing

additional information, like last sale information for free. So we

think that we need to, as Carrie said, shed some sunlight on the

plans, not just in how the pricing is determined, but how the plans

operate. Inject some competition into the process and start running

these things more like businesses.

Mr. OXLEY. Mr. Knight.

Mr. KNIGHT. Mr. Chairman, we proposed that the plans be

changed. We have proposed an alternative we call the Market

Choice Alternative which would create alternative mechanisms to

create this information and inject more competition into this marketplace.

We’re perfectly comfortable with that. We think that’s the direction to go. Less regulation is what’s needed here; more competition.

And we think there is a way to do that using the existing statutes,

and that is an idea that we think will also create the possibility

for lower cost to the investor, and more innovation in the types of

information that are available to the individual investor.

Mr. OXLEY. Mr. Bell.

Mr. BELL. I guess I would just follow up with what Ms. Dwyer

was saying. I think that it is a concern of ours that in this environment where SROs are becoming for-profit organizations, and you

have situations like free real-time data on websites that is different

26

from what we could provide, because we’d have to pay for it, or

what I mentioned, the trace situation with corporate bonds.

Again, the NASD and NASDAQ now have a monopoly where

there isn’t one presently, so I think that’s of great concern.

Mr. OXLEY. Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mr. Chairman, for your participation.

As is the custom, we will recognize Members by seniority on time

of arrival on the Democrat side, just so people have a heads up

here, the next four folks are Bentsen, Mascara, Sherman, Shows.

On our side, it is Ney, Shays, Royce and Weldon.

Mr. Bentsen.

[No response.]

Chairman BAKER. Mr. Bentsen has gone.

Mr. Mascara.

Mr. MASCARA. Yes. Thank you, Mr. Chairman.

Just a couple of observations. One, it’s good to see that the monopolies are alive and well. During the past 6 years with the megamergers, I was going to ask Webster to remove the word ‘‘monopoly’’ from the dictionary, so I’m glad to see that everybody’s referring to the New York Stock Exchange as a monopoly.

I’m curious as, in my former life, I did accounting. And I noted,

Mr. Britz, you said that it was impossible to ascertain what the

costs were.

I mean, having done a little bit of cost accounting at cost centers,

somehow you should be able to break down the execution costs and

costs of providing the market data.

Are you saying that the New York Stock Exchange does not have

the ability of ascertaining that information?

And if so, I suggest you change accounting firms.

But go ahead.

Mr. BRITZ. Congressman, I didn’t mean to say impossible. I

meant inevitably—cost accounting, as you undoubtedly know, is an

art, not a science—it inevitably involves making determinations as

to what categories of cost ought to be included and what allocation

of those costs you ascribe to market data on the one hand to the

execution of the transaction on the other hand, and possible other

functions.

You can clearly do it, but it’s going to be assumption-driven, and

my comment was I think it would raise the decibel level of this debate, the debate over those allocations and those categories of costs.

Not at all impossible.

Mr. MASCARA. OK. Because I was going to say, if I’m on the

other side, and I see that you have many more people there that

oppose those fees, if they’re going to be charged a fee, they like to

know that it’s a fair fee and it is representative of the cost the New

York Stock Exchange is absorbing.

So I think they would take more comfort if your answer had

been, yes, we can ascertain that and determine it, and these

charges are based upon that information.

Mr. BRITZ. I would imagine that’s true, Congressman, but I wonder if it’s not naive to think there would ever be consensus surrounding those assumptions and those allocation determinations

27

that have to inevitably be made to produce a profit and loss statement to everyone’s satisfaction.

So I’m skeptical that it can happen. It’s clearly not impossible to

produce a P&L statement.

Mr. MASCARA. The other observation was I would like to have

seen someone from the SEC that we could have asked questions of.

And that leads me to the next question, Mr. Britz. I understand

that the SEC Advisory Committee on Market Information is currently examining many of the issues that we are discussing here

today.

It seems to me that our subcommittee should wait for the recommendations of the experts, whatever that means, on the SEC’s

Advisory Committee, before considering any legislation on market

data.

After all, we are not experts. I’m here exploring new ground for

me. But don’t you agree that we should review the Advisory Committee’s recommendations before determining whether to legislate

in this area?

Mr. BRITZ. Well, I would never be so presumptuous as to advise

this subcommittee as to what it ought and ought not to do. I would

say that the Seligman Committee is 25 professionals from around

the securities industry, both the buy and the sell side, various

types of broker/dealer firms, not simply one category around that

table. The vendor community is around that table, and various academics representing the public are around that table as well, so

there certainly is a wealth of expertise around that table.

I don’t have the clarity of vision to know what the end product

of this committee will be. But I think it will be an interesting and

a provocative and thought provoking one.

Mr. MASCARA. Well, thank you, Mr. Britz.

And thank you, Mr. Chairman.

Mr. BAKER. Thank you, Mr. Mascara.

Mr. Ney.

Mr. NEY. Thank you, Mr. Chairman.

The question I had of Mr. Knight.

If we change the market distribution system into a competitive

model, would any loss in the total revenues created by restructure

of the market data system be passed on to the consumers?

If so, what impact would that have on the investors who invest

in the market?

Mr. KNIGHT. If you’re asking about our market choice alternative, it’s our belief that competitive forces exist now that if the

National Market System Plans stepped back and allowed those

forces to play out, people would step forward to put together the

national best bid and offer, and that other competitors would

spring up and that that is the best mechanism to go.

And that that will result in lower prices for the investor for this

information, and better information because of innovation and competition. That’s a system we’re willing to work with.

The existing one is the product of circumstances that may have

passed in the 1970s, where this information wasn’t coming together. But in the end, people need to recognize the reason the

SROs were given the responsibility is because, and explicitly in the

statute, Congress had a concern about the integrity of this informaVerDate 11-MAY-2000 13:43 Oct 04, 2001 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 71311.TXT HBANK1 PsN: HBANK1
28

tion, and we live under regulatory requirements that broker/dealers and other vendors of information don’t have to carry.

Mr. NEY. Well, the SROs could recoup, because they’ll be selling

the data because the SROs would have a recourse.

I’m just saying though that the consumers and that cost passed

down, does that increase costs and how does that affect—— Mr. KNIGHT. I would think that with more competition, the costs

would go down.

Mr. NEY. OK.

Mr. BRITZ. Congressman, if I may come at that in a different

way. If your question is, in my shorthand, if you vaporize market

data fees, will that have an impact on the operations of the exchange, or more importantly the ultimate end customer.

And I don’t know the categoric answer to that. But back to the $130 million toothache, water seeks its own level, and the most obvious thing that our board would do, without presuming what they

would do, is that they would gravitate toward the transaction

charge that both we and the over-the-counter market have.

And that’s clearly a charge in the form of brokerage commissions

that would inevitably find its way very directly to the end customer.

Mr. NEY. A question of Mr. Putnam.

We’re not going to haze you on this question now. I found your

testimony very interesting.

The question I had, if we know, change from a monopolistic

structure, and the consumer relies on reliability and trustworthiness of data, would there be anything lost due to competition, as far as reliability of data, trustworthiness of data?

Mr. PUTNAM. Well, we’ve suggested that we take an incremental

step initially to protect investors from just that. That we wold

maintain the current plans to provide a baseline, a minimum baseline of information, introduce competition to the system, and then

hope that the utility died.

If it turned out that market data was a natural monopoly, then

we’d have to rely on SEC oversight and antitrust regulation to help

determine the outcome on market data pricing. We don’t believe

that. We believe we’re seeing it now.

The New York Stock Exchange is offering more and more, and

they’re getting ready to offer a lot more information, and I believe

competitive forces have driven them there.

The same thing on the ECN side of the marketplace. We’re offering information for free to investors, as a way of competing with

one another.

So we really think that’s the way to get there.

Mr. NEY. So you don’t have any hesitations, if this was changed

from the current structure, about reliability if it was changed?

Mr. PUTNAM. I think there are other examples in our current

market where the SEC mandates a minimum level. So if you have

someone who chooses to be a market data consolidator, that they

are held to a standard of performance, system reliability, those sort

of things, or they wouldn’t be able to be a consolidator of data.

I think we can get to it that way.

Mr. NEY. Thank you.

Thank you, Mr. Chairman.

29

Mr. BAKER. Thank you, Mr. Ney.

Mr. Meeks.

Mr. MEEKS. Thank you, Mr. Chairman.

Let me just ask your indulgence for a second. This is new to me,

sitting on this subcommittee, this particular issue.

So let me just ask Mr. MacDonald, first. I just want to be sure

that I completely understand and ask you, can you explain to me

why transparency in the market information is important, first of

all?

Mr. MACDONALD. Well clearly, you want the investor to be informed about the best bid offer. Mr. Meeks, if you called my broker

and you got one of my brokers, one of my registered reps on the

phone, and asked him for a quote on AOL, he would give that to

you for free.

If, Mr. Meeks, you dialed into my website, and attempted to get

a quote on AOL, you would effectively pay, either directly or indirectly. Directly, because you’ve signed a subscription agreement to get unlimited quotes, real-time quotes, for $4 a month. Or because

indirectly because I’m paying on a per-quote basis.

So we have a situation that’s patently unfair to the individual investors. The system was designed for larger institutions who that

sort of cost to them is incidental. It is not incidental to the person

who trades periodically once every couple of months.

Mr. MEEKS. Let me next ask then, I briefly read or understand

that the SIA Subcommittee had released a report on transparency

and made a recommendation or several recommendations.

Now I’m trying to figure out I should ask then Mr. Britz and/or

the gentlemen from—Mr. Knight, whether or not, did you participate in that subcommittee’s report or in the hearings or anything

of that nature, or have any input whatsoever in that report?

Mr. KNIGHT. I don’t think we were excluded, but I think it’s important to note that that report was not adopted by the SIA, Congressman, in any official way. So I think associating it too much

with the position of the SIA would be incorrect.

Mr. BRITZ. Congressman, that report was largely a survey of

broker/dealers, so I guess I’m not sure how to answer the question

as to whether we participated.

We were aware it was happening. And at the end, we were sent

a draft for our comments. So to that extent, yes. But we were not

the intended audience of that report.

And I think what Mr. Knight said is absolutely true. That is a

report of a subcommittee of the SIA. When that subcommittee

asked the board of the SIA to approve that report, the board declined to do so, and effectively distanced itself from that report.

Mr. MEEKS. Either Mr. Britz or Mr. Knight, let me then ask this

question, and I think it was somewhat asked, but I’m not clear on

the answer.

If say, the current plan structure was completely eliminated, and

you, as an individual SRO, were able to sell data individually, how,

and could you provide consolidated data and how would you charge

for supplying that data?

Mr. KNIGHT. Well, under the plan we submitted to the settlement committee, we believe the competitive forces that exist now,

particularly in the information technology area, because of the deVerDate 11-MAY-2000 13:43 Oct 04, 2001 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 71311.TXT HBANK1 PsN: HBANK1
30

mand that the consumer has, that they would pull together, that

vendors would spring up to pull together that information for the

public because of that demand. And we would sell to those vendors.

Those vendors would be subject to certain rules from the SEC.

Currently, they are called the Vendor Display Rules, and other

mechanisms. But what would happen is there would be competitors

also spring up to supply the same information, and we believe that

competition would set the price as opposed to the cost-based ratemaking or some other Government alternative to setting that price.

We believe that is the better way to go.

Mr. MEEKS. And finally let me ask one of the others, I think I

heard someone testify to the fact that one of the drawbacks in the

inconsistency of distributing delayed quotes, and mentioned differences between NASDAQ and the New York Stock Exchange.

My question is, if individual SROs could sell their data independently, would you be concerned about greater inconsistencies in the

distribution of real-time or delayed quotes?

Mr. BRITZ. Well, first of all, if I may correct something that was

said earlier, the New York Stock Exchange does not produce delayed quotations. Nothing leaves the Stock Exchange’s factory, as

it were, that isn’t real-time.

Several intermediaries in the distribution chain, for whatever

reason, may choose to delay it along the way, but we’re not in the

business of delayed quotations. We think that’s an inferior product

and that’s why we’ve pushed so aggressively to make real-time

data more pervasive.

Viz a viz the quality, this is a tough one. I think that from a pure

self-interest point of view, the New York Stock Exchange would

like to be able to distribute an NYSE-only product.

And indeed, based upon a number of discussions with buy and

sell side brokers, there’s a demand for that product. But I wonder

whether—and the tension here is whether you uncouple New York

from Philadelphia and Boston and so on, whether or not there is

something that happens there that dilutes the integrity of the product.

And particularly, whether the end users, and I don’t worry about

the institutional end users, because they’ll get the New York product, particularly whether the less sophisticated end user, who may

get a secondary market’s bid or offer discrete from another bid or

offer in the New York, and whether or not the quality of that information product will be up to what the primary market is.

So, Congressman, there is a tension there as between just full

and complete competition, unbundling of product, and whether or

not you somehow deteriorate the quality of the product to the unsophisticated end user.

Chairman BAKER. Mr. Meeks, your time has expired. Thank you,

sir.

Mr. Weldon.

Mr. WELDON. Thank you, Mr. Chairman.

My colleague, Mr. Mascara, asked whether Congress should wait

for the SEC’s Seligman Committee to produce a report before we

act on this issue.

Ms. Dwyer and Mr. Putnam, you are both participants in that

committee. Do you believe Congress should not seek to promote

31

greater transparency in competition in market data dissemination

absent the Seligman Committee’s report?

Is that committee producing results that you believe will lead to

necessary reform?

Could you answer those questions for me?

Ms. DWYER. Sure. We don’t know what the committee will recommend at this point. It’s still very much involved in a lengthy discussion of what is actually a very, very complex issue, and essentially is operating to pull the views of a group of 27 or so folks each

time we meet.

I know that Dean Seligman’s committed to producing a report on

September 15th, but it’s a slow process. I don’t see anything wrong.

In fact, I wholeheartedly welcome this subcommittee’s interest in

educating itself about this issue.

Because it is complex, it’s not something that anyone would want

to act on precipitously, but I don’t necessarily—I think the Seligman Committee will probably produce some very interesting results.

I don’t know that anyone needs to wait in considering these

issues for that to happen.

Mr. PUTNAM. I agree with Carrie. It’s difficult, at this point, to

tell exactly what’s going to come out of the committee and there is

still considerable disagreement on what we ought to do.

And I think if we wait until December, to see what the committee produces, and then for this subcommittee to start to act or

examine market data, we’re just stalling a process that needs to be

looked at now.

Mr. WELDON. Thank you.

I just have one other question. The exchanges point out that

market data revenues have remained steady as a percentage of

total revenues, so why is anybody complaining about excessive

market data fees?

And, Ms. Dwyer, maybe you can tackle that one first, and then

I’d like to hear Mr. MacDonald’s response to that.

Ms. DWYER. Sure. Well, just as Bob has had some difficulty portioning out the costs of market data, I don’t know much about the

revenue situation at the New York Stock Exchange. But I will say

that our market data fees three years ago, when the internet first

took off, went from about $7 million a year to all the exchanges,

within one year up to almost $20 million, that was due to this increased usage that I talked about before.

Partly due to, I think Schwab can take some credit, also some

other people at this table, and people who aren’t here.

Due to the consternation of the huge run up in revenues and

costs to us, due to the internet usage of individual investors, the

rates have come down. And we’ve had many negotiations with both

the plan operators at the CTA Plan, NASDAQ Plan about that.

There has been some accommodation. But in terms of our costs,

that has left us basically flat. Because as the costs have come down

for individual investor usage, certain kinds of usage, their usage

has simply escalated and gone up.

And we are continuing to develop products such as, you know,

real-time portfolio monitoring products, streaming quotes and so

32

forth. As we introduce those, our costs are simply going to continue

to escalate.

And I may say that the costs of our brokers, ten thousand brokers at Schwab, who get market data delivered to them on a terminal, those costs have not decreased appreciably at all over the

last several years.

And somebody mentioned that as insignificant, but when you

have ten thousand brokers, it’s not an insignificant amount of

money.

Mr. WELDON. Mr. MacDonald, would you like to respond to that?

Mr. MACDONALD. I would. The innovation of the internet has

changed the playing field pretty dramatically in the last year or

two.

So, the cost that we experience is not a fixed cost. It is a linear

cost, and those costs are passed on to our customers.

We, right now, represent one of the lowest price points for customers at eight bucks a trade.

I gave you the example where, in order for you to obtain realtime quotes on an unlimited basis, you have to subscribe at $4 a

month.

Half my customers do less than one trade every 2 months. Those

customers are, therefore, very disadvantaged.

I have to absorb those costs, and I already produce one of the

lowest price points in the industry.

So, these costs to me are linear. They are not fixed. They go up

with volume usage.

I think Carrie makes a very good point that the other innovation

that is then stifled is, as we start to deliver those products and

services that our customers want so they can make more informed

decisions—things like real-time charting, real-time portfolio analysis—they are significantly disadvantaged against the institutional

investor.

Chairman BAKER. Mr. Weldon, I am sorry, your time has expired, sir.

Mr. WELDON. Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mr. Weldon.

Mr. Bentsen.

Mr. BENTSEN. Thank you, Mr. Chairman. Mr. Chairman, I apologize for not being here. I had two committee meetings at the same

time. Unfortunately, I missed this panel’s testimony, and I apologize to you. I look forward to reading your testimony, and I don’t

have any questions at this time.

Chairman BAKER. Well, thank you, Mr. Bentsen.

Mr. Fossella.

Mr. FOSSELLA. Thank you, Mr. Chairman, and good morning, everyone.

Mr. Britz, you have testified that the New York Stock Exchange

wishes to withdraw from the CTA, and I am curious as to what’s

the motivation. You touched upon it in your testimony, but, if you

can expand upon that a little bit, but also what the implications

that you see down the road from that decision, how it would work,

how it would be structured.

33

Mr. BRITZ. Well, the overriding implication, I think—and this is

perhaps something that the entirety of the panel agrees on—is a

more competitive environment.

Congressman, we didn’t wake up one day and decide to do this.

The CTA, for whatever reason, has become a magnet for—noise,

for lack of a better word.

When that noise comes from a particular broker, or even a couple

of brokers, and it is obviously a competitive-positioning kind of

noise, we are all big boys and we deal with that.

On the other hand, when the SEC begins to take that so seriously that it issues a concept release on market data, then it raises

questions as to whether or not there is a problem with market

data, and goes so far as to suggest, if not propose, possible solutions to the problem.

Those solutions look like bandaids rather than a straightforward

approach to the real or perceived problem, which is the consortia.

There are lots of other reasons, not the least of which is what the

SEC and the Justice Department have done recently vis a vis another consortium, the OPRA—Price Reporting Authority.

We became increasingly uncomfortable with our participation

going forward in consortia like the CTA.

Very clearly, if there ever was a reward for the New York Stock

Exchange—and it is debatable as to whether there ever was—the

risk/reward situation is way of out balance. That is what triggered

our decision, and, when you understand that we can withdraw— and that is all we are suggesting, by the way. We are not so presumptuous as to suggest a market data landscape for the industry—we simply want to withdraw, and we know we can do that and

continue to meet our statutory obligations exactly as written.

That is really what is behind our position.

Mr. FOSSELLA. What do you envision—it seems like you have a

problem with the construction. What are the implications as you

see them?

Mr. BRITZ. I think it might be as simple as the New York withdrawing and perhaps other markets continuing to band together in

organizations like CT, in which case the world will hardly notice.

Certainly, the end customer will never notice. The individual investor or the professional investor hitting the enter key and calling

up a bid or an offer will have—will not——

This will be completely invisible to them. I do think, as other

commentators have suggested, you’ll introduce competition.

Someone raised the issue of value here.

The New York will be able to contract for its own market data,

which is a product we have great belief in.

It can be decoupled or uncoupled from other markets. We can get

directly and discreetly at the value of that data.

So, I think there are a number of positive benefits. At worst, it

will be invisible to the end user. At best, it will have positive benefits.

Mr. FOSSELLA. Two questions, because I know my time is limited,

so I will throw one first at Mr. Putnam.

In your testimony, you recommend a soft landing. I would like

for you to expand a little bit as to where the airport is, for example,

in your opinion, and how this soft landing would take place.

34

Then, I am still a little confused, which is not abnormal, on this

whole issue where one side says ‘‘costs of market data have

dropped dramatically and precipitously in decrease.’’ The other side

is saying ‘‘we haven’t seen the benefit of those lower costs and investors are still paying.’’

I am trying to figure out where the money is going, if I can do

that.

Mr. PUTNAM. We think the reason to take an incremental step

is, in the interest of investor protection, you should——

One, brokers need to know what the best bid and offer is across

competing marketplaces in order to fulfill their best execution obligations.

So, in order to guarantee or preserve that—I think I am agreeing

certainly with what Bob is saying, is that keeping the exchanges

staying on the current system is a way of guaranteeing that the

best bid and offer is available.

Last-sale information is a good idea. We introduce, at the same

time, competition so that New York, ourselves, NASDAQ is free to

go and contract with other vendors or to provide the data directly

themselves.

That will introduce competition into the system, and then we no

longer have to keep the utility that was created in the 1970s in

place.

Then, ultimately, that will get us to where we will start to competitive price market data.

As far as commenting on the cost of the data and the cost to the

end user, it is really not my area of the marketplace. We generate

market data.

Mr. FOSSELLA. That second question was to sort of anybody else

who has heard somebody else comment on fees going down, but

costs either remaining the same or——

Chairman BAKER. If we can get a single panelist to respond to

that.

That wraps up your time, Mr. Fossella. Anybody choose to respond to this?

Ms. DWYER. I’d be happy to respond to it in case I was unclear

before.

Some of the fees have been reduced. There are—You know, you

would have to see the fee schedule.

They are very complicated schedules around this. An individual

retail customer could choose to subscribe and pay a set fee, as was

referred to by Randy.

They can pay on a per-quote basis. There are a variety of ways

of delivering data to customers.

They are all priced differently. Some of those have, indeed, gone

down quite dramatically over the last couple of years.

But, at the same time, their quote consumption, has gone up geometrically and will continue to do so as people become more and

more used to using real-time data.

If they can have it, they want it. They don’t want 20-minute delayed quotes.

The New York Stock Exchange used to be in the business of selling those.

35

They realized several years ago that there is no value in that,

and more and more investors are wanting to not look at what their

portfolio was like 20 minutes ago, but what it is like right now, especially on a day like today, you can imagine.

So, the cost of providing that even at a lower rate continues to

escalate for a firm like ours.

Mr. FOSSELLA. I think I am a little more clear. Thank you very

much.

Chairman BAKER. Thank you, Mr. Fossella.

Ms. Jones.

Ms. JONES. Like my colleagues, we—thank you, Mr. Chairman—

we all have a number of other committee meetings, and we ran in

and out.

What I didn’t hear—and I was trying to flip through your testimony—is what do they do in other parts of the world to deal with

this subject matter?

What kind of costs do they have? Is there anything going on

somewhere else in the world that we ought to copy?

Anyone can kind of respond to that. Did I miss that? We haven’t

talked about that? Good, OK.

Mr. BRITZ. They actually do very similar things. I didn’t bring it

with me. I wish I had and would be happy to supply it to the subcommittee.

The Federation of International Stock Exchanges—FIBV—publishes a report on a great many subjects including market data,

prices, and fees, and revenues and such.

You have to look down that column of worldwide stock exchanges

for quite a long time before you get to the CT/New York Stock Exchange level of price.

It is in descending order by price. I should have said that

straight away.

The simple answer to your question is that they do very much

like what we do here in the States.

But, the data worldwide is dramatically more expensive than it

is in the States.

Ms. DWYER. May I also add I think that would be a very interesting set of issues for the committee to look at.

I think there are some markets that are moving toward a free

model.

I would point out here in the United States the ECNs which are

the newest kind of stock market that we have. The majority, if not

all, including one that Schwab created a few years ago, give away

market data for free.

We see it as advertising, like, when you walk into WalMart, you

are not charged to look at the prices on the cereal boxes.

We think it generates business to give it away for free, so we set

it up that way, so that would also be something to factor in.

Mr. MACDONALD. With regard to the costs, one of the recent impositions on the industry—and it was a fairly expensive one to put

in place—was the OATS System, which is basically an auditing

system so that you know, from cradle to heaven, what has happened to a transaction.

36

So, I would ask New York and NASDAQ to speak, that when

they talk about cost allocation, I would suggest that we have a very

robust, very expensive system to keep track of those things.

Ms. JONES. What would you propose as an alternative to that

system from cradle to—whatever the other word you used?

Mr. MACDONALD. I think the systems in place, I think, it is extremely robust.

The point is simply there is a great auditing system for getting

at the real cost of this.

I think that the technology that we have arrived at here in the

United States—we are very technologically proficient in these markets—one would argue that those costs should plummet as we become that technologically proficient.

Mr. KNIGHT. I would just confirm that our data also shows that

the cost overseas, a place like London, for instance, is much higher

than here in the United States for similar information.

Ms. JONES. I yield back my time.

Chairman BAKER. Thank you, Ms. Jones.

Mr. Shays.

Mr. SHAYS. Thank you, Mr. Chairman.

Mr. Chairman, as a new Member, I want to thank you for holding this hearing and also thank all our witnesses. It is very enlightening to me, and I would say just up front I will probably expose my ignorance, but, hopefully, by the time I have to make decisions I won’t be.

I am struck by the fact—I bring to the table a general view that,

if you don’t have competition, you have regulation.

But, the last thing I like seeing is regulation, and I think there

is a general consensus that change has to take place.

My question to the panel is, basically, is this change going to

have to take place through legislation, through some decisions by

the SEC, or will you all be able to work it out among yourselves?

Mr. MACDONALD. I’ll tackle that one. The SEC has authority in

this case.

We are supporting that there be a piece of legislation that Congress do mandate that there should be blue sky, that we understand better what the costs and the revenues are.

If there are excess revenues, then what has happened to those

excess revenues?

Are they going to build in competitive systems that will compete

with market participants?

Mr. SHAYS. Mr. Britz, will you——

Mr. BRITZ. Congressman, I am perhaps one of the few non-lawyers in the room, so I won’t comment on what has to happen from

a legal——

Mr. SHAYS. That makes you first among equals.

Mr. BRITZ. I won’t comment what needs to happen from a legalprocess point of view. But, I would tell you that——

Mr. SHAYS. I didn’t ask what needs to happen. I need to know

what the mechanism is. Is it going to be worked out amongst you?

Mr. BRITZ. We will have shortly before the Securities and Exchange Commission a petition for the New York Stock Exchange to

withdraw from the Consolidated Tape Association.

37

I have no idea what they will do with that petition. They, in fact,

may hold it pending the deliberations of the Seligman Committee,

and so on.

But, if they were to acknowledge that we have provided them or

will have provided them with a plan that comports with all of our

requirements vis a vis consolidation and disclosure, and certainly

the existing CT/CQ plans allow participants to withdraw.

Mr. SHAYS. This sounds like a more confusing answer than most

lawyers would give me with regard to this.

Mr. BRITZ. OK, sorry. If we withdraw from the CTA, it may be

the spark that gets you to a more competitive environment.

Mr. SHAYS. Thank you.

Ms. Dwyer. Anybody else care to answer?

Ms. DWYER. Yes, I would just say I think even the Seligman

Committee is the—— Some of the things we are talking about would require legislation. Unfortunately, 25 years ago, when Congress looked at this

issue, it crafted a statute that described the world as it was. So,

when you go to undo something like that, quite often you are going

to have to go in and look at the statute. I don’t believe the parties

are going to work it out among themselves.

Mr. SHAYS. You say you don’t?

Ms. DWYER. I don’t believe so, no.

Mr. SHAYS. Fair enough.

Ms. DWYER. It has been a long couple of years. The SEC didn’t

act on my petition in 1999, so I don’t know what they are going

to do with Bob’s.

There is a simple solution, and that is to continue a level of regulated disclosure of the NBBO and then have a free market and any

other data above and beyond that depth of other kinds of prices.

Mr. SHAYS. In fairness to disclosure, I happen to represent the

4th District. I am very proud that NASDAQ is there, so I don’t

want you guys to do anything to hurt NASDAQ, so we will have

to——

Ms. DWYER. We are one of NASDAQ’s best customers and one of

the New York Stock Exchange’s as well.

Mr. SHAYS. Mr. Knight, how do you think this is going to be

worked out?

Mr. KNIGHT. We believe that the Seligman Committee is very

constructive in the approach it has taken. They are listening to all

parties. We believe it is quite possible they will reach a solution

here. I think, of course, as we all know, there has not been a chair

named to the SEC at this point. I think that is part of the issue

here, too, is the SEC’s response to that.

We would want to see what the new commission’s views are in

this area.

The way the law is structured, in our view, is sufficiently flexible

to deal with the situation, and we think, frankly, Congress should

be very proud.

If you look at Congressional history and the economic history of

the United States, the securities laws have served us very well.

Mr. SHAYS. Right, they have, but I do think—I will say, even

with my preliminary look, I do believe that there will be some

change, and the question is, what will that be?

38

I would question, and let me give you the opportunity to answer

it. Do you believe that there is discrimination in pricing? Do you

think that takes place?

Mr. KNIGHT. No, in fact, we have a statutory obligation, which

is policed by our board and by the SEC to avoid that.

That is one of the reasons why our pricing is out on the website.

That is one of the reasons we are heavily monitored in this area,

so we don’t believe we are—— Mr. SHAYS. So, are you different than the New York Stock Exchange?

Mr. KNIGHT. Both are subject to the same rules.

Mr. SHAYS. Could you use your mike, please? Use your mike.

Mr. BRITZ. We have the same view. We are subject to the same

regulatory regime as the—— Mr. SHAYS. So, in the ten seconds I have left, someone on the

other side tell me how it is discriminatory.

Mr. MACDONALD. Well, I would ask that both New York and

NASDAQ, they have the power to do that—allow firms like online

brokers—and I am including Merrill Lynch and all the others who

are going online—to not have the discrimination of having a customer call a broker and the quote is free, but they go to the

website, they get charged. That is discriminatory. That needs to

change immediately. It is within their power. They should do it.

Mr. SHAYS. I’ll follow up in the next round.

Chairman BAKER. Thank you, Mr. Shays.

Mr. Ford.

Mr. FORD. Thank you, Mr. Chairman. I will be very brief. I want

to just, sort of, one more time for the record: there are three—according to the notes we have been provided, there are three of the

witnesses—and I was not here at the beginning of the testimony,

so I do apologize. But, three of the witnesses serve on this advisory

committee. Which three members?

The three right there in the middle, so your advice to those of

us on the committee, in a lot of ways, is to essentially ignore what

that advisory committee would be doing, because it has reached the

point where you—if I am mischaracterizing it—you have come

today to suggest that we act in light of the fact—during the face

of the fact that the advisory committee is meeting.

I guess we have—those of us on the committee don’t know a

whole lot about the market.

We read the Wall Street Journal, and we think we are really empowered and smart about what is going on.

We are led to believe that some progress is being made on this

committee—with this advisory committee. If that is not the case,

it would be helpful for those of us on the committee.

Two, in light of your participation with this committee, you are

advising us to act even though the committee is in the process of

trying to figure this out.

Is that a fair characterization?

Mr. BRITZ. Certainly not on behalf of the New York Stock Exchange, with the proviso I mentioned earlier that we would never

presume to suggest what Congress ought and ought not to do.

There are about 25 people around that table at the Seligman

Committee, a broad cross-section of customers, providers, users,

39

vendors, representatives of the public, and so on, who have been

discussing this since October of last year.

As Carrie said, the end-product is due around the middle of September of this year.

I would not presume to give you advice as to wait or not wait,

but it is inaccurate to reflect the New York Stock Exchange position that we are asking you to act before that committee.

Mr. KNIGHT. NASDAQ is a member of that—— Ms. DWYER. NASDAQ as well, yes. We were invited to come here

today to help educate the subcommittee on the issues. So, at least,

I did not come with any idea that we were recommending legislation.

I think I am being realistic in answering the question that was

posed to me by the other Member.

Mr. FORD. Would you be opposed if we were to act prior to the

advisory committee making a recommendation?

Ms. DWYER. No, I wouldn’t oppose that at all, but I think that

this subcommittee and the large committee need to get into this

issue, understand it, and understand where the Seligman Committee is coming from. You may know very soon what the ultimate

recommendations will be. I don’t know that you would need to wait

for a final report.

Mr. PUTNAM. And, as Carrie pointed out earlier, it may take legislative action at the end of—when the committee produces a report.

Certainly, this subcommittee educating itself is going to be helpful if we are going to get something done quickly if that legislative

action is required.

Mr. FORD. Thank you. I know that this subcommittee, and certainly many on this subcommittee have—and I am new to the subcommittee, obviously a newly created one. I often believe that the

marketplace can figure out a lot of these problems.

So, consistent with that, I hope that we don’t pick and choose

when we want the market to act and when we want to act.

I guess my last question sort of deals with who actually—and we

have all of these questions they provided us, and some are good,

and some are not so good.

One that sort of stands out is the sort of the ownership aspect

of this data.

As one who is trying to be educated here today, in the eyes of

those on the committee—those who have testified—who actually

owns this data?

I mean, it reminds me a little bit of what a lot of the people in

my district do with Napster.

Obviously, there are some steps being taken now to correct—to

remedy that and to ensure that everyone gets their fair share of

the pie.

In the eyes of those testifying today, who actually owns the data?

Would you say those who compile it own it, those who access it

own it, those who own it need it, or those who know more about

it own it?

I am just curious.

Mr. BRITZ. Congressman, again, as a non-lawyer, I am not qualified to answer that question. I would quote Professor Seligman.

40

Mr. FORD. I am a lawyer, and I know I am not qualified to answer the question.

So, any light you could shed would be helpful.

Mr. BRITZ. Professor Seligman thinks it is a great article for a

law review and not much more than that. I don’t know who owns

it, to be perfectly honest with you.

I know that the New York Stock Exchange and other markets invest great sums of money to produce it. I know that the New York

Stock Exchange has been charging for market data for 130 years.

I know that 34 Act as it exists today talks about terms that are

fair and reasonable, and not unreasonable but discriminatory, and

clearly, if not explicitly, implicitly refers to the cost as being part

of those terms.

So, there is a great deal of history. One of the committee members at our last meeting said it is an irrelevant question. It doesn’t

matter who owns it. It is important to produce it.

There is a cost associated with producing it, and you ought to be

able to recoup that cost.

Mr. BELL. Mr. Ford, if I could just speak up very quickly, basically our point of view is that these—— Chairman BAKER. Pull the mike up just a little closer.

Mr. BELL. All right. This market information, we believe, is really in the public’s ownership.

We believe these are facts. We think we are bringing together a

buyer and a seller. The result of that information is market data,

and it should be available to the public.

Chairman BAKER. Mr. Ford, you’ve exceeded your time.

Mr. FORD. Thank you for letting me go over a little bit, Mr.

Chairman.

Chairman BAKER. Yes, sir, Mr. Ford. To not inconvenience our

panel unnecessarily, we have a vote with about—I understand two

votes with about six minutes left on the first.

It would be my intent to recess for approximately 15 minutes.

We have at least three, maybe four, Members who would like to

ask another question. I would point out to those Members, when

I return, we will convene.

So, if you will timely return Mr. Crowley, Mr. Barr, Mr. Shays,

I will recognize who is here first so we can move this meeting along

a little better.

We stand in recess for at least 15 minutes.

[Recess.]

Chairman BAKER. If I could ask the hearing to come to order and

our witnesses to take their seats, please.

We will have other Members returning momentarily. I would recognize Mr. Bentsen at this time.

Mr. BENTSEN. Thank you, Mr. Chairman. I have a couple of

questions.

As I read through the testimony and try and grasp the issue, I

want to pose a question to you, and tell me whether I am right or

wrong.

If I am right, then I assume I will get a variety of answers.

But, it would appear that the issue here, at least in part, on the

fee structure that Ameritrade and Schwab, and other primarily online or discount-brokerage firms, are concerned about is, as more

41

of your clients are directly trading themselves, they are incurring

this cost on a per-capita basis, as opposed to someone going

through a traditional brokerage operation where they would call up

Merrill Lynch or whoever.

That cost is maybe passed on or not, but, also, because Merrill

is able to absorb that cost through the 2000 terminals they have

hooked up around the country and disseminate that to their brokerage operations, they carry that cost.

I guess my question is sort of two-part. I mean, one, doesn’t a

Merrill or a traditional brokerage operation—I mean, they incur

that cost, and they are able to spread it out. But, they are also incurring a lot of overhead costs that the online brokerage is not incurring. So, doesn’t it all come out in the wash in that respect?

Second, isn’t that just part of the disintermediation that is occurring where, I mean, there are some costs associated with it, that

nobody is getting anything for free here. It is just a business plan

between what the online brokerage has and what the traditional

brokerage has. In fact, as we see more of the traditional brokerage

houses go to an online subsidiary or component, they are sort of affected by both.

So, is that a correct analysis of what is going on?

If it is, I am not sure that I understand where the equity is in

your argument.

The second part, I think I do have a different feeling, and that

is that, with the disintermediation that is going on, the question

that these changes do have certain exemptions under the law based

on the 75 amendments to the Act then does raise some questions

and how they raise their fees, and how they allocate.

So, I understand that equity argument, but the first part I am

not sure I see where your equity is.

Ms. DWYER. Well—so, let me say first of all that a statement was

made earlier that it is primarily the online firms that are carrying

this issue.

We have been the noisiest for sure, because the effect has been

so immediate and sharp for us.

But, Merrill Lynch, Morgan Stanley, Smith Barney are all represented on the Seligman Committee.

There has been consensus with those firms as well that a real

hard look needs to take place at the governance and at the level

of costs that they absorb, too.

So, it is not simply an online issue. It will be more of an issue

for them as they transfer more of their business to online.

I don’t think—you know, if you understood Schwab’s business,

we have 350 branches. We have the same kind of overhead that a

firm like Merrill Lynch would have.

We have, to support our internet business, a tremendous investment in infrastructure.

I think we have the largest mainframe computer system in the

world, possibly, certainly the largest transactional one.

So, there is a tremendous—I don’t think there is a huge difference in the cost of doing the brokerage business even though our

customers may choose to access us sometimes over the internet.

42

The issue about the cost of quotation information, the market

data, is that it is differentially priced depending on how the customer chooses to access the data.

If a customer chooses to call his broker at Merrill——

Mr. BENTSEN. Let me interrupt you for a second. I understand

that.

But, the point is that, through a discount brokerage operation

where you offer a much more discounted price than the traditional

brokerage operation, there are some underlying costs that have to

be assumed somewhere.

Doesn’t the client ultimately have to assume those costs if they

are going to go directly as opposed to going through——

Ms. DWYER. The difference is that the costs are being set by the

exchange. The exchange has no incremental costs or even interest

in how the quote is supplied. It doesn’t affect the exchange in any

way, shape, or form. There is no reason why a customer who calls

Merrill to get a quote is charged nothing.

The firm absorbs a per-terminal cost. Our firm absorbs 10,000

terminal costs.

If a customer chooses to access us over the internet, he or she

pays on a usage basis.

There is no reason why the exchange, as the setter of those costs

and the entity that gets the revenues—why there should be any

difference there.

That is the issue. It’s not the firm’s business model so much as

the fact that the exchange has no incremental cost once it provides

the quote.

The quote is distributed over our network or over Merrill’s.

We have the cost of creating that network and supplying it to the

customer, but the pricing of the data itself is different.

Does that answer your question?

Mr. BENTSEN. I guess I still don’t—I would like to hear from the

exchanges, but I still don’t understand.

Is the price for access to the data different between you as an

individual and—when you get it off of your home computer terminal and the price that Schwab pays when it gets it off its terminal in Schwab San Francisco, or wherever?

Ms. DWYER. Well, we may not charge the customer at all.

Mr. BENTSEN. But I mean the price between the computer

that——

Ms. DWYER. Yes. Yes, it is a different.

Mr. BENTSEN. There is a different price?

Ms. DWYER. It is a different fee schedule based on the usage.

One of the issues that many of us have had is there are different

usage models and different fees associated with how you use the

data.

We think that should be blind to the exchange, because it doesn’t

raise the exchange’s cost to provide us with a data port or a per

quote, or whether we provide per-quote stream to our customers or

to provide to a broker’s terminal.

There should be no difference in that pricing, and yet the exchanges have over the years developed pricing models depending

on our usage.

43

So, that is really the issue rather than what the customer pays

or doesn’t pay, is that clear?

Mr. BENTSEN. Sort of.

Mr. BAKER. Yes, Mr. Britz, could you respond?

Mr. BRITZ. I think your analysis is incredibly perceptive. You

synthesized the discussion better than I could have myself.

The notion that there is discrimination as between online and socalled full-line traditional broker-dealer is actually quite silly.

For example, Merrill Lynch, when I call them up and ask them

for a quotation, is paying for the display device that enables them

to give me that quotation in the first place.

Just to put this in some context, that display device revenue is

the overwhelming portion of the New York Stock Exchange’s revenue and market data north of 85 percent.

Merrill Lynch non-online firm, in general, is the single largest

payer for market data.

So, I think you need to understand that context and the notion

that prices are escalating in a linear way belies the fact that there

is an enterprise industry-wide cap, at least within the CTA organization, of one-half-a-million dollars a month.

Mr. BELL. Mr. Congressman, if I could just give you my perspective as a vendor.

One of the things we brought up earlier was the fact that the individual investor can go to a website that is being offered by—— Mr. SHAYS. Excuse me, sir. I have a real hard time hearing, and

I know you have something important to say. You talk away from

the mike. I need you to talk into it.

Mr. BELL. I’m sorry. I was just trying to give you my perspective

as far as a vendor’s concern.

We are trying to innovate in this market by providing all kinds

of monitor screens and real-time information to our users.

What concerns us is that we now have competition from the exchanges who are also putting this real-time information on their

websites.

The difference is that we have to choose as a vendor to either absorb the cost of us putting those real-time prices up on those—our

analytics or passing them on to our clients, which eventually then

gets passed on, we believe, to the individual investors.

So, now, we are in a competition situation where the exchanges

are displaying the same information that they get for free essentially versus what we are paying for.

Mr. BENTSEN. I would just say, Mr. Chairman, you all are an

intermediary of information.

I am familiar with—or used to be familiar with your product. It

has probably changed a thousand times since then.

But, that seems to me a somewhat different issue, but a real

issue, and it is something that the subcommittee ought to take a

look at.

Thank you, Mr. Chairman.

Mr. MACDONALD. Mr. Bentsen, this is Randy MacDonald. In my

mind, it is very simple.

Merrill Lynch has 14,000 salesmen out there, and they are moving to online. They are going to have the same exact problem that

we have, but let me demonstrate my point by extreme.

44

Ninety-eight percent of all of our trades happen in an automated

fashion.

That is not the case for Merrill Lynch. We both have overhead,

so the issue for me is we are impeding progress here. Innovation

is being impeded to the disadvantage of the individual investor.

The fact that I can call Merrill Lynch rep and get the quote for

free, whereas if I go onto an Ameritrade website I have to pay, is

discriminatory.

It is arbitrary and capricious on the part of the SROs, and it

needs to change.

They have the power to change it right now, and they refuse.

Chairman BAKER. Thank you, Mr. MacDonald.

Mr. Shays.

Mr. SHAYS. I really appreciate my colleague from Texas asking

the question he did, because that is where I ended up with the discriminatory.

The only example I heard was the issue of calling up a broker

and not having to pay a fee.

I did think it is slightly different, because my sense is that, when

I deal with a broker, I am paying for other costs.

I would say to you, Mr. MacDonald, that I don’t watch TV, because I don’t like advertisements. But, if I knew when your advertisements were on, I would watch TV just for the advertisements.

I love them.

Mr. MACDONALD. Thank you.

Mr. SHAYS. And I would think—but, what I get a sense of is that,

if I deal through you, my costs are less; if I deal through a broker,

my costs are higher.

So, I don’t want to call, and my sense is that I will get the information the way I want when I want instead of having to go

through someone who tells me something.

So, I guess—tell me another discriminatory pricing.

Mr. MACDONALD. Well, the other one I mentioned was the actual

subscription agreement.

If you and Mr. Shays want to get unlimited real-time quotes, I

have to have you sign a subscription agreement. We have attempted to do that through the web through a click-through method that has been—the process of which is now being rejected again.

We also are being rejected, because we have the ability for people

in multiple locations to sign on to their account, so that my wife

can be on our account looking up news, weather, sports, her net

worth, account, and so forth.

I can be on the account at the same time trading, and the exchange has told us that that cannot happen.

I say, well, the telephone is the exact same thing. If my wife calls

up a broker at Merrill Lynch and I am also on the phone from Merrill Lynch, it is free, and you’re telling me that—again, it is discriminatory in my mind. Just because the device is the internet

versus the telephone, there are different rules.

I am not getting it. Now, on the issue of unbundled execution,

I think you are 100-percent correct.

The cost structure is very different, because we represent an

unbundled execution.

We have given our customers the choice of just an execution.

45

You don’t have to pay for research. We are not in the advice

game, so that is the big difference in pricing.

That is what we have always represented is choice for the consumer.

We are having a very difficult time right now dealing with these

SROs.

Mr. SHAYS. What I am trying to wrestle with is my general concept of a monopoly somehow is regulated.

What is the protection to the public that the fees that you charge

will be fair, reasonable, and nondiscriminatory and consistent with

your obligations under the exchange?

What protects me as a——

Mr. MACDONALD. Well, one thing I have to do——

Mr. SHAYS. I’m not asking you. I’m sorry, I meant the exchanges.

Mr. MACDONALD. I’m sorry.

Mr. BRITZ. Congressman, the process that I described before is

one that begins with either an idea at the SRO level or the customer bringing an idea to us.

It is then vetted with a wide variety of customers, either individually or through trade associations, again, up to our board to the

extent it continues to have some traction, finally to the SEC for

public comment, and the ultimate disposition one way or the other

with the SEC.

Keep in mind, even at our board level, it is 50 percent chief executive officers of member firms—the payers.

Mr. SHAYS. Does the public get to see all your data on costs?

Mr. BRITZ. Sure they do. That data is filed with the Securities

and Exchange Commission and available for public viewing.

Mr. KNIGHT. We have the same process, and we are subject to

the same discovery, if you will, by the SEC.

The process is a public process where public comment can be involved and where the board structure——

It is important to understand that these entities—exchanges—

have a board structure unlike any other in the American corporate

world.

We are required by statute to have a certain composition that reflects a non-industry interest in our market that reflects the public

interest.

Those boards must approve this knowing very well their legal obligations here to the public to protect them. Then, and only then,

will it go to the SEC, where they go through a similar process of

asking these questions and allowing the public to comment again.

Ms. DWYER. I always hate to be in a position of contradicting my

regulators.

But, let me just give you an example of how this process doesn’t

always work.

Mr. SHAYS. And who are you referring to as your regulators?

Ms. DWYER. My primary regulators are the NASDAQ and the

New York Stock Exchange.

A couple of years ago, our customer usage fee was doubled in a

filing that was effective on filing, perfectly legal, but does not provide any opportunity for notice of public comment.

Mr. SHAYS. The notice of filing takes effect——

46

Ms. DWYER. The filing takes effect on filing, and your only right

is to get the SEC to abrogate it if you feel that it wasn’t properly

effected.

Mr. SHAYS. And does it go back to the fees that were already

paid, or does it just start?

Ms. DWYER. Well, if it is abrogated. So, I will finish the example.

The fees were doubled, no notice. In fact, we were very surprised.

We were in the middle of a negotiation with the exchange at the

time, and we saw it in the Federal Register after it had been filed.

We asked the SEC to abrogate it, because we felt that the multiple was huge—the effect on us was huge, there should be public

comment.

The exchange withdrew it and instituted the fee for awhile as a

pilot program.

SEC did not abrogate it. There was no public notice and comment, and the fee stayed.

Now, subsequent negotiations got those fees down, and they were

properly filed.

We have gone on with a lower rate structure, but there are other

pilots out there that don’t go through the process—— Mr. SHAYS. Mr. Chairman, could I just have someone explain to

me why it is—do you mind if I—— Chairman BAKER. No, please.

Mr. SHAYS. Explain to a new Member here, when you say a pilot

project, I don’t understand why it is a pilot project. You said it ultimately became a pilot project.

Ms. DWYER. Pilots—this is something we touched on in our testimony.

Under the CTA plan, the exchanges are allowed to conduct pilot

programs to test pricing models. They do not go through the rule— they are not considered rules or changes to the plans.

Mr. SHAYS. No, I understand. What I don’t understand is, if it

is a pilot project, it only affects certain of its customers or anyone?

Ms. DWYER. Well, yes. For instance, Schwab had a pilot program

for 7 years with a pricing structure with one of the markets.

Schwab was, to my knowledge, the only participant in that program

Mr. SHAYS. Maybe in the next round. I would just like to understand what protects each of the so-called—I call you a customer— each of the customers from knowing that they have the best price

that their competition has and that there are not special arrangements for particular groups.

Chairman BAKER. Thank you, Mr. Shays. I’ll follow up on that,

too, to some extent.

Ms. Dwyer, would it be your opinion that the result of the pilots

is to artificially distort the pricing mechanisms at least momentarily or for some duration while the pilot is operative?

Ms. DWYER. Well, I think that is so. If the pilot cannot be taken

advantage of by all, if it is not well-known, absolutely. Then, as I

said in my testimony, we were beneficiaries of one. We enjoyed it

very much.

But, you know, it leads you to wonder what else is out there and

leads you to think there should be more transparency in the system.

47

Chairman BAKER. Let me take a slightly different tack from my

earlier line of questioning, particularly for Ms. Dwyer and Mr. Putnam.

The exchanges have developed extensive infrastructure and

spent a lot of money to facilitate transactional activity. The benefit

or sideline of that is the data which comes from those transactions,

which obviously has some value.

But, without the data, there wouldn’t be transactions for anybody, because I am not going to go out and buy X shares of whatever depending on what the price is.

On the one hand, we have an unusual problem the SEC has created, and the Congress by law, a requirement to have a consolidated source for information to facilitate economic transactions

which should be neutral and blind to all participants operated at

a fair market cost to incentivize these transactions.

It would appear, coming at this issue from a different direction,

that it is much like having a public utility who is told you have

to deliver the electrical service, do it in non-profitable areas as well

as profitable areas, to make sure all people have access, do it in

a fair, reasonable, and nondiscriminatory standard. And now somebody wants to come in and take certain parts of that utility’s operation that are profitable and share in the revenue stream.

Am I missing it, or what is the distinction there between what

you are asking for and what the exchanges have historically done

and provided?

Mr. PUTNAM. I think that your example of public utilities is exactly the problem.

The way the system works there isn’t competition among market

centers and providers of data, so that we can get at a fair price——

Chairman BAKER. But, when you deregulate public utilities, all

too often in some States I have heard about, the consequences may

not be necessarily beneficial, because you don’t have an infrastructure that is properly funded that can provide market integrity with

the delivery of the product.

I have wrestled with this privately before our hearing. How do

we fix this?

You can’t blow up the public utility. We need them. Whether you

like them or not, you’ve got to have them if you want to have a

market.

I have heard you say—I heard Ms. Dwyer say a specific recommendation for action.

I have heard you say it ought to be incremental, but give me an

increment or two.

Mr. PUTNAM. Well, it gets back to our view, which is different

than the over-the-counter marketplace or the New York Stock Exchange’s view, at least my perception of what their view is.

We believe that the market data belongs to the customer, actually, the one who started by placing an order in the system.

Therefore, we don’t charge for that data. What we do charge for

is the facility that we operate where we execute orders when customers want to interact with those bids and offers.

So, we charge execution fees. There is, obviously, a cost for us to

produce that market data.

48

We just absorb it through transaction fees when customers come

to buy and sell.

Chairman BAKER. I can understand that. Instead of saying here

is your charge for market data, here is your charge for transaction

fees, you take market data off the shelf and say here is your enhanced charge for transaction fees which covers the cost of the

market data.

Everybody does that. You’ve got to make money in the business,

or else you are not going to do it.

I don’t have a problem with profit. That is not what is bothering

me.

The only thing that is a problem for me is if there is, in your

view, a monopoly which now governs the issuance of this market

data, which then leads to transactions off which everyone prospers.

Is there a mechanism you can suggest to provide alternate competition that is not disruptive to the current system, thereby putting it all in jeopardy?

In other words, we don’t want to shoot the guys. We want to provide another racehorse in the race to see if they can do it better

or more efficiently, and thereby reduce cost as a result of competition.

I think that is what I have heard you say.

Mr. PUTNAM. We’ve suggested that we maintain the Government

utility consolidator, at the same time allowing for competitors to

come in the system.

The reason for maintaining the current utility is just to guarantee that the baseline of information, a bid and offer, and a lastsale is available.

Chairman BAKER. I agree with you on that. We’re there. Next

step? How do we get to that competition you are talking about?

Mr. PUTNAM. The next step is—one suggestion has been to create

a category of consolidators. So, you go to the SEC and you say, ‘‘I

want to be a consolidator of information. Here is the system that

I am going to operate. I have adequate capacity and reliability, and

I am signing up as a consolidator,’’ just like we do as an ECN

today.

We sign up as an alternative marketplace, and we have to meet

certain standards.

Then, we go in the business of providing that data. I think New

York would like to be one of those.

We think that they should have the right to be one of those.

At that point, market forces will start to decide on what price the

data is.

Chairman BAKER. May I ask Mr. Britz on that point? Does he

want to be one?

Mr. BRITZ. No, Congressman. I think we are unlikely to be a

consolidator.

But, we are not against the notion of competing consolidators at

all.

Mr. PUTNAM. And I guess they would like to provide their own

information at that point.

We also think that there is some value—not some value—a big

value in allowing market-data providers who want to be nonconsolidators.

49

That example would be Yahoo, where they are giving away certain data for free, but they don’t have to provide consolidated data.

With adequate disclosure, maybe the customer that Randy was

talking about that trades once every 11⁄2 months decides that that

is good enough for them, and they don’t want to go the extra cost

of getting the superior data and that that is adequate for them to

look at.

We think that having the second category is another way of introducing some competition in the process.

Chairman BAKER. Not to go on at length, let me just request

from any participant if there is a suggestion for specific statutory

modifications that you think facilitate additional transparency, or

the consolidator approach which Mr. Britz has said there to which

there is little objection if properly done.

Let’s explore that avenue. It would appear to me that what every

member is about is making sure any participant in the marketplace has access to real-time information at the lowest cost possible. That benefits everybody, because that means you are more

likely to have transactions that occur, and everybody goes away

happy.

At the moment, it appears there may be some inhibitions to all

parties having access to real-time information at what they perceive to be an unfair cost basis.

Now, I don’t know that is the case, because I don’t know what

the cost is, which gets me back to my eventual starting point.

Mr. Bentsen, did you want another round?

Mr. BENTSEN. Well, Mr. Chairman, if I could just for a second.

Yes, I want to echo what you said, because, Mr. MacDonald, you

made the comment that your clients are paying for it and other clients aren’t paying for it.

Ms. Dwyer has said there is a different fee structure, and I

guess, you know, that is something we are going to have to learn—

I’m going to have to look into, because I don’t know all the details.

But, somebody is paying for it. Whether it is being passed on directly to online purchasers versus full-line purchasers, somebody is

paying for it somewhere, because the information is not free.

I do agree that we are sort of entering this new world of technological innovation we’ve got.

We have this tremendous market disintermediation in all sectors

of the economy just about, not just here in the power sector and

elsewhere.

But, I am not yet convinced, and maybe I will be, that there is

still a service that exchanges that provide, to the extent that Mr.

Putnam and his colleagues are creating sort of sub-exchanges, I

guess, if I understand your business.

There still is a question, or a desire, I think, for market integrity

that does, at least in theory, and I think generally comes along

with exchanges, and also the liquidity that is provided in marketmakers, and all of that.

There is a price associated with that, so I guess what we have

to get to is exactly how that floats out at the end of the day.

I mean, again, you all are able to offer trades at $8 a bundle

versus $80 a bundle, or whatever the going rate is, and so the

other costs have to be made up.

50

But, I think actually this is a pretty fascinating issue, I have to

tell you, the more I listen to it.

Let me ask, Mr. Bell, you talked about in your testimony the

MSRB’s proposal for the muni bond repository of information and

the fact that this is a regulatory imposition upon the market to

provide this. Wasn’t that as a result of concerns—as we know, municipal bonds are not under the Securities and Exchange Act—are

not subject to SEC registration, nor should they be, in my opinion.

But, there was a concern that, even with the broad institutional

and retail market—secondary market for municipal securities, that

there wasn’t sufficient price transparency.

So, as sort of a compromise, this idea of putting together this information repository would provide greater price transparency.

Is that a fair tradeoff, or, in your testimony, you’re saying that

is a concern that now the Government is imposing it here and saying provide this information free of charge to everybody?

Mr. BELL. Well, I think it is a good question. I think that the

municipal markets are a very different market from, let’s say, the

equity markets in the sense that—— For example, for one municipal bond, Bloomberg, collects 40 different pieces of data. You need all those 40 pieces of data, we believe, in order to accurately determine whether the price is right

or not—whether it is a fair price.

As a NRM-Serv—and I think there’s five different NRM-Servs— we take a proactive approach toward getting all this information.

Other NRM-Servs seem to take a more reactive approach. As a

NRM-Serv, all the issuers in the banks are required to provide documentation to the NRM-Servs at some reasonable timeframe.

So, you can sit back and get that piece of paper that says three

weeks ago there was a refunding on this bond. As a result of this

funding, it has now gone from, let’s say, Double A to Triple A in

its rating. Obviously, if the rating changes, goes up, it usually becomes more valuable.

So, what we tend to do is we say, ‘‘Look, we know that this is

something that’s happening. We’re going to call up the issuer ourselves.’’

We bear the costs ourselves, and we bear the cost of the people.

We have about 15, 16 people that do this on a daily basis.

We get that information before the piece of paper comes out, and

we put that out on the system.

So, even though eventually the data will all be the same and

eventually you will be able to determine if that price is fair once

that official notice comes out, if you take more of a proactive approach, you have added value to that information on that bond. As

such, if you have that information, you can then determine quickly

whether that price is fair or not.

So, it tends to be, I think—you know, the approach the NRMServs take are different. As a result, if we were to have to pool all

that information and make it available on a common basis, then

the value-added would obviously—you know, we would be giving

our value-added away.

Mr. BENTSEN. So your concern as an information provider is that

you would have to give away some of your property or some of your

intellectual property that is associated with that, not the—I am not

51

familiar with the acronym yet—but not the repository—the idea of

the repository itself or the fact that the market-makers have to

provide the information voluntarily.

Your concern is that other providers of information such as

Bloombergs or others might later have to provide that and that

would undercut your own business?

Mr. BELL. Well, I mean, in a simple example, if we are taking

a proactive approach, then the person—the NRM-Serv who is taking a reactive approach could just sit back and wait for us to tell

them, ‘‘Hey, this is refunded.’’ So, they don’t have to spend the money of having those people

call up and find out if it has happened three weeks before it actually becomes official by a piece of paper.

So, we are actually then giving our value to our competitors, if

you will.

Chairman BAKER. Can I jump to Mr. Shays? Mr. Shays.

Mr. SHAYS. I find this absolutely fascinating. You referred to, the

SRO says, your competitors. But, they are also your service providers and, in some cases, they are your competitor. But, isn’t it

true, also, that some of you sit on their board?

Ms. DWYER. Yes.

Mr. SHAYS. I mean, it is really not all that kind of, you know,

precise and clean.

Ms. DWYER. Highly incestuous.

Mr. SHAYS. It is. No, I think—I am saying that is the way it has

to work. But, in a way—are you in a sense making an argument

to us that you are like the post office, you have to provide universal

service and that your potential people you provide services compete

with you and will take—will cream—you know, go after what is

most profitable?

Mr. BRITZ. No, Congressman, I was making no such argument.

You are absolutely right. Our board room is an interesting place.

Sitting around that board table are our owners, our customers,

and our competitors.

Mr. SHAYS. In that sense, it is like the post office, because FedEx

and UPS are helping to make decisions on why the post office

prices itself.

Mr. BRITZ. But, because of the regime that we have today—and

this I think is what Jerry was referring to—markets compete

today—not only markets—markets compete with broker-dealers.

We are a competitor of Schwab and others on a certain level.

Markets compete in lots of arenas, certainly for execution, but

because of the regulatory regime we have today vis a vis the Consolidated Tape Association, they don’t compete in terms of distributing market information.

Mr. SHAYS. But what I hear on the other side is they are basically fearing that you are using the fees to subsidize other parts

of your business that compete with them.

You know, that is a valid concern if it is true.

Mr. BRITZ. I think if you ask them they will not make that suggestion about the New York Stock Exchange.

I think there may be examples of other markets that may be

doing that. They can’t make that suggestion vis a vis the New York

Stock Exchange.

52

Mr. SHAYS. Mr. Knight, so basically they are making it against

you?

Mr. KNIGHT. I can’t imagine that they are complaining about a

dollar a customer fee or the fact that we are providing information

for free, although, when we applied to the SEC to provide information for free on our website.

Mr. SHAYS. That’s a dollar a month?

Mr. KNIGHT. Right.

Mr. SHAYS. That’s not a dollar a transaction?

Mr. KNIGHT. No, in fact it is an unlimited amount of transactions

for an individual.

And many of these were delivered by pilot programs, but I think

the important point here is that we feel there could be more competition put into the system.

We and the New York Stock Exchange and Archipelago are all

suggesting different ways to do that.

But, they share the common characteristic of eliminating the current single processor and have multiple consolidators.

We are willing to live with that system, and we think it would

bring even more competition.

But, right now, the oversight by the SEC, the oversight by our

boards, and the nature of the current process does give the public

a large measure of protection.

Is it perfect? No. Can it be improved? Yes. Are we on a road to

improvement? I believe we are. We will know more in a few

months.

Mr. BRITZ. Congressman, if I may, there are some regional stock

exchanges who pay for order flow, make a payment to a brokerdealer.

Some broker-dealers who are sitting at this table receive such

payments, and they are on record as having said that they are

using excess market-data fees to fund at least a portion of those

payments.

I would go back to a statement I made earlier, some markets—

the percentage of market-data revenues to total revenues is enormous relative to the New York Stock Exchange.

So, perhaps that is the reference.

Ms. DWYER. Can I just add a couple of things, or are we out of

time?

Chairman BAKER. Certainly.

Ms. DWYER. I wanted to say that the NASDAQ fees, for example,

there is a dollar a month rate that you can get if you want to subscribe, if you are going to use a lot of quotes.

There is also per-quote fee of one-half a cent, but that is on pilot.

It is going to revert back without change to a penny on May 31st.

This additional——

Mr. SHAYS. So then it will only be service?

Ms. DWYER. Pardon?

Mr. SHAYS. It will revert back to service?

Ms. DWYER. Unless somebody extends the pilot, it will revert

back to a higher rate. There’s also, if you want——

Mr. SHAYS. I just need to understand, a higher per-transaction

rate?

53

Ms. DWYER. Per quote. Yes, per quote. There is also, if you want

Level 2 data, which is the good data on the NASDAQ market—it

gives you more depth of market—you need that in a decimalized

world—that is $10 a month per customer. That is also on a pilot that is scheduled to revert back to $50 a month if it is not changed.

So, yes, the fees have come down quite a lot, but, you know, this

is why we concentrate on the structure of the setting of the fees,

because it is an unstable situation.

Mr. SHAYS. Well, you be nice to my NASDAQ.

Chairman BAKER. If I may suggest, just as a summation for the

subcommittee’s purpose, we would very much appreciate specific

recommendations with regard to statutory modifications anyone

might think appropriate.

There appears to be some agreement, surprisingly, on the multiple-consolidator approach. I am sure there are variations on how

that is achieved. We would like to understand that more fully.

I think you can tell from the number of Members who participated and the duration of this hearing, which many would not have

expected to last quite this long, that there is considerable interest,

because we believe that the markets are dynamic, they are growing, and that there are significant new numbers of investors who

are now investing the $200 a month, perhaps, toward the first

home, the college education, or that retirement one day.

They are people who are brand new to this market, and, since

1995, the boom in online investors is nothing short of staggering.

There is great sensitivity, therefore, by the Members of Congress

to ensure that the system works efficiently and fairly.

We need to better understand how this process is working, because the basis on which these investment decisions are made is

information.

We recognize the value and timeliness of that information.

We certainly want to recognize that the exchanges have done an

extraordinary job with huge investment in providing this service.

But, we are bumping up against a changed economy that does

make relevant review of these proposals, I think, very timely.

To that end, Members may have additional questions they may

wish to submit for the record. We will leave the hearing record

open for an additional 30 days. Certainly, we appreciate any additional comments you would like to make, as well, for the record.

I appreciate your patience, your participation, and our hearing is

adjourned. Thank you.

[Whereupon, at 12:56 p.m., the hearing was adjourned.]

(55)

A P P E N D I X

March 14, 2001

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