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74–410 PS 2001

MARKET DATA: IMPLICATIONS TO INVESTORS

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

JULY 26, 2001

Printed for the use of the Committee on Financial Services

Serial No. 107–40

(

(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:

July 26, 2001 ..................................................................................................... 1

Appendix:

July 26, 2001 ..................................................................................................... 45

WITNESSES

THURSDAY, JULY 26, 2001

Bernard, Richard P., Executive Vice President and General Counsel, New

York Stock Exchange, Inc. ................................................................................... 11

Callcott, Hardy, Senior Vice President and General Counsel, Charles Schwab

& Co., Inc. ............................................................................................................. 4

Ketchum, Richard G., President, The Nasdaq Stock Market .............................. 12

Lackritz, Marc E., President, Securities Industry Association ............................ 8

Smith, Cameron, General Counsel, The Island ECN ........................................... 7

APPENDIX

Prepared statements:

Baker, Hon. Richard H. ................................................................................... 46

Oxley, Hon. Michael G. .................................................................................... 48

Kanjorski, Hon. Paul E. ................................................................................... 49

Bernard, Richard P. .......................................................................................... 73

Callcott, Hardy ................................................................................................. 50

Ketchum, Richard G. ........................................................................................ 82

Lackritz, Marc E. .............................................................................................. 68

Smith, Cameron ................................................................................................ 58

(1)

MARKET DATA: IMPLICATIONS TO INVESTORS

THURSDAY, JULY 26, 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 2 p.m., in room 2128,

Rayburn House Office Building, Hon. Richard H. Baker, [chairman

of the subcommittee], presiding.

Present: Chairman Baker; Representatives Shays, Oxley,

Biggert, Miller, Kanjorski, Ackerman, Bentsen, Sandlin, Sherman,

Inslee, Moore, Crowley, and Israel.

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

Markets Subcommittee to order. I am informed that Mr. Kanjorski

is on his way and will be here momentarily for his own opening

statement.

Today, the Congress faces the challenge of reviewing the national

market system to determine how securities laws may be amended

not only to reflect today’s technology, but also be flexible enough

to adapt to the changing market condition.

This is our second hearing on market data, the stock price information that is basically the lifeblood of our capital markets. In a

sense, we are beginning to weigh in on very difficult questions, but

one with very important implications. What is the metaphysical

status of market data? Where does it reside? Who owns it? How

can the system be improved so that all investors have equal access?

The 1975 amendments to the 1934 Act reflect the need for a system that would provide consolidated quotes so investors could easily match lowest offers with highest bids. While the plans established as a result of the amendments have provided a valuable

function, they do not operate, in my view, in a truly competitive environment. Moreover, recent technological advances and explosion

of the internet usage were not and could not have been contemplated in 1975.

In March we focused on how market data is collected, consolidated and distributed. We examined whether the fees collected by

the exchanges from users, investors, are being used solely to fund

the Government-mandated consolidating functions, or whether fees

were subsidizing other activities.

Today, we will discuss whether there should be additional legislation to explicitly establish a proprietary right over the market

database or to give special protection to the operators of the databases through new private causes of action.

2

The plans claim they already have a property right in the data

because they build and maintain the system and add value to the

information. Others, including the electronic communications networks and online trading systems, argue that the quotes from their

customers are what give the databases their value. These same

market participants claim that opening the market data system to

a competitive environment would allow them to provide investors

with better quality and depth of information and perhaps even at

lower cost.

In a time when we are considering the entire national market

system, we are faced with the question of whether Congress should

act to give further legal protections to the exchanges over market

data. Today, we will examine whether there is a need for such legislation and whether or not the cost and dissemination of market

data to investors and other participants is adequately served. More

importantly, we will ask whether legislation on this issue is appropriate when there is such a broad array of concerns with the underlying national market system itself.

I would note, beyond the prepared statement, that in reading all

of the testimony last evening, there is a clear bifurcation in opinion. From one perspective it is our data, and we not only want to

preserve and protect it, but we want an additional right of civil action against those who use it inappropriately. From the other perspective it is not yours, it belongs to me, and you should give it to

me for very little cost and perhaps create an environment in which

the generation of that data itself is put in jeopardy.

So this is no easy question to resolve. Clearly there is a need for

modification. The question is the appropriateness of those modifications and whether we bring about any disruptive consequences of

suggesting those alterations.

[The prepared statement of Hon. Richard H. Baker can be found

on page 46 in the appendix.]

With that, Mr. Bentsen, do you have an opening statement?

Mr. Israel, do you have an opening statement?

Mr. Israel.

Mr. ISRAEL. Thank you, Mr. Chairman. I am pleased to be here,

and thank you for convening this hearing, and I would like to welcome the witnesses.

Mr. Chairman, as you know, the securities markets have been

producing market data for two centuries. In my home State of New

York, the New York Stock Exchange provides an essential liquidity

source for the collection of information of millions of orders every

day and creates valuable, reliable and accurate market data that

is relied upon by investors worldwide. The markets invest billions

of dollars in state-of-the-art technology to ensure that the public receives real-time data on demand, and no one has to worry that that

data is not truthful or that its integrity has been compromised.

Now, some would suggest that the New York Stock Exchange

and the other security markets do nothing more than collect orders

and charge others to receive the data. I strongly disagree. I visited

with the New York Stock Exchange, I have seen their technology,

and I am convinced that the New York Stock Exchange provides

an efficient forum for price discovery that produces accurate and

valuable market information that is unparalleled worldwide.

3

It does concern me that as we move to a greater reliance on the

internet, enterprising hackers could make unauthorized uses of

market data and hurt investor confidence in market information.

So we have to ensure that any legislation that this subcommittee

chooses to consider protects the authorized use of data and provides a uniform Federal standard. Efforts that would deter those

who would pirate market data and attempt to damage the integrity

of the greatest capital markets in the world would be a welcome

tool.

I thank you, Mr. Chairman, for holding this hearing. I look forward to the testimony of our witnesses, and I yield back.

Chairman BAKER. Thank you, Mr. Israel.

Mr. Kanjorski.

Mr. KANJORSKI. Thank you, Mr. Chairman. And thank you for

the opportunity to comment on market data issues, and particularly the implication to investors and for market transparency of

granting ownership rights over stock quotes, before we hear our

witnesses today.

We last discussed this issue of market data at a hearing in

March. At that time, I noted that 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 data 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 an efficient price discovery

and the best execution of customers’ orders.

In our current system for distributing market data, millions of

investors worldwide have easy access to market data. The world,

however, has changed substantially since Congress enacted a law

governing market data in 1975, and we are therefore reexamining

these issues to determine whether we need to refine our approach

on such matters. For example, the Securities and Exchange Commission (SEC) has recently begun to examine these difficult issues

and other related and complicated questions through its Advisory

Committee on Market Data.

As you may also recall, at the end of our last hearing, Mr. Chairman, you and I wrote to the SEC inquiring about the activities of

its Advisory Committee on Market Data issues. In her response,

SEC Acting Chairman Unger noted that she expects the Advisory

Committee to issue its report no later than September 15. She also

expects this report to be quite helpful, not only to the Commission,

but to others interested in reviewing market data issues. Although

it is appropriate for us to begin to educate the Members of our subcommittee about this complex issue, I would hope that our subcommittee would wait to pursue any further action on market data

issues until we hear and fully digest the recommendations of the

Advisory Committee.

In closing, Mr. Chairman, I want each of our witnesses to know

that I continue to approach the issue of market data with an open

mind. The comments of our panelists about securities database

4

issues and market data ownership rights will therefore help me to

discern how we can maintain the efficiency, effectiveness and competitiveness of our Nation’s capital markets in the future.

I yield back.

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

page 49 in the appendix.]

Chairman BAKER. Thank you, Mr. Kanjorski.

Mr. Shays, would you have an opening comment?

Mr. SHAYS. Thank you, Mr. Chairman.

For disclosure, since Nasdaq is in my district, I disclose that it

is in Trumbull, Connecticut, but I intend to have an open mind, but

be very slanted toward Nasdaq.

Chairman BAKER. As your historic conduct has indicated. Thank

you, Mr. Shays.

Any other Member have an opening statement? If not, at this

time I would like to proceed to introduce our first witness, pleased

to have you here, the Senior Vice President and General Counsel

of Charles Schwab, Mr. Hardy Callcott. Welcome.

Mr. CALLCOTT. Good afternoon.

Chairman BAKER. And I am sorry for interrupting already. Everyone’s full testimony will be made part of the official record.

Please feel free to summarize as appropriate, Mr. Callcott, and you

will need to pull those mikes pretty close. They are not as sensitive

as you might think.

STATEMENT OF HARDY CALLCOTT, SENIOR VICE PRESIDENT

AND GENERAL COUNSEL, CHARLES SCHWAB AND COMPANY

Mr. CALLCOTT. Thank you. Thank you, Chairman Baker, Ranking Member Kanjorski and Members of the subcommittee. My

name is Hardy Callcott, and, as you say, I am senior vice president

and general counsel of Charles Schwab and Company. Schwab offers a full range of financial services to our more than 7.7 million

active customer accounts, helping our customers manage more than

$850 billion in assets. Thank you for inviting me to testify this

afternoon.

As many of you are aware, Schwab has at been at the forefront

of the debate on market data for several years. In 1999, our rulemaking petition to the SEC was a catalyst that helped bring this

issue to the forefront. We have participated in the SEC’s Advisory

Committee on Market Data, which the SEC formed last year after

its 1999 concept release on market data, which was, in turn, a response to our rulemaking petition.

We asked the SEC to review the market data system for one

major reason. Our clients and millions of individual investors that

make the U.S. capital markets the most vibrant in the world want

and deserve a system that uses cutting-edge technology to provide

the robust, innovative market data essential to success in today’s

volatile markets.

Over the past 2 years, we have come to recognize that market

data reform for the 21st century is absolutely essential for our markets, and that reform must be based on three basic principles: deregulation, competition and equal access. Today, individual investors are disadvantaged in several ways by the current Governmentgranted monopoly in market data.

5

First, the high cost of market data prevents brokerages like

Schwab from offering its customers the best possible product. It is

technologically feasible for Schwab to provide real-time streaming

quotes to all of our online customers so that, just like institutional

investors, they can watch the markets as they move. But providing

all currently-available streaming data to our customers who have

electronic access would cost in the neighborhood of $157 million a

year, some nine times what we currently pay for market data. As

a result, we can’t afford to offer streaming quotes to most of our

client base. With rapidly changing quotes in today’s market, static

market data places individual investors at a disadvantage compared to other market participants.

Second, the introduction of decimal pricing in our markets is

making the monopoly quotes irrelevant for all investors. Decimals

have lowered the bid-ask spread for stock, saving billions of dollars

for investors. The decimals have also decreased the depth of

quotations, the amount of stock available for purchase that the inside bid or ask, by some 60 to 80 percent. As a result, the basic

market data provided by the markets, the inside bid and ask, no

longer provides investors with enough information to make informed trading decisions.

No market currently provides a retail depth-of-book quote product. Nasdaq does provide a Level 2 quote product for an additional

fee, which provides the best quote offered by each market-maker in

a given security, but even Level 2 is not a true depth-of-book product, and the Consolidated Tape Association, (CTA), which processes

quotes for exchange-traded stocks, has no product even equivalent

to Nasdaq Level 2. As is always true when the Government grants

a monopoly, product innovation and technological development is

stifled.

Further, because of the increasing cost and decreasing relevance

of the monopoly quotes, internet portals such as Yahoo now provide

real-time quotes from ECNs in preference to the quotes produced

by the markets. Brokerages like Schwab are legally precluded from

providing these alternative quotes to clients without also having to

display the market data provided by the self regulatory organizations.

With that context, let me briefly address two important issues

today. First is our view of what not to do, and that relates to the

database protection legislation that has been proposed in the last

three Congresses. The second is our suggestion of what Congress

can do to make a market data system that best addresses the

needs of all investors.

For the past several years, the SROs have advocated database

protection legislation that would grant them a property right over

market data. But market information is a set of facts: bid prices,

ask prices, limit order prices, last sale prices. No one can own facts.

The Supreme Court’s unanimous 1991 decision in Feist Publications v. Rural Telephone Service Company held that facts, in that

case telephone numbers, cannot be owned, and we see no reason

why this set of facts should be any different. In the several years

that the markets have sought a property right in market data, they

have not been able to point to any real-world abuses which would

justify such a lucrative windfall.

6

Moreover, it is investors and brokerages who create these facts,

not the securities markets. Brokerages are required by law to provide these facts to the SROs without any compensation. Brokerages

are then required by law to buy this information back from these

Government-created monopolies and provide it to our clients.

Schwab is not advocating that brokerages be given property

rights in market data, but if we are legally required to provide the

information free of charge and then are legally required to purchase it back from the markets, in our view it would be grossly inequitable to grant those markets property rights in that information in preference to us. Moreover, such a property right would be

counter to Congress’ laudable goal of ensuring ready public availability of the information.

Let me now turn to the principles Schwab believes should form

the core of a reform plan. The solution is not to require more regulation of what should be displayed and how. Rather, it is to deregulate market data systems so that multiple vendors can compete to

provide the most innovative and cost-effective market data products. To promote competition, legislation should require the SROs

to make available the same raw data that brokerages and clients

are required to report to them. The SROs would then be required

to offer all of that data on the same terms to everyone; not just inside quotes, but also depth-of-book information. This would enable

brokerages and market data vendors to disseminate real-time market data independently in ways that best respond to investor

needs.

Second, all aspects of the market data system must have greater

transparency.

Third, under our proposal, regulatory oversight would be limited

to ensuring fair and nondiscriminatory access requirements are enforced so that no one is penalized because of how they use or distribute market data.

Finally, database protection legislation should not give the securities markets a property right over market data in preference to

brokerages who create the information.

Thank you very much for the opportunity to testify this afternoon, and I look forward to answering your questions.

[The prepared statement of Hardy Callcott can be found on page

50 in the appendix.]

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

Before I recognize our next witness, we have been joined by the

Chairman of the full committee, Congressman Oxley. I would like

to recognize him at this time if he has an opening statement.

Mr. OXLEY. Thank you, Mr. Chairman, and I will submit my full

opening statement for the record, but simply to welcome our witnesses on a series of hearings on market data. And as the last

hearing pointed out, clearly there is a crying need for reform and

modernization through the structure governing market data dissemination, but obviously a lot of different views on how we should

do that. Ultimately our subcommittee will be working on making

certain that whatever ultimately the outcome is, it is based on

transparency and giving the average investor and the market players adequate information that they can use and at a reasonable

cost.

7

And so I want to commend you, Mr. Chairman, for what you

have been able to accomplish in setting up an excellent panel that

will focus in on all sides of this very difficult issue, but one that

we simply have to address, and obviously the sooner, the better.

And with that, let me yield back, and I look forward to the rest

of the testimony.

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

page 48 in the appendix.]

Chairman BAKER. Thank you, Mr. Chairman, and as always I

certainly appreciate your interest in these issues and participation

in the subcommittee’s work.

Our next witness is the General Counsel for The Island ECN,

Mr. Cameron Smith. Welcome, Mr. Smith.

STATEMENT OF CAMERON SMITH, GENERAL COUNSEL, THE

ISLAND ECN

Mr. SMITH. Good afternoon, Mr. Chairman, Members of the subcommittee. I commend the Chairman and the Members of the subcommittee for holding these hearings concerning the integral part

of our securities markets, market data.

Island has played a leading role in providing investors with unprecedented access to market information through the Island Book

Viewer, a free real-time view of all open buy and sell orders on Island. It is available to all investors on our website. For this reason

Island greatly appreciates the opportunity to share its views on

market data.

In brief, it would be a mistake to grant exclusive proprietary

ownership rights in market data before reviewing the outdated

policies that create regulatory monopolies for the producers of market data. Therefore, we should embrace those reforms that promote

competition and innovation.

I am Cameron Smith. I am the general counsel of Island ECN.

Island is an automated trading system for equities securities. We

function as a pure auction market directly matching buy and sell

orders. Island is a network of approximately 700 broker-dealers

represent ing a diverse array of market participants.

On an average day, Island will trade over 320 million shares, approximately 16 percent of Nasdaq’s transaction volume. Through

June of this year, Island has traded over 44 billion shares worth

almost $1.5 trillion.

Since Island introduced the Book Viewer in 1998, hundreds of

thousands of investors have visited the Island website to get the

latest market information. In light of the popularity of the Island

Book Viewer, the New York Stock Exchange has recently announced OpenBook, and Nasdaq plans to introduce the Super-Montage. Both initiatives are designed to provide investors and market

participants with a broader and deeper level of market data.

It was the very success of Island’s Book Viewer and its competitive effect on the market that drove the subsequent market reforms. Consequently, we risk undermining the very process of competition and innovation if each market were granted an exclusive

proprietary right in its market data.

Let’s briefly review the extensive regulations currently governing

market data. By regulation, all broker-dealers are required to beVerDate 11-MAY-2000 07:59 Feb 14, 2002 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 74410.TXT HBANK1 PsN: HBANK1
8

come members of self-regulatory organizations such as the National

Association of Securities Dealers or the New York Stock Exchange.

By regulation self-regulatory organization members are required to

report transactions exclusively to the applicable SRO. By regulation this information is required to be consolidated. And by regulation, any party disseminating market data must only disseminate

consolidated market data from every SRO.

As you can see, there are no competitive free market forces at

work with respect to market data. The price is determined by

SROs, subject to SEC approval. The SEC, therefore, is entrusted

with a difficult task of regulating market data fees.

One of the key regulatory requirements underpinning the current

regulatory monopoly enjoyed by SROs is what is known as the vendor display rule. The decision as to whether to abrogate the vendor

display rule is the key decision in creating a truly competitive market for data. In its simplest terms, the vendor display rule requires

every vendor market participant to disseminate only consolidated

quotation information. Thus, the issues related to market data

rates that Charles Schwab, among others, has long raised all emanate from the existence of the vendor display rule. Ultimately the

decision concerning whether to continue the vendor display rule

should only be made after careful consideration of the cost and benefits.

Let me briefly identify three of the clear costs to the rule. First,

the current regulatory structure confers monopoly power on the

SROs that could only be checked by Government regulation.

Second, a vendor display rule subsidizes smaller markets, thus

distorting competition between markets.

And third, the vendor display rule harms innovation by either directly prohibiting new data services or making such new data services cost-prohibitive to provide to investors.

In conclusion, Mr. Chairman, given the comprehensive regulatory

structure already governing market data, it is not an appropriate

time to create additional proprietary rights in market data. Instead, we must first reexamine the current regulatory structure,

particularly the vendor display rule.

I look forward to working with you and your colleagues in introducing competition and innovation to market data and thereby

strengthening our Nation’s equity markets. Thank you.

[The prepared statement of Cameron Smith can be found on page

58 in the appendix.]

Chairman BAKER. Thank you, Mr. Smith.

Our next witness is no stranger to the subcommittee, President

of the Securities Industry Association, Mr. Marc Lackritz. Welcome,

Mr. Lackritz.

STATEMENT OF MARC E. LACKRITZ, PRESIDENT, SECURITIES

INDUSTRY ASSOCIATION

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

here, Chairman Oxley, Chairman Baker, Mr. Kanjorski and distinguished Members of the subcommittee. The Securities Industry Association, (SIA), appreciates the opportunity to testify today on the

implication of granting ownership rights in stock market information.

9

SIA member-firms, regulators, legislators and other market participants have been reconsidering the current system of providing

securities market data now for several years. We have examined

the appropriate avenues to collect and consolidate the information,

the fees charged for this information, and the role of revenue derived from those fees. The issue is complex, and the impact on market structure will be quite significant.

As the database industry in the United States continues to grow,

efforts are now underway to grant new protections to those who

collect and compile information, including securities information

processors. We believe that legislation that would create new property rights in stock market information would seriously undermine

the current effort to reform the process of consolidating and disseminating stock market information. Moreover, it would be contrary to the goals that Congress set forth in the Securities Act

amendments of 1975. We believe that adequate protections currently exist to address information theft, and to legislate in this

area would disrupt the regulatory and contractual regimes that

make real-time market information so widely available today.

Securities markets are synonymous with information. Market information, that is the quotes at which people are willing to buy and

sell stock and the price of the last sale of the stock, is truly the

lifeblood of the market. The widespread availability of this information, also known as transparency, ensures that buyers of securities

do not pay more than the lowest price at which someone is willing

to sell, or sellers do not sell for less than the highest price at which

someone is willing to buy.

Transparency of market information has also given individual investors unparalleled access to much of the same information that

previously was available only to market professionals. Unrestricted

easy access to this information is what has made the U.S. capital

markets the envy of the world. Our markets are deep, liquid and

fair. Transparency is one of the reasons.

The advent of the information age has raised concerns about

database piracy and the need to protect those who compile information in online databases. Copyright law will generally prevent the

wholesale copying of an entire database as long as there is at least

a minimal amount of original expression, but it does not protect the

extraction and reuse of individual facts.

Securities market information, that is, the best bid and offer and

last sale reports, is no more than a collection of facts derived from

various market participants. Database publishers, including securities information processors, also rely on contracts, common law and

technological measures to prevent the misappropriation and misuse

of data that the publishers compile.

Such measures have always been sufficient, at least until recent

actions in Europe created the possibility of powerful new rights for

database publishers. We must be careful not to let international

initiatives trigger the dismantling of a system that has grown up

over the last 30 years in the U.S. securities industry. Any legislation that would create an intellectual property right in securities

market data would have huge implications on the system for collecting and disseminating market information that Congress so

carefully devised in the 1975 Act amendments.

10

In addition, conferring new property rights could impede the flow

of real-time market information, because as single-source monopolies, the markets could charge excessive fees and restrict the downstream use of that information. Because they are SROs subject to

SEC oversight, this may not seem problematic at this point in time,

but these markets may soon be operating as for-profit enterprises

that will be obligated to shareholders to maximize their earnings.

Under SEC rules broker-dealers are required to submit last sale

and best bid and offer information to the markets securities information processors. Vendors in turn receive and distribute market

information from the processor pursuant to various contract and licensing arrangements. Although it is important to protect the markets’ joint investment in data technology and infrastructure against

persons who would take market information without paying for it,

we do not believe that markets are without protection under the

current structure.

Our industry strongly supports broad dissemination of stock market information. Granting new property rights in market information through database protection legislation, no matter how well-intentioned, will vest control of market information into the hands of

single-source monopolies in the securities industry, and that would

be the antithesis of broad access to market information that Congress intended in enacting the 1975 Act amendments.

With new proprietary rights in the information, the only constraints on pricing would be the statutory standard that requires

fees to be fair, reasonable and not discriminatory. What is considered fair and reasonable by an exchange might be very different

than what is considered fair and reasonable by a market participant that conducts business off of the exchange. If costs should

prove to be excessive, the result is likely to be less information

available to investors. Legislation that would restrict such downstream use of market information would cripple this industry and

impede, rather than enhance, investors’ access to information.

Bids, offers and last sale prices are nothing more than facts generated by investors. Alone they have no value, but when they are

consolidated into a single stream of information, they tell investors

what the market for a particular security is at a given point in

time. The value of this information is unquestioned. It generates

hundreds of millions of dollars each year.

Today, a combination of regulation, copyright, contract and common law ensures that information is widely accessible to all investors, and that compilers of information are adequately compensated

for their efforts. New property rights will unnecessarily upset this

careful balance.

Thank you, Mr. Chairman.

[The prepared statement of Marc E. Lackritz can be found on

page 68 in the appendix.]

Chairman BAKER. Thank you, Mr. Lackritz.

Our next witness is the Executive Vice President and General

Counsel for the New York Stock Exchange (NYSE), Mr. Richard

Bernard. Welcome, Mr. Bernard.

11

STATEMENT OF RICHARD P. BERNARD, EXECUTIVE VICE

PRESIDENT AND GENERAL COUNSEL, NEW YORK STOCK EXCHANGE

Mr. BERNARD. Thank you, Chairman Baker and Mr. Kanjorski

and Members of the subcommittee. I am glad to be here on behalf

of our Chairman Dick Grasso and have the opportunity to testify

about protecting market data, and it is with particular pleasure I

note that this is our 134th year of electronically disseminating

market data, the ticker having been invented and used since 1867.

It is the 26th year since your predecessors gave jurisdiction over

these matters to the SEC, and as a personal note, it is 22 years

since I wrote my first memo on proprietary rights in market data.

So this is a special opportunity for me.

To the extent I have time, I will touch on three themes briefly.

First, contrary to what some of my colleagues have suggested, we

don’t merely collect data, we create it.

Second, the law, as Marc has indicated, already recognizes proprietary rights, not only the common law such as State misappropriation law, but also the 1934 Act itself.

And thirdly, lest we forget, those same members of Mr. Lackritz’s

group are also members of the New York Stock Exchange, and

they, through our board of directors, are the ones who decide how

much market data fees ought to be and what percentage of our

costs ought to be covered by market data fees. And so the very

structure of the New York Stock Exchange is where the subcommittee should be looking to satisfy itself that what is being

done with market data fees is fair and reasonable and fairly allocates our costs.

We exist to provide market data. We provide a mechanism to discover prices, and to echo a point that Congressman Israel made in

his opening remarks, the orders that come from investors and the

proprietary trading interests of broker-dealers, these are the inputs

to our process, but the output is the trade and the last sale price,

and that is what happens at the New York Stock Exchange. That

is why I characterize what we do as creating data and not simply

collecting data.

Second, in this regard I want to point out that current law, as

I mentioned, protects the stock exchange, as Marc has mentioned.

You can look to copyright law. You can look to the State common

law on misappropriation. You can look to contract law, and you

look to Section 11A itself, which very explicitly recognizes that the

exchanges have the rights, or, I should say, confirms, since we have

been doing it for some 100 years before Congress got around to

speaking on the topic, but confirms a right that had been recognized by the Supreme Court of the exchanges to use market data

as a way of fairly allocating their costs among their members.

Mr. Chairman, you will recall from last March’s hearing that

many people tried to take the matters that Mr. Kanjorski mentioned of the Seligman Committee and keep trying to boil it down

to a matter of who owns the data. We think that this debate is

somewhat misplaced, and it is not just because the Supreme Court

settled these matters a century ago, but it is because the real issue

is if you are going to change the system, you have to think about

how you do it in a way that is revenue-neutral to the stock exVerDate 11-MAY-2000 07:59 Feb 14, 2002 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 74410.TXT HBANK1 PsN: HBANK1
12

change and the other markets and doesn’t create winners and losers among the broker-dealers and others who bear the market data

fees. And for all the rhetoric that has accompanied this topic, both

here, in previous hearings, and the hearings that your predecessor

subcommittees, and before the Seligman Committee and at the

SEC, no one has come forward with a better answer to the questions that the exchanges face as we try to fairly allocate our costs

for creating this market data in the first place.

Let me close by simply reminding the subcommittee that we support legislation that will Federalize and codify the existing common

law around misappropriation, although we are not a prime mover

for it and were not part of the original discussions in the 104th

Congress. But we think it will be a useful thing, in particular in

reference to the Feist case, but more importantly, if a Federal law

made clear the rights beyond what the statute does today, of the

exchange to use market data as we do, then it would be simply confirming the process of our constituents, our listed companies, our

broker-dealers and those who represent the public in using market

data fees as one of the tools which they have to equally allocate the

costs of creating this extraordinary database.

Thank you very much.

[The prepared statement of Richard P. Bernard can be found on

page 73 in the appendix.]

Chairman BAKER. Thank you, Mr. Bernard.

Our final witness is the President of the Nasdaq stock market,

welcome to you, Mr. Richard Ketchum.

STATEMENT OF RICHARD G. KETCHUM, PRESIDENT, THE

NASDAQ STOCK MARKET

Mr. KETCHUM. Thank you. Mr. Chairman, Members of the subcommittee, I am Richard Ketchum, President of the Nasdaq stock

market. I want to first commend you on holding this hearing on extremely timely issues, and I welcome very much the opportunity to

continue our dialogue with this subcommittee on market data

issues.

Under the thoughtful leadership of Congress and the SEC, the

U.S. capital markets are the envy of the world. In particular it is

under this leadership that markets like Nasdaq have been able to

provide American investors with wide access to the highest quality,

most current and lowest-cost market data of any major nation.

Initially, I would like to address the questions you raised in your

letter of invitation. Within that context, though, I don’t want there

to be any misunderstanding. I strongly agree with what Mr.

Lackritz said that in effect and in large part the environment today

works well with respect to the regulation of market information

data. As I indicated, that data is widely available; available not

only to market participants, but public investors as well at costs

substantially lower than available in the rest of the world. In addition, our rights to that data and other markets’ rights to that data

are properly protected, and we are quite comfortable with those

protections that exist today.

And finally, and somewhat contrary to what may have been at

least implicitly suggested before, entities that are not markets are

not restricted from making available their order information, as

13

long as they do so consistent with SEC rules and requirements that

look to both encouraging competition among markets and look to

ensuring that investors have knowledge of what the best prices in

the markets are.

Within that context and within the recognition that indeed the

environment today does work well as the internet expansion continues and other communication modes develop, some additional

legislation to protect databases may be necessary. We believe that

a database of market data, like any other valuable database, would

benefit from greater protection mechanisms. The value of that market data is in its integrity. When unauthorized parties can misappropriate it and perhaps change it, that integrity is jeopardized

to the detriment of investors here and worldwide, and for that reason we would be pleased to continue to work with the subcommittee as we have in the past in your efforts to evaluate possible legislative action.

In this regard I would like to highlight several reasons why

Nasdaq, as with any exchange or self-regulatory organization, has

a right, first, to protect its market data and, second, to be able to

establish prices for its market data consistent with basic free market principles.

First, Nasdaq’s market data is created within our marketplace

and is shaped by our regulatory framework and internal quality

controls. It is in this way that Nasdaq adds layer on layer of value

to our market data. In particular Nasdaq has created a market

structure designed to promote liquidity and transparency. Our

market is supported by quality market participants, such as on the

panel today, that are subject to stringent marketplace rules. We

have also developed and maintained sophisticated automated market surveillance tools to monitor trading and issuer activity.

The investments made by Nasdaq in our market, regulatory and

technological infrastructure facilitate universal access to quality

market data that investors can trust.

Second, under the contracts we have established with our market

data subscribers, investors enjoy broad access to our quality market data at fair and reasonable prices. In 1975, Congress made certain that our national market system must be premised on investors having access to consolidated market data. Nasdaq has long

recognized the importance of market data to investors’ decisionmaking process and has sought to disseminate our market data to

the broadest population of industry professionals and investors.

In fact, Nasdaq’s market data today is distributed to over

550,000 industry professionals and millions of investors, and investors have enjoyed a 75 percent decrease in our market data fees

over the past 2 years. In fact, a full month of Nasdaq market data

costs only $1, less than a single ATM transaction.

Third, our Nation’s markets operate in a highly competitive environment which acts as a natural regulator of market data fees. Exchanges and other self-regulatory organizations vigorously compete

for issuers’ listings, market participants and trading volume, which

culminates in the ultimate value of particular markets’ quote and

trade data.

Fourth, in this competitive environment Nasdaq understands the

need to protect the flow of its market data to contracted parties.

14

However, the risk of unauthorized use of our market data by others

is an issue that requires some attention. If markets like Nasdaq

are to continue to seek innovative ways to ensure unparalleled

market integrity through greater market transparency of highquality data to investors, our ability to limit the flow of this valuable market data to parties who have contracted for its use must

be apparent and expansive relative to existing rights.

In summary, it is important to ensure that the core policy goals

established by Congress in 1975, including broad public access to

consolidated market data, the maintenance of stable and orderly

markets, and the ability to promote competition, are preserved and

encouraged to the greatest extent possible. Our legislative and regulatory framework, such as exists today, that encourages competition and innovation among markets will result in a continued development of quality market data that investors can trust.

Nasdaq stands ready to assist the subcommittee as it continues

to consider this very important issue, and I thank you again for allowing me to participate in this hearing.

[The prepared statement of Richard G. Ketchum can be found on

page 82 in the appendix.]

Chairman BAKER. Thank you, Mr. Ketchum.

I do very much appreciate all the witnesses’ participation here

today, and your openness to discussion of this topic, which is a very

difficult one.

Mr. Bernard, in your written statement, you make reference on

page 7 to the importance of market data, and actually make the

comment that it is important to preserve the revenue stream for

the market that is generated by the fees associated with the sale

of that data. And, Mr. Ketchum, I think I recall reading something

where Nasdaq’s revenue stream, approximately a quarter to a third

of that comes from market data fees. Is that still a broad statement

of accuracy?

Mr. KETCHUM. It is broadly accurate, though each year is a little

different, broadly accurate that somewhat less than a quarter of

our revenue comes from that.

Chairman BAKER. All I wanted to establish is the significance of

this to both markets as an element of your stability so I understand the sensitivity of this discussion.

Second, the basis on which you feel the current revenue stream

is appropriate is still difficult. You will recall from the hearing in

March, I raised the issue, how do we know about appropriateness

if we can’t allocate the costs associated with the function? The response to this is that the breadth and depth of the data we collect

and the assimilation and the value added are all very difficult to

segregate. Therefore, we may not have the ability to generate a

fixed dollar cost per transaction, for example.

In looking at the provisions of Section 11A, which you made reference to, Mr. Bernard, it does allocate the responsibility to the

SEC to make a determination as to whether the charges are fair

and reasonable, and I have asked staff basically to look at the elements that are reviewed, and I got back fair and reasonable. It

doesn’t seem to be real clear.

On the other hand, both have taken some credit in recent years

for significant fee reductions that, depending on which type of inVerDate 11-MAY-2000 07:59 Feb 14, 2002 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 74410.TXT HBANK1 PsN: HBANK1
15

vestor we are examining, reductions could be from significant to

very significant. It again is a troublesome point, and that is, if we

are able to reduce fees and acknowledge that that fee reduction has

come about through efficiencies, how does one measure the appropriate level of fees if you can’t tell me what the cost basis for the

fee is to begin with other than perhaps pressures from the consumer side of the equation are saying this is too much? Which

then, I think, gets to Mr. Kanjorski’s issue of what is it you do to

the data that is the value-added aspect of the process?

And I am going on a bit, because we have got a vote, and I am

going to give you a chance to respond at length during the vote,

but, for example, Mr. Kanjorski and I enter into a transaction, the

broker-dealer executes, the trade is done, it is a $20-per-share activity, you record it. I assume your response would be, yes, that is

correct, and we just report the $30 trade, but we do it across market breadth so we have the depth and assure quality of that information. So therein is the value; not one transaction, but perhaps

thousands. And you would claim that the value added is the quantity and quality, verification of that activity is what is representing

the value of that transaction.

In looking at the report language of the 1975 Act, which I had

here somewhere, it went on to say that we must be sure that the

central processor is not under control or domination of any particular market center. Any exclusive processor is, in effect, a public

utility, and thus, it must function in a manner which is absolutely

neutral with respect to all market centers, all market-makers and

all private firms.

The point here is that the function, as I am understanding it, it

is a collection of data, a distribution of data, with an obligation to

do so for the national economic good as a public utility, and the argument that the fees are not related to the cost associated with

this transaction is the difficult point for me. I am at a loss as to

how we establish the fairness of the transactional cost associated

with your process, because you are, in effect, aggregating a utility

as a utility, a publicly reported value of a transaction.

Lastly, with regard to the competitive action aspect, and I am restating Mr. Smith’s testimony on these points, by regulation every

broker dealer who wants to trade has to be a member of some SRO,

let’s just say Nasdaq. If I am a Nasdaq member, I have got to report exclusively to you on my activities. Then you are required to

consolidate and make that available to investors, and that anybody

we catch disseminating this inappropriately is subject to some SEC

enforcement action. That is a different model of free market competition. I will admit that the problem is that we don’t have a

counterparty ability for someone else to do this, because by Government regulation, the responsibility is created and the authority to

govern solely granted to the particular SRO.

So in a broad context we have a fee system established without

an understanding of the cost basis which has been reduced over the

last few years that is required by a law to preserve the economic

function of our investment community.

Help me out here. Give me a picture that makes me understand

why significant modifications—and let me answer Mr. Kanjorski’s

opening statement, I have no intent to do anything anytime soon.

16

We are certainly going to wait on the Seligman Committee before

I would recommend any action. And this is not with the idea that

tomorrow morning we are going to wake up with a new national

market system, but I certainly have concerns in light of the explanations given about how these functions are conducted.

Mr. Bernard, why don’t you take a swipe at it.

Mr. BERNARD. I think I tracked about five questions within your

comments, and let me try to answer them in turn.

First, just as a point of reference, about 17 percent of our revenue is from market data, and as you will remember from Mr.

Lackritz’s testimony, that has been consistent for about 70 years.

That is as far back as we can trace it.

When you get to the question of fair and reasonable, it is important to remember that Section 11A is not the only provision in the

1934 Act. If you go to Section 6, under which we are registered as

an exchange, and under which Rick will shortly be registered, you

will see that we are obliged to have constituent boards, with fair

representation of everybody, not just the broker-dealers, but also

the listed companies and the public. And so if you look at the

scheme as a whole, the SEC is just a fail-safe mechanism. The real

defense to ‘‘fairness and reasonableness’’ lies in having the very

people who pay the fees decide what the fees shall be. The SEC is

a fail-safe. The focus should be on the board of directors, and you

will see in recent SEC actions over the last 10 years that the SEC

has intervened with the Nasdaq and with the Philadelphia Stock

Exchange to make sure that those boards of directors really do do

a good job of representing all the constituencies.

Second, to characterize us as being in the business of collecting

data is not accurate. We don’t have any conventional vendors on

the panel today, but such companies, like ILX or Bloomberg, those

people are in the business of collecting data. We are in the business

of generating data. Two people don’t just show up and do a trade

and tell us. Rather, we provide a facility for price discovery, investors send orders through systems to the New York Stock Exchange

or call them into brokers on our floor, we provide a facility for that.

We provide a facility for arraying those interests. We provide a facility for figuring out which of those interests by itself are aggregated with others as the best quotes, and we provide a facility for

actually making that execution take place. So we are far more than

a mere data collection operation.

And in that lies the answer to your third question regarding

whether we are just charging for the quality and quantity. First of

all, we are not charging for anything. What we are doing is allocating our costs, as our members and our listed companies and investors direct us to, into various ‘‘buckets,’’ i.e., listing fees, transaction fees, market data fees and other fees. They have chosen in

their wisdom to put about 17 percent of our costs into market data

fees.

No one is trying to decide that listed company fees are collected

to only pay for services provided to listed companies. What we are

talking about is one big machine, one big factory, the NYSE, to use

an earlier analogy, and how do you finance that thing, and what

are the vehicles for financing it.

17

To your fourth question regarding the 1975 language, not to prejudge the work of the Seligman Committee, but I should tell you

that consistent with the NYSE’s position for more than a year-anda-half now, the Seligman Committee does seem poised to recommend the New York Stock Exchange and the Nasdaq and the

other exchanges withdraw from the Consolidated Tape Association

and the other consortia. That language that you are talking about

was very specifically related to anticipating that these consortia

would be created, and they were. Now they are about to be dissolved, and so this issue of exclusive authority to process evaporates if the Seligman Committee makes the recommendations and

the SEC supports them as they go forward.

And I think I will yield to Mr. Ketchum, if I might, on the last

question having to do with competition in membership.

Mr. KETCHUM. Thank you, Mr. Chairman, and I would agree

with everything that Mr. Bernard has said. I will just add two additional points and certainly get to your point with respect to the

membership question.

My first point is to reiterate what he has said, the level of SEC

oversight with respect to reasonable fees. The Commission does

look at and does recognize that both the membership participation

and investor participation in the board has a governing effect on

fees as well as it looks very closely itself to ensure that we are reacting to an expansion in the numbers of investors and numbers

of participants taking the fee and the growth in those fees. So it

is not an accident. It is not an accident from the standpoint of competition from the desire of our marketplace to increase the dissemination of public information, because increasing the dissemination

of public information increases the volume in our market, increases

the desires of investors to trade. The Commission looks very, very

closely at those issues.

The last piece I will just mention as you go is that while it is

true a broker-dealer must be a member of an exchange and must

be a member of the NASD, they are not required to be a Nasdaq

market-maker or required to be a dealer or participant in any particular market. They can choose to bring their orders or participate

as a dealer in any market that they choose, and with that have the

ability and indeed in many cases have the ability to share in transaction fees as those markets compete with each other.

Chairman BAKER. If I may, Mr. Ketchum, we will return to this.

We won’t cut off any discussion. I am told we have about 3 or 4

minutes left on the vote under consideration. There is a subsequent

5-minute vote. Depending on the outcomes, could be a third. So at

best expectation the most we will be gone is about 15 minutes, and

we will recess momentarily. Thank you.

[Recess.]

Chairman BAKER. Mr. Ketchum, I curtailed your remarks at the

end of the last question if you wanted to respond for us.

Mr. KETCHUM. Mr. Chairman, I think you gave me the opportunity to finish my response, and I guess the only thing I would

add from what I said, just on the particular point you raised is to

emphasize again the choice that brokers have between other markets, the fact that those markets do compete very aggressively to

have them choose, and the one point I did not indicate; that the

18

SEC has spent a great deal of time looking at the policy issues involved of brokers that wish to operate free from the marketplace,

including the right way for them to do that is to register as an exchange. And in fact Island, represented at this table, has begun the

process of doing exactly that.

Chairman BAKER. I read through a Nasdaq subscription agreement, and I am not a subscriber, just for the sake of saying I had

done it.

Mr. KETCHUM. I admire you for merely taking up the—— Chairman BAKER. You can tell I am not well. Section 7 of that

agreement has an interesting provision, and I wanted you to explain it to me, because I understand this is the agreement that

would be used for a retail agreement, is that not only do you make

records available—and that is understandable—upon reasonable

notice, but ‘‘subscribers shall make its premise available for review

of said records and for physical inspection of vendor services.’’ Does

this mean in a technical sense that if I sign the agreement and my

computer at home is the location for distribution of the data, do

you have the right to examine that physical location?

Mr. KETCHUM. No. That provision is basically aimed at professional participants in the marketplace. It does not apply to a nonprofessional agreement and to an individual investor from that

standpoint, as I understand it, Mr. Chairman.

Chairman BAKER. Oh, sure. Well, have your folks look at it, because I went back and read it a couple of times to make sure that

I didn’t want to bring it up inappropriately, but I didn’t find any

qualifying conditions around it, and if it is something you want to

get back to me on later, that is fine.

Mr. KETCHUM. Mr. Chairman, it has just been added to the fact

that it can be read as client and nonprofessionals, and I think it

is a good point. In fact, we are in the process of looking at it and

making sure that if—we have never invaded the premise of an individual investor with respect to—— Chairman BAKER. The market consequences of that headline

would not be favorable, but, you know, examine it, get back to me,

and it is something that I found—it is a basis for saying we need

to be looking at the whole subject matter.

We have been joined by Chairman Oxley, Mr. Kanjorski has just

returned. And Mr. Kanjorski has waived his right at the moment.

Mr. Chairman, if you would like to proceed.

Mr. OXLEY. Thank you, Mr. Chairman, and I appreciate the gentleman from Pennsylvania’s courtesy. Let me ask Mr. Callcott. You

mentioned the Seligman Advisory Committee during your testimony. If the Seligman Committee were to recommend a competing

consolidator model, what would be your position? Does that really

provide the kind of competition we are looking for, or do we need

to look at other avenues?

Mr. CALLCOTT. I think a lot of the participants in the Seligman

Committee have been advocating a competing consolidator model,

including us. It depends what that model consists of. For a competing consolidator model to work, as Mr. Smith indicated, in our

view, you have to eliminate the display rule, because otherwise the

requirement under the display rule is that you display the quotes

from every market. And so even if you have competing

19

consolidators, every market has the right to charge monopoly rents.

But we think a competing consolidator model, as we have outlined

in our testimony, where every market has to sell information on

the same terms to every customer does create the possibility of actual price competition. That would bring down the prices for market data, and, in our view, improve the quality and innovation in

market data products.

Mr. OXLEY. Mr. Smith, do you agree with that?

Mr. SMITH. Certainly I do. I want to make clear that we certainly

would not be opposed to a market owning its market data, but in

order to get to that ultimate goal, we do need to reexamine the current regulatory structure. And as Mr. Callcott said, the vendor display rule. And I was struck by something Mr. Bernard said earlier

about how the board sets the prices for the market data. The board

meets and they, in consultation with their members and other constituencies, decide the price for the market data. That struck me

as not a very market-oriented approach to deciding a price. To me,

a price is determined by a free market, where a buyer meets a seller, instead of having it be set. If we could all determine prices like

that, that gives—to the extent that, for instance, Nasdaq has capacity issues or something, I suppose we could have this subcommittee to meet and decide the closing prices for the stocks each

day, because that would be certainly much more convenient than

having the market forces decide the closing prices.

Mr. OXLEY. Mr. Smith, while you are on, let me ask you, Mr.

Ketchum observed in his testimony that competition in the marketplace acts as a natural regulator of market data fees. Do you agree

with that perception?

Mr. SMITH. Yes. It is certainly their duty to ensure that all fees

are fair and reasonable. Clearly, it is a very difficult position for

the commission, but it is a role that they do play.

Mr. OXLEY. And Mr. Callcott, what do you think about that?

Mr. CALLCOTT. Well, there is active competition right now between the markets for listing. There is no question about that for

listed companies, but as we set forth in our testimony, right now

each of the major markets, the exchanges, Nasdaq and options, has

a monopoly in the market data area. And so there is not effective

competition in the market data area, and all the competition in the

world on the listing side is not going to create competition on the

market data side.

If I could expand on that, I very much agree with what Chairman Baker said earlier, that as the exchanges are going to for-profit status, this idea of cross-subsidization, that you have a monopoly

in one area that cross-subsidizes other areas, becomes even more

problematic. I mean, their boards are going to have a fiduciary

duty to their shareholders—and we are a shareholder in Nasdaq—

to maximize their profits, and that is just an inherent conflict for

us with the idea of having low priced, widely available market data

as the 1975 Act amendments contemplate.

Mr. OXLEY. I will start with Mr. Bernard and respond to Mr.

Callcott’s last statement.

Mr. BERNARD. Well, first, for the record, the New York Stock Exchange has no plans to demutualize. So its members will continue

to run the exchange in order to minimize their costs while getting

20

the best services possible, deciding how much of those costs ought

to be recovered by market data fees. The structure is like a condominium or the New York City cooperative building in which I live,

or a golf club. So, at least in the context of a mutualized institution

like the New York Stock Exchange, I don’t understand that issue.

Mr. OXLEY. Mr. Ketchum.

Mr. KETCHUM. Thank you, Chairman Oxley.

I think the point we meant in our testimony with respect to competition, why we do think it is quite effective, as Hardy correctly

indicated, there is aggressive competition between markets, both

for listings and also for market share. Beyond that, there are efforts by markets in as many ways as possible to increase the

amount of trading that occurs on their marketplaces, and overall

in the United States. Market competition—that is a natural competitive regulator with respect to price and market information.

It is our desire and always a balance to both be able to gain sufficient return with respect to market information to support, not

cross-subsidize, but to support the things that make that market

information valuable. The running of the technology, the maintenance of the network that allows market makers and ECNs to collect information and to compete and the regulatory surveillance

that ensures fair and orderly markets and the accuracy of that information.

But within that balance on the other side is the need to have the

prices sufficiently low enough that as Mr. Lackritz said before, that

in the United States, we have the widest most broadest dissemination of market information in the world, and that is equally critical

to our mission if we are going to succeed as a market.

Mr. OXLEY. If I could have one more question, Mr. Chairman.

And as the Chairman pointed out, you have had a lowering of

costs, and that has been rather significant in some areas. What

drove that cost lower, and if there is no competition—or not adequate competition, then why would those costs be lower?

Mr. KETCHUM. Well, I guess part of the answer to that is that

there is adequate competition, in our view. Those costs were driven

lower, and indeed the initial decisions, both with respect to Nasdaq

and its securities and with regard to listed securities where we participate in a joint plan, resulted basically from the initial decision

to have separate pricing for when data was disseminated to individual investors or nonprofessionals in the marketplace. That was

because of our desire to expand the availability of that information,

a continuing desire to expand that information, continuing belief

that the lower the price, the more focus on that information, particularly with the revolution as a result of the internet and online

investing that would lead us and allow us to benefit in two ways:

One, if a price is low enough, more investors will take it; second,

if more investors take it, more investors see that information. They

will be more interested in trading and have a higher degree of

trust and confidence in the marketplace, which will encourage their

trading as well, and that is how we gain our primary means of

being able to operate and profit as a marketplace.

Mr. OXLEY. Well, that turned out to be a softball for you, Mr.

Ketchum. Let me just finish with asking Mr. Callcott and Mr.

Smith essentially the same question. If, indeed, those prices have

21

gone down, wouldn’t that indicate that competition is truly working

in the market data area?

Mr. CALLCOTT. I think the prices have come down per individual.

The market’s revenues for market data have been growing at double digit rates because of the increase of individuals who are coming online and are paying prices for quotes that they never paid before. I would say that the market’s prices have come down precisely

because in the last 2 to 3 years, the SEC and the Congress has

been paying attention to this issue and putting pressure on the

markets, and as a result of that, monopolies respond to their regulators, not to market price.

But the fact is, their revenues have been growing at 18 to 20 percent annual rates for the last half-dozen years.

Mr. OXLEY. But, there haven’t been any changes in the regulations, nor have there been any changes in the statute.

Mr. CALLCOTT. Right. The change has been that once the SEC

started putting out concept releases and Congress started holding

hearings, the markets all of a sudden had a very substantial incentive to keep their prices fair and reasonable.

Mr. OXLEY. So ergo, if we keep having hearings, the price will

continue to drop; is that correct?

Mr. CALLCOTT. This is a very useful function that Congress

serves, Mr. Chairman.

Mr. OXLEY. Well, Mr. Chairman, I had no idea we had that kind

of power.

Chairman BAKER. And I am so appreciative of this. You have finally learned I am worth something, Mr. Chairman.

Mr. OXLEY. Let me let Mr. Smith take a crack at it, and then

I will yield back.

Mr. SMITH. Thank you, Mr. Chairman. At the risk of sounding

repetitive, I think I would return to my earlier comments. While

it is certainly good that market data prices have declined, there is

still the fundamental fact that the price charged by the consortium

of SROs is still not determined by a competitive market. It is determined by a group of individuals who, after canvassing market participants, decide on what they think an appropriate price is.

Mr. OXLEY. That describes a cartel, doesn’t it?

Mr. SMITH. I agree, yes.

Mr. OXLEY. I yield back.

Chairman BAKER. Thank you, Mr. Chairman.

Mr. Kanjorski.

Mr. KANJORSKI. I just want to make the observation, Mr. Chairman, that if you look at the panel, we have two of the investor

groups, and then we have two of the exchanges, and in the middle

we have the association. It probably is interesting and what is reflective of the issue. I want to address it, first, to the investor

groups. I listened to your testimony, Mr. Callcott, and isn’t this just

a fight over how much and who pays?

Mr. CALLCOTT. It is a fight about money.

Mr. KANJORSKI. Do you have any feeling about being a little

guilty of talking about the freest market in the world and charging

the exchanges with being monopolistic utilities?

Mr. CALLCOTT. We would like to provide the best possible information to our customers. There is very good market data informaVerDate 11-MAY-2000 07:59 Feb 14, 2002 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 74410.TXT HBANK1 PsN: HBANK1
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tion out there, streaming market data that professional investors,

institutional investors use. Most investors, because of the current

cost structure, do not have access to that data. We would like to

provide it to them. We can’t afford it at the current rates, and most

individual investors can’t afford to pay for it themselves at the current rates. We think we could make that available under a competitive structure.

Mr. KANJORSKI. OK. On the other hand, you have to concede,

don’t you, that this is a utility and a monopoly? I mean, this portion of it? There is nobody else that can announce to go out there

and create this information. You are really granted this right

through the SEC and through the Federal legislation. I am not

criticizing what you have done, and I cannot go into business tomorrow and compete against you.

Mr. BERNARD. If you break up the consortium, which we have

been a strong advocate of, what you are talking about is ten or

more stock exchanges competing with each other for order flow.

Now, it is certainly true that the New York Stock Exchange has

consistently enjoyed market share of about 85 percent, but that

hasn’t been because of an absence of competition. It is because——

Mr. KANJORSKI. But you are not representing the same companies on the same exchanges. They are different.

Mr. BERNARD. Oh, yes, we are. Nasdaq has what they call the

‘‘intermarket’’ that trades in New York Stock Exchange-listed

stocks; Philadelphia, Chicago, Pacific trade NYSE stocks. Island,

for that matter is trading New York Stock Exchange stocks.

Mr. KANJORSKI. So when they do greater volume, they are just

better than the New York Stock Exchange?

Mr. BERNARD. Well, they haven’t done greater value. We continue to do 85 percent. The rest of them together do 15 percent. So

I guess that means we are doing better.

Mr. KANJORSKI. This is going to call for the wisdom of Solomon,

I think, and I don’t know any of my colleagues up here that possess

that type of wisdom. The one thing that really does disturb me is

the fact that when you are privatizing, this does seem to go to that

conflict. It was indicated that there are just two fiduciary responsibilities that have to be there, the charge that you are under to

charge reasonable and fair rates, and to disseminate this information; on the other hand, to earn as much for the investors as possible. Why can’t we take market data and treat it like a monopolistic utility and just set it over there and with the SEC as the regulator, to take the complaints of the new internet market and other

things that weren’t here in 1975, and treat the data in that regard.

This will ensure a fair return on an investment, that you continue

to have the excellence for which that material goes out, but that

no one feels disadvantaged as to price, nor do they want to come

in with another competition.

I have to mention that just the other day, as you know, we have

had deregulation recently in telephones and utility companies, and

I can address just the telephone problem that was interesting. My

wife called me up, and she said, you know, we have a telephone,

but we are only listed in one book. And there are four books that

are disbursed, but we would take advertisements or whatever we

23

have to do to get the other three books, which costs me four times

what it is going to cost today.

I don’t know that we can get in there every year with new technology and new methodology, trying to figure out who is advantaged or who is disadvantaged, but if we look at this market data

accumulation and disbursing and we did it and said this is a utility. It is monopolistic, because the SEC has given it to you. You are

entitled to a fair return on your investment, as a utility would be,

and then the SEC will be your regulator when there are complaints

and changes in the marketplace that this information should be

available. Because quite frankly, if you think about it, nothing

stops you from charging $1,000 a hit, and that would take away

all day traders.

I am not sorry if it probably took them away, but, you know, that

is one nice way to get rid of day traders, just hit them so hard, that

they cannot participate. That wouldn’t be the fair thing to do if we

really have a free and open competitive market. And on the other

hand, we can’t anticipate where Schwab or other firms are going

and what is the change in evolution of technology that is going to

occur over the next 2 or 3 years. By the time we get done drafting

a bill, it will probably be obsolete and not relative to the situation.

But if we did recognize that the 17 percent of your revenues that

come out of data processing get carved out of whatever you are

going to do in privatizing and put that into a utility-type, agreedto monopoly and give you a decent return on your capital and

evaluate that fairly, and then have a very broad board or representation of users to help set rates, and even they won’t be able to finalize it, and have the final determiner the Federal Communications Commission, wouldn’t that be fair to both sides?

Mr. KETCHUM. Congressman, if I could, let me try to address

each of the points that I think you have made. I guess the first

point is that indeed there is somebody who stands between us and

imposing a $1,000 charge with respect to this information, and that

somebody is the SEC that has the ability and responsibility to both

ensure that the fees are fair and reasonable and the authority to

look at all relevant issues, including our costs involved with the information.

The second thing is I do have to respectfully disagree. I don’t believe in any way this is a monopoly, or certainly as Rich Bernard

indicated, it does not raise any consortium issues if indeed the position, both Nasdaq and the New York Stock Exchange, is taken,

that we should eliminate the plans and each market should have

the ability to offer its data separately and separately price it.

Third, not only are there 10 exchanges operating today, but there

is also the ability for trading systems, such as Island, to become

an exchange and to compete directly with respect to——

Mr. KANJORSKI. Do you think by defining that as a property right

and maintaining your own data collected that you would do a favor

to the free market system that we have, and the transparency and

access that we have in this market? Isn’t it to the advantage of the

members of the Exchange that they have the absolute access to the

most investors possible, that it is accurate, reliable? I mean, that

is the precondition to good trading. It wouldn’t seem to me so that

you could get some return on, quote, this property right interest,

24

which I still have some difficulty with. It would seem to me that

you would be shooting off your toe to spite your foot.

Mr. KETCHUM. Well, again, I think it very much is an advantage

to the members of the Exchange or from the standpoint of Nasdaq,

of Nasdaq, for there to be wide dissemination of this information.

It is just as much to the advantage of Nasdaq to occur, because it

does attract activity and increase confidence in the market. That

is the very reason why the prices have been reduced as much as

they have and why there is a different price for access to the information of the individual investors. And indeed, I wonder if you had

utility rate regulation, whether there would be anything such as a

separate charge for individual investors.

Mr. KANJORSKI. Maybe there wouldn’t be.

Mr. KETCHUM. And I think that necessarily wouldn’t be in the

interest of our—— Mr. KANJORSKI. Why?

Mr. KETCHUM. Because I think you would not necessarily have

seen the innovation of providing lower cost information.

Mr. KANJORSKI. Well, if you were making a decent return on

your investment as a utility, you mean you are only driven to make

more, and that is the only reason that you change?

Mr. KETCHUM. The primary reason we are driven to provide the

information is, because it increases investor confidence and increases investors.

Mr. KANJORSKI. That’s right. So giving this information out, if

you could effectively do it for nothing or almost nothing, and increase the activity of the market and increase the activity of capitals in general in the United States, that is to your benefit. You

are going to drive brokerage fees and other fees and transactions

that are going to make more than enough money for you.

Mr. KETCHUM. And that is usually what competition is quite effective in driving forward, if indeed it is to our benefit, and I would

agree it is, and it is exactly that reason why we have continued to

reduce the price and to distinguish the price for individual investors over market professionals.

Mr. KANJORSKI. Well, how about if we allocate part of this excess

money that the SEC is collecting to you fellows, some portion of it,

so we do not have to charge the other fellows anything, or an extremely low rate. Is that a fair way to do it?

Mr. KETCHUM. Well, those other fellows are the same ones being

charged that other fee, and we think it is a great step that Congress has taken to try to reduce transaction fees, which is an important step to ensuring the continued competitiveness of the U.S.

markets.

Mr. KANJORSKI. I am sort of disappointed that we have to have—

I mean, I know our activity and attention to this probably plays to

make all parties work better together, but it just seems to me you

are almost disproving the effectiveness of the private market to

work these things out. This shouldn’t be before the Congress, and

if it has gotten to that point, you know, we certainly should not cut

favoritism on either side. But then, you know, don’t argue if we

start regulating things. Do we want to empower the SEC as a great

super-regulator to constantly be hearing who is being charged

what? It seems so infinitesimal, in terms of the whole capital marVerDate 11-MAY-2000 07:59 Feb 14, 2002 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 74410.TXT HBANK1 PsN: HBANK1
25

ket of the United States, that you all have to come together and

do what is right and what is reasonable.

And that would get a return on investment that is reasonable.

I would say make it a utility rate or both. It doesn’t matter to me.

But not exceptional. I mean, you know, it is possible that, as a result of technology or change or activity, you could end up like these

banks with the ATM fees. I mean, you know, I keep telling my

friends in the banking business, and incidentally the credit union

business, that they keep making more money on ATM fees than

anything else, they are apt to get themselves regulated, because I

am one of the guys that will do it.

I mean, I find that incomprehensible that a college kid has to pay a buck-and-a-half or $3 bucks to get $20 or $30 out of an ATM

machine. And they say that is not the cost of the transaction, but

they can get it. Do we want to get into that regulation? You are

almost forcing us to get into the exchange regulation. I don’t see

that as very profitable for the Government to start thinking in your

business and regulating your business any more than we absolutely have to.

So I would hope you take away—I am hoping—and I look at Art

Folcum in the middle there. It is your job to come up here or tell

these fellows to work this out. And this is something that should

be able to be negotiated in the private market without Government

involvement. If it requires Government involvement, all five of you

are going to come up here and be yelling at us, oh, you are moving

into the private market and you are doing things, but you are not

giving us a heck of a lot of choice.

Yes, Mr. Bernard.

Mr. BERNARD. If I might respond, first of all, neither the New

York Stock Exchange or the Nasdaq is a proponent of creating

database legislation. That is coming from the outside. Second, the

very negotiation that you want to have happen happens every

other month at the board table at the New York Stock Exchange.

You may be hearing from some people who don’t like the outcome

of that consensus, but that consensus, for at least 70 years by our

count, has said that market data fees is a good way to cover about

17 percent of the New York Stock Exchange’s expenses.

I don’t think Congress should intervene and tell Merrill Lynch

and Goldman Sachs and Salomon Smith Barney and IBM and Leon

Panetta, representing the individual investors—and by the way, I

don’t know why you call two broker dealers more of a representative of individual investors than the New York Stock Exchange or

Nasdaq. I have got three people on my board who are specifically

charged with representing the interests of individual investors, not

to mention ten broker dealers. So I don’t understand that dichotomy.

But to finish my thought, that board decides that 17 percent is

a good number. All the continued recognition of our proprietary

rights does is permit that negotiated outcome to be activated.

Chairman BAKER. Thank you, Mr. Kanjorski.

Mr. Shays.

Mr. SHAYS. I have questions, but Mrs. Biggert needs to leave, so

I will defer to her.

Chairman BAKER. Certainly.

26

Mrs. Biggert.

Mrs. BIGGERT. Thank you, Mr. Chairman. And I thank the gentleman from Connecticut for yielding.

Mr. Bernard, you just mentioned that you are a proponent of the

legislation. Why do you need this legislation to protect your databases?

Mr. BERNARD. I am sorry if I said I was a proponent. I misspoke.

What I said was that we did not initiate this legislation. However,

if there is going to be database legislation, then discriminating

against markets’ data as opposed to baseball scores is not something that we think ought to happen.

Mrs. BIGGERT. Well, I guess I was changing the question a little

bit. I assumed that you thought that you needed legislation and I

just wondered if you could cite any examples of someone who has

disseminated your stock quotes, those obtained from you without

your permission?

Mr. BERNARD. Well, it does happen when we don’t know about

it, but when we catch it, let me just quickly explain. First of all,

the common law of misappropriation, which is all you are proposing

to do in the database legislation simply tries to federalize and codify an existing common law that has been out there for centuries,

and is one of the protections that we enjoy today.

The second, of course, is contracts. The contract that the Chairman was reading, although I believe it applies to professional subscribers, it is those network of contracts that helps us make sure

that no one is pirating the data. And just to finish the point, remember what is the relevance of preventing pirating? We are allocating the cost of running the Exchange among various users as

those users have chosen. If someone is pirating the data, they are

cheating. They are not paying their fair share. And that is why it

is important that we be permitted to do this, but we are not proponents of legislation.

Mrs. BIGGERT. So you have been able to use the current copyright protection laws, as well as the contract laws?

Mr. BERNARD. Not the copyright laws, although the copyright

laws may protect us. It is a fine question for the litigators, but

clearly the State law, the common law of misappropriation, as well

as contract law, have been the two pillars upon which we have

been able to minimize any pirating.

Mrs. BIGGERT. OK. What has been the practical effect, then, of

the 1991 Supreme Court, their first decision?

Mr. BERNARD. Well, we have seen no impact in our world, and

I point out the case was about putting together a telephone directory. As I have already mentioned, we don’t simply collect data. We

actually create the data. So we are in a different place from someone who puts together a telephone book anyway. So it has had no

impact.

Mrs. BIGGERT. I guess I was looking for what would be creating

the data?

Mr. BERNARD. Well, as I have mentioned—let me go a little slower on it. If Island and Schwab and Salomon Smith Barney and

Merrill Lynch and the rest of them all send orders to us—and take

General Electric, the world’s largest company—to the New York

Stock Exchange, our job is to have systems that collect those orVerDate 11-MAY-2000 07:59 Feb 14, 2002 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 74410.TXT HBANK1 PsN: HBANK1
27

ders, safe-store them, validate them, route them to the place where

the stock is traded, have them interact with each other, and with

the brokers on the floor who are representing institutional investors and with the specialists who are market making and have

them all come together, and when the buyer meets seller, to perform an execution.

When we do that execution, we have systems that disseminate

that data out to the world. That is the market data side of it. It

also reports the trade back to Salomon and Merrill Lynch and the

rest of the firms and sends it into the Securities Industry Automated Corporation. So it is no different than producing anything

else. We are in the business of producing trades under the allowed

sale prices.

Mrs. BIGGERT. OK. Thank you. That is all I have. Thank you,

Mr. Chairman.

Chairman BAKER. Thank you, Mrs. Biggert.

Mr. Bentsen.

Mr. BENTSEN. Thank you, Mr. Chairman.

Is the position of Schwab and Island that—if I read this right,

Mr. Callcott, is that you believe that the exchanges should provide

the raw market data to anybody at no price or the same price, or

what do you mean exactly?

Mr. CALLCOTT. Our concept is the Most-Favored-Nations concept.

So if they provide it to anybody, everybody else gets the benefit of

that best price that they offer to anyone, and then our expectation

is that private sector enterprises like Reuters, Bloomberg, Bridge,

and so on, will compete to aggregate that data in ways that is both

cost-effective and innovative in terms of the quality of the information.

Mr. BENTSEN. And so, under the current structure, as allowed

under the 1975 Act, the raw data is just provided by the exchanges

to their own processors, and then resold to the market. And the

processors are effectively subsidiaries of the exchanges?

Mr. CALLCOTT. That’s correct.

Mr. BENTSEN. And then members of the exchanges are able to

subscribe to the refined data, but rather, you would almost—you

would want to—I mean, I don’t know that they charge for the raw

data. So maybe it is a bookkeeping exercise. I am not sure how it

works out with the exchanges. I guess I have two concerns. One is

do current SEC regulations, govern how the raw data is refined?

I don’t want to say ‘‘manipulated,’’ but that may not be the appropriate term. I think it is, but it has unfair connotations. But are

there any regulations governing how the raw data is refined and

then made public? Because there are regulations in how it is utilized by the brokerages after it is made public, the crosses and

things like that.

And the second is—are you arguing that there is no value in

that?

Mr. CALLCOTT. The answer to the first question is the plans are

subject to SEC regulation and any amendment to the plans has to

be approved by the SEC, and no, we are not arguing that there is

no value in the Exchange’s function. What we are arguing is that

there can be alternative sources. If the NYSE or Nasdaq or the Pacific Exchange decides to charge too much to all-comers, we could

28

put together a quote today from Schwab, Waterhouse, Island,

Datek, Knight, which we think would have equal or greater value

to the quote products currently being offered by the Exchange or

Nasdaq. If there is that level of competition in the markets, we

think that will keep the prices down and improve the quality of the

overall information.

Mr. BENTSEN. Is there a risk that, you know, Schwab is a pretty

good-sized company. Is there a risk that if you were to open up the

primary market for this data, if you will, that the bigger, well-capitalized players would have access to it, but the smaller brokerages

wouldn’t necessarily have the ability to go in and create the systems to refine the data and make it available. Could there potentially be a disadvantage to the smaller brokerages?

Mr. CALLCOTT. Under a competitive system, our view is that,

sure, they probably wouldn’t do it themselves, but they would have

multiple different vendors, such as Bloomberg, Bridge, Reuters,

plus bigger brokerage firms from which they could buy the data.

There would certainly be competition. Of course, those little brokerage firms are overseen by the NYSE or the NASDR, and so if they

were providing something that was so far out of the mainstream

that it was problematic from an investor protection standpoint,

there would be that level of regulation.

Mr. BENTSEN. But the other point is that the smaller brokerages

are—if I understand the essence of the exchanges, already two

parts to it. One are the members who make the Exchange, and the

other are the stocks that trade through the Exchange. Wouldn’t

this be unraveling the exchanges effectively and unraveling the national market system as we have it today? And maybe we want to

do that. I don’t know, but I suspect there is a structure in place.

And it may be a cartel. But we established these exchanges so you

had some regulated exchanges to ensure that the most accurate

market data was available to the consumer and that somehow has

to be paid for.

Mr. CALLCOTT. Well, that is a good question. Right now we have,

as Mr. Bernard and Mr. Ketchum have indicated, a great deal of

competition on the listing side. Different Nasdaq market makers

compete with each other. The New York competes with Island and

with Nasdaq third market makers and with the regional exchanges. So on that side, the natural market system is built on

competition. In 1975, it wasn’t feasible to build competition on the

market data side. Computer systems just hadn’t sufficiently

evolved. Today, 26 years later, we think that evolution has occurred and that it is worth exploring the possibility of competition.

Mr. BENTSEN. I guess, then, with the Chairman’s indulgence

here, could you make an argument that the members of the NASD

and the members of the NYSE and the other exchanges, for that

matter, pay their dues and created these systems and created these

exchanges and made the initial capital investment and created

these markets and created the asset? And even if it is a regulated

asset and they have monopoly power, you now have Island. You

have got other market makers out there. You have, you know,

these electronic networks that can trade stocks. You have afterhour networks, things such as that. Why should somebody who can

29

set up their own operation receive a preferential benefit to information that these others set up earlier?

Mr. CALLCOTT. Well, we are legally required by the 1975 Act

amendments and the rules to buy the information from the existing

consolidators. That is the display rule. We have to show it to customers, and I should tell you, Chairman Baker, we have tried for

3 years to convince Nasdaq to drop that very clause that you read,

because we get hundreds of complaints a year from customers saying, well, why does Nasdaq want to come into my house to examine

my computer? And the Nasdaq subscriber agreement, you have to

check in six different places. Furthermore, because it is a monopoly, they don’t have to negotiate with us on those terms and conditions. So, again, our view is if you can create a competitive system,

you won’t have those sort of hallmarks of monopoly behavior.

Mr. BENTSEN. Can I ask another question?

To Nasdaq and NYSE, it seems to me the problem here is that

with the change in the structure of the market, particularly the retail market, where people like Schwab and others—they have more

individual trading on their own, and I think this is where Mr.

Lackritz is coming from, whereas the SIA membership consists of

brokers and dealers with their rates and all sitting up on the phone

calling and making trades. Now you have more online brokerage

through traditional brokerage houses. Would it not be appropriate—and maybe this is what the Commission is looking at—to

revisit the pricing structure?

I mean, on the one hand, it is not fair to say that, well, online

brokerage should get a better deal, a group deal when traditional

brokerage houses have to carry the freight, because they are the

ones that have 10,000 brokers or 12,000 brokers or whatever. On

the other hand, the marketplace has changed, and maybe there

ought to be some weighted form of pricing for the service. To me,

somewhere in between there seems to make more sense than disrupting the national market system, which I think is not necessarily a bad thing. I think, as you have said in your testimony,

it has served us quite well. I mean, what would your comment be

on that?

Mr. BERNARD. First of all, we have done exactly the weighting

you are talking about. The New York Stock Exchange’s revenue for

market data—74 percent of it comes from charges on traditional

market participants; that is, broker dealers who are operating with

registered representatives interfacing with customers and individual traders and institutional investors who are taking the data

as professionals. Only 17 percent in 2000 came from the sort of

consumer end. These are the $1.00 a month that we charge to nonprofessionals or the so-called ‘‘per quote’’ or ‘‘pay as you go’’ at a

penny per quote that is capped.

So we have done exactly that and it is exactly as you say. If you

start from the premise that you are going to collect 17 percent or

cover 17 percent of your costs from market data, you want to hit

each of the market data users in a fair way, and we have struggled

with that. And the reason that the prices have not come down for

the professional, except in real terms, but the nominal amounts

have been stable for a very, very long time. But the rates for nonprofessionals have dropped and dropped and dropped, and that is

30

because the explosion of the internet has greatly increased that end

of the spectrum, and so we have responded by reducing those

charges.

Chairman BAKER. Thank you, Mr. Bentsen.

Mr. Shays.

Mr. SHAYS. Thank you, Mr. Chairman. I love being on this subcommittee, but I am not ready for prime time yet. So I ask these

questions with some trepidation. From my simple mind, I have this

basic sense that if innovation should be rewarded that cost should

be covered. I see Nasdaq and I see the New York Stock Exchange

as providing the service. I came here thinking that Nasdaq and the

New York Stock Exchange and others were asking for something

to happen that doesn’t exist right now. In the hearing, I am realizing that the court case basically established a challenge. We want

to see a change. Am I wrong?

Mr. Callcott, am I wrong? I mean, you are basically asking for

the change; correct?

Mr. CALLCOTT. We are not asking for database protection legislation.

Mr. SHAYS. That is not what I asked. What I asked, though, is

you don’t like the present system. You want the present system

changed. Basically, the court has established that they have a right

to own this data and that they can charge a fee for it. Isn’t that

accurate? I am not saying in the end I won’t agree with you, even

though if there is a tie, I am going with my constituent.

Mr. CALLCOTT. And we have tens of thousands of constituents in

your district, Mr. Shays.

Mr. SHAYS. That is a problem.

Mr. CALLCOTT. Anyway, the court case said that facts are not

something that anybody can own. So we are in complete agreement

with the Feist case. The legislation that we think is necessary is

to reform the 1975 Act amendments and introduce competition into

this one area of market data where Congress established a set of

monopolies.

Mr. SHAYS. So you are saying the Feist case basically left this

question unanswered?

Mr. CALLCOTT. No. We think the Feist case resolved the ownership question in our favor. Facts are facts. You can’t own facts.

Mr. SHAYS. Would the New York Exchange agree that that is

what the case determined?

Mr. BERNARD. I don’t believe that was a fair reading of the Feist

case. It was relating to telephone pages. That is what we do.

Mr. CALLCOTT. It is related to data; can you own data, can you

own facts?

Chairman BAKER. And if I can further complicate your picture,

Mr. Shays, as I understand it.

Mr. SHAYS. The way you talk, you need to talk more slowly with

me.

Chairman BAKER. That is a rare comment on a southerner.

Thank you. Let me say it this way. I believe the gentleman represented correctly that the court determined that facts are not intellectual property which belong to an individual, but that intellectual value or some asset must be added to the fact that creates a

property right which the exchanges would say is their role. They

31

are taking the facts, the dollars from the sale, and doing things to

it that create value to that asset, to which the other team is saying,

no, you are not. We want the raw data. It is a fact. Give us the

raw data, and then we can compete with you in the marketplace.

So that complicates your problem, I think.

Mr. KETCHUM. One thing, Congressman, I think you are absolutely correct on your characterization. Both, I think, Nasdaq and

the New York Stock Exchange are perfectly comfortable with our

interpretation of the law at the present time and our ability to enforce our rights from adding the value that the Chairman has

articulately stated. So we don’t believe there is a need for Congress

to be involved in that determination.

Mr. SHAYS. Let me just ask, why is the remedy here and not in

the courts? I am just curious, from your standpoint.

Mr. CALLCOTT. The basic concern we have is with the regulatory

system set up in the 1975 Act amendments for market data. And

so that can be changed either perhaps by the SEC, but more probably by Congress.

Mr. SHAYS. So the bottom line is your reading of the 1993 case— is it 1993 or 1991?

Mr. LACKRITZ. 1991.

Mr. SHAYS. The 1991 case. Your reading of the 1991 case suggests that the 1975 law is somewhat in conflict with that case?

Mr. CALLCOTT. No. Again, the issues are about who owns the

market data. We are satisfied with the status quo on that issue,

as are I think the exchanges and Nasdaq. The problem that we see

is with the regulatory issue, which has caused the price of this data

to be so high. That is a separate issue, in our view, from the ownership issue as resulted from the Feist case.

Mr. SHAYS. Just a basic question. Is Nasdaq and your exchange

and other exchanges getting complaints from general consumers, or

is this basically being generated by companies like Schwab and

others that are saying, you know, they want Congress to deal with

it?

Mr. KETCHUM. I can speak for Nasdaq, Congressman. No, this is

not an area where we receive complaints from investors or consumers. To my knowledge, if we have had any, it has been very

few, and I am not aware of any.

Mr. SHAYS. What practical difference does it make as to who

owns the market data? I open that up to any of you.

Mr. BERNARD. May I just make a point regarding Rick’s point?

The reason consumers aren’t complaining——

Mr. SHAYS. I want the mike a little closer.

Mr. BERNARD. I am sorry. The reason the consumers aren’t complaining is they never see these charges. These charges are imposed on broker dealers, not on individual investors. So if an individual investor is even aware of them, it is because the broker

dealer has made a decision to pass through this particular cost in

a more explicit way and all the other costs they face in doing business.

Mr. SHAYS. See, that wouldn’t bother me if they made that cost

clear to their consumers, to their clients. And you do that? You let

clients know that that is part of the cost?

Mr. CALLCOTT. We do.

32

Mr. SHAYS. Is the cost so small that it is almost insignificant to

point out?

Mr. CALLCOTT. Well, to provide the Nasdaq level 2 data to our

customers, costs $10 per customer per month. We are able to pass

that on to some customers, but very few. We make that data available for free to a very small number of our very best customers.

We would like to make that best quality data that institutional investors get available to all of our customers. Technologically, it is

perfectly possible to do that, and it wouldn’t impose any additional

marginal cost on the exchanges at all. We can’t do it because of the

current cost structure.

Mr. SHAYS. What practical difference does it make as to who

owns the data? What is the practical effect of that?

Mr. CALLCOTT. Our view is that this data is pervasively regulated in the public interest by legislation, and that is the way that

it is and should be and should stay. So that basically no one owns

it. It is facts.

Mr. LACKRITZ. If I could just address that for a second. The

whole issue of property rights and the reason that we don’t think

there needs to be legislation providing property rights to market

data is, because owners of property can control its use after it is

gone. And so, for example, if there is a database of historical data,

if there is a property right to that data, then it would be illegal to

take that historical data and use it for other purposes or put it into

new products or services. So, property rights would provide an impediment to users from getting access to large bodies of data, in essence.

Mr. BERNARD. I am sorry. I don’t understand the conversation.

We have had property rights recognized by the Supreme Court for

more than 100 years. This discussion is not about adding proprietary rights. If anything were going to happen in the area of database legislation in regard to market data, what you would be talking about is federalizing common law. That is an accurate statement of the law as it exists.

As to why it matters, it is as I said before. If the broker dealers

and the listed companies and the representatives of the individual

investors on our board feel that market data fees is a good way of

allocating our costs among themselves in an equitable matter, then

you need the legal tools to make that stick. It was the question

about pirating data that I addressed to your colleague before. That

is why the proprietary rights——

Mr. SHAYS. OK. And maybe one of the three, not with the Exchange, could just explain to me. How do you view their board as

being representative of your interests or not being representative

of your interests?

Mr. CALLCOTT. Not particularly representative of the retail interests. Our view is their board tends to be dominated by their institutional and floor membership.

Mr. SHAYS. So is this a battle between the institutions and the

general consumer?

Mr. SMITH. I think I have a unique view on this. I keep coming

back to the same point. Island is troubled, because——

Mr. SHAYS. A little louder, please.

33

Mr. SMITH. Island is troubled, because the whole price-setting

mechanism is determined by a board rather than the free market,

and a board can never completely represent all interests it needs

to represent. We are certainly not represented on those boards.

Mr. SHAYS. Let me just conclude. If the 17 percent disappears,

how do you cover your costs?

Mr. BERNARD. Well, first of all, that 17 percent—the answer is

that the members who could decide tomorrow to make that 17 percent disappear, would have to look to other sorts of ways of allocating the costs among themselves, the members of the listed companies. Presumably that would mean we would raise listing fees,

raise transaction fees, or we would institute other charges.

Mr. KETCHUM. Congressman, if I could, I just would like to clarify, because I don’t want you to leave an impression that certainly

the board of the Nasdaq stock market doesn’t reflect firms that are

actively involved in serving individual investors. Among the members of the board of the Nasdaq stock market is Dave Pottruck, the

CEO of Schwab. Another member is a CEO of Knight Securities,

which from a market making standpoint, has its basic business

providing executions and service to, again, individual investors.

Mr. SHAYS. Well, that is weird, frankly.

Mr. CALLCOTT. And he is correct that we feel better represented

on the Nasdaq board than we do on the New York board.

Mr. SHAYS. Oh, that is a good answer.

Mr. BERNARD. I think I would point out that just as every citizen

of the United States is not sitting in Congress, so, too, not every

broker dealer or every listed company can sit on the New York

board. But we have ten positions that are allocated to so-called

public directors, included listed company representatives, institution investors and individual investors. Ten director positions are

allocated to broker dealers, four from the Exchange floor, the other

six from ‘‘upstairs’’ firms. At least one of which includes DLJ Direct, which is a major online broker.

Mr. SHAYS. Let me just ask another question of the three. Are

you basically saying that you are paying for a service in which you

are overpaying for the cost of the service you are getting and that

you are, in a sense, by the fee, paying for other parts that the Exchange should cover by other expenses? Do you understand the

basic question? Do you feel that basically you are paying more than

your fair share of the cost?

Mr. CALLCOTT. We do, and moreover, the current cost structure

prevents us from providing the best quality information to all of

our customers. If we were to purchase that, it would increase our

costs approximately ninefold over what we are currently paying for

market data.

Chairman BAKER. Mr. Shays, if I can, I am going to go to one

other Member, and we will come back for another round.

Mr. SHAYS. I didn’t know another Member was here. I apologize.

Chairman BAKER. Mr. Inslee, did you have a question?

Mr. INSLEE. I will pass.

Chairman BAKER. Do you want to start a second round?

Mr. SHAYS. Yes. Let us do that.

Chairman BAKER. Let me try at a summary here and get a reaction. On the one hand, the exchanges will not acknowledge the

34

view that you are in the role of a public utility, which would perform a public service at a cost plus a percentage rate of return,

which would require supervision by an outside Government party,

SEC, to determine whether or not the charges for the public good

are fair and reasonable. It is my view the SEC has not exercised

that authority, to my knowledge, has never acted unfavorably toward a rate structure, if they have reviewed them. And second,

that there is no understandable methodology by which an outside

party today can look at the Exchange’s operations and come to a

conclusion as to the promptness of the rate schedule in relation to

the cost of providing that service. So if you are a public utility,

which I know—I am not saying that you are acknowledging this.

It is just part A. If you are a public utility, it would appear we need

to have additional authority or have the authority now granted be

exercised to understand the now apparent mystical methodology

which does not lead one to conclude as to the reasonable charge associated with data production.

On the other hand, if we assume that we are corporations funded

by investors who are making a profit, which I still have to believe

is OK in America, and that you are providing a service, you should

not, however, then be in a privileged position, granted by statute,

regulation or other provisor, that enables you to engage in a service

or activity which others are not offered the opportunity to provide.

I don’t know how you describe the circumstance differently, but

take a shot at it, because if we are A and we are a public utility,

I have a problem. If we are not and we are a private corporation,

then the benefits of business conduct that are afforded those enterprises should be removed, or at least, similarly, granted to others,

to enable them to compete in a similar regulatory environment. Are

either observations close or are both wrong?

Mr. BERNARD. I think ultimately we are somewhere in between

what you just described, but let me make one point. The only—this

display rule—we need to talk about this, because it is the only SEC

regulation that is creating what is being called a monopoly here,

and you should know that that rule was invented to prevent the

New York Stock Exchange from being the only source of data. We

are trying to promote competition by forcing vendors—in those

days they had different names, but just like ILX today—from only

displaying New York data.

When that issue was before the Seligman Committee, we had a

real conflict on that issue, because on the one hand, we agree with

Schwab and Island and others that if you want to get the most

power out of dissolving these consortia, you should get rid of the

display rule and let the strongest competitive forces apply. The reason that New York was among the majority that voted against getting rid of the display rule was for the very reason why the SEC

continues to feel that that display rule is important, because no one

is worried about broker dealers or institutional investors getting

any data they want. They have got enough clout. The issue is the

individual investor, and the fear that if you drop a display rule,

then, perhaps we will be back to where they only see the New York

data and they only see the 15 percent of the——

Chairman BAKER. Let me interject on that point. This is not

1901. It is 2001, and the ability of an investor to get access to inforVerDate 11-MAY-2000 07:59 Feb 14, 2002 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 74410.TXT HBANK1 PsN: HBANK1
35

mation via the internet, for example, or telephone or any other

mechanism, is extraordinarily different from the environment in

which many of these rules were constructed. And I think the person who is investing $200 who makes $30,000 a year is going to

be just as interested in knowing where his money is going as a fellow investing $200,000 who makes $3 million a year.

I think the investing environment is different, and you know, I

don’t want to pass anybody up for blame here, but you know the

media, to a great extent, contributed to a lot of this enthusiastic

activity until the last few months, I would say. So people have a

different mindset. We have a different set of market conditions

which are being constrained by rules written many years ago, although I am not agreeing with the ECN approach to resolve this.

I don’t think we ought to blow up the national market system,

but it sure appears on its face if you can’t explain to me what the

charges relate to, other than a board meeting, you know, some

mechanism, maybe not the Congress, maybe not the SEC, maybe

somebody ought to have to be able to make that assessment and

your problem goes away.

I think the question that is being asked here from a market practitioner’s view, are the fees that are being charged for the service

being rendered appropriate in light of the services that are available, and if they aren’t, perhaps adjustments are required.

I think the most onerous suggestion would be to rewrite all the

rules and have 50 people claiming to be able to process this data

knowing full well the enormous investments you make preclude

most people from doing it at the level of competency which you provide.

So I have regard for your ability and what you do, but we need

to have more disclosures to understand it in order to take a position that stands in defense of the practice. Do you understand our

dilemma?

Mr. KETCHUM. Mr. Chairman, if I could say one thing on that,

and you are right there, it is 2001. There is enormous access in the

internet. It is for exactly that reason that we applaud, and think

it is a great idea that a variety of brokers like Island and other

ECNs do provide information available on the internet that provide

one picture of what is going on in the marketplace.

I think our experience has been, and I think any study would

find, most investors don’t avail themselves of that information.

Some sophisticated investors will, and that is good and it should

be there and available. Most investors look at the consolidated information. They look at it because it is the simplest and easiest

way to gain a picture of the marketplace, and as Rich indicated before, there was a requirement of consolidating information. Vendors

simply did not make that information available and brokers given

the choice of providing to their customers all information in all

markets, speaking as a primary market in the securities we list as

a competing market to the New York Stock Exchange and sectors

we don’t, vendors and brokers didn’t make that information available in the third market of the other competing exchanges.

Chairman BAKER. But today, we have the delayed tape disclosures, which prior to that determination, it was viewed as being a

highly controversial decision to let this information go out, even on

36

a 15-minute tape delay for fear there might be some inappropriate

market response. My view of that is that the 15-minute tape delay

for free is an exact comment about its value. If you don’t know

what is going on at the moment, you are trading in the dark. So

I take no comfort in the fact that we shouldn’t disclose real-time

information to any investor who chooses, and let them, through

their own judgment, make whatever decision they may make. That

is my problem. I think we are giving people information that is

worthless.

Mr. BERNARD. No one disagrees with that. The SEC’s concern is

that that is not what would happen. They would never see, if the

past is prologue, the prices from Boston or Philadelphia or Pacific.

That is the SEC’s concern, and you can take it for what it is worth,

but it is a thoughtful discussion. Although that rule was passed, I

think when this guy was running the division, we looked very carefully at that.

Chairman BAKER. But the next logical step is to assume that because we are giving people information that is of no value that we

are providing a public service. How do we argue, if the real value

is in real-time data and the trouble with these gentlemen is that

if they provided real-time data to all customers within their base,

they make the allegation they would have to pay $157 million annually in order to get that level of access, level two disclosure is

that correct?

Mr. CALLCOTT. Yes.

Chairman BAKER. And our judgment is that may be appropriate,

but how do we know that if we can’t get disclosure of the cost associated with the management of the data?

Mr. BERNARD. Well, I did tell you we were hybrid and I owe you

an answer to those questions.

First, remember, we are like the guy who produces a cow, when

you produce both the leather and the steak. I can’t tell you, and

you keep asking me and my colleague to tell you how much do I

spend on producing market data and how much do I spend on producing trade executions.

Chairman BAKER. Your illustration is perfect. If I find out the

guy who is selling me the leather is doing it in the same room

where he is making the steak, I ain’t buying. They have got to be

separately allocable activities to which a reasonable business—I

will tell you, I have dealt with some—the Government sponsored

enterprises are extraordinarily complex organization, and they can

almost break it down to the microsecond expenditure of what they

do and where they do it, even given their level of sophistication.

Now, I can’t do it and I may not understand it, frankly, even if you

give it to me. But the point is there has got to be some way to come

to a defensible position in understanding the broad subject matter,

and maybe there will be art form judgments made as to allocation

of cost. As for capital costs, I know they are traditionally costs such

as real estate—you are going to allocate those to different areas of

your activity, but what do you call that?

I mean, is that an investment cost? Is it an advertising cost? I

understand the problem, but I think there is a remedy to it.

Mr. BERNARD. Mr. Chairman, if I am feeding grain to the cow,

I don’t know whether it goes to the leather or to the steak. My

37

problem is that I produce last sale prices and quotes at the same

time I produce trades. What I can tell you is that I only allocate

to market data 17 percent of my costs. So I am very comfortable

in telling you that whatever I am doing, I am not allocating too

much cost to market data.

Chairman BAKER. But when the board sits down and makes that

judgment from the broad array of participation you have, what information do they look at that helps them decide 17 percent?

Mr. BERNARD. I have already testified, they don’t care about that

question.

Chairman BAKER. But I do.

Mr. BERNARD. That is a question that’s being posed by others. The board is saying I have $700 million or $800 million of expense

to cover next year to run the stock exchange that produces, among

other things, market data. What is a fair way to hit listed companies, broker dealers and institutional investors in doing that, what

is the fair way? And over the years, they have come up with a variety of ways of doing it. That is how the board looks at the question,

and I don’t know that Congress, when it imposes taxes, tries to understand, does any kind of a cost allocation, either. Congress says

I have got this budget, we make decisions about expenses, Congress makes decisions about expenses. Once you have done that,

you have got to cover those expenses, and then the question is not

cost allocation, you know, how much goes to the military, so we will

have a military charge. It is fair allocation of those costs, in your

case, through taxes and through us, the different types of charges.

Chairman BAKER. That engenders a longer conversation, which

I won’t abuse my fellow colleagues with.

Mr. Bentsen.

Mr. BENTSEN. I think that is all, with due respect, somewhat

simplistic observation of the budget process up here. Mr. Shays

would agree with that. We have sat on the Budget Committee for

a while and I think, Mr. Chairman, that after hearing this, that

you should rename this subcommittee when you brought up the

GSEs, this ought to be the subcommittee on hybrids.

But I think what Mr. Bernard is saying, to use the cattle analogy, is that the butcher and the tanner are the same person, and

because you are getting the information on pricing at the same

time that you are executing the trades, and so it is hard to tell

whether he spends more time with his right hand or his left hand.

But again, I mean the fundamental issue here, it seems to me,

and I may be wrong about this, is that Mr. Callcott feels that in

on-line trading and very broad discount brokerage, that under the

current fee structure, you are paying too much for the information

that you are getting, and that you ought to just get—that this information, these facts of trades are basically public domain, and

you ought to have access to them and you manipulate them how

you want and you make whatever investment you want.

And that, I would understand, if it was just this sort of open

marketplace, that anybody could show up in the morning and trade

and there was no regulation, but the market system doesn’t work

that way, does it? I mean, it is an organized exchange with listed

companies. There are fees allocated to it. There are investments

that are made and somehow that cost has to be recouped. And you

38

get the benefit of this stable exchange. Isn’t there some value to

that?

Mr. CALLCOTT. Sure there is, but what I should say is that at the

New York, they compete for listed companies, they compete for

trade executions. There is a monopoly for market data, and when

they are allocating their costs among those three, it is very easy

for them to say, well, let’s put some more on the market data side,

because we know we are going to get that. You know we don’t want

to raise the cost on listed companies, we don’t want to raise the

cost on transactions, because we might lose those to other markets.

It is the cross-subsidization problem when you have a monopoly

that is the basic core of what we see as the problem here.

Mr. BENTSEN. Would then the analogy be that—Congress went

through this a few years ago, and we are still going through it in

the telecommunications industry, and we said that the regional

Bell companies had to open up their monopoly markets for local

phone service, and, in return, they would be allowed to get into the

local long distance market. I mean, would the corollary be here

that the exchanges could go beyond just being an even exchange

and get into the brokerage side and the sell side, buy and sell side

of the business?

Mr. CALLCOTT. Well, I think that is a very appropriate analogy.

If they provide the raw market data to everyone on the same basis,

they can set up a separate subsidiary to aggregate that market

data and sell it at whatever the market price would bear for their

aggregation services as long as everybody is getting the same raw

feed on the same terms.

Mr. BENTSEN. But the Bell companies are doing that. In theory

they are going to sell their local phone service at the same time

they are allowing others to come in and sell local phone service, but

they are going to also include the long distance companies, but

then they are going to get into the business of selling long distance

as well within the local region. So what would preclude Nasdaq or

NYSE to set up their own discount brokerage operation? Would

that be fair trade?

Mr. CALLCOTT. Well, the concern is, of course we are members

of them and we are regulated by them. If they were to get into the

brokerage business, I think they would have to move that regulatory responsibility they have into a separate organization that

was independent from their market. Indeed, the SIA has done a

white paper suggesting precisely that, and Schwab supports that

idea.

Mr. BENTSEN. I guess that is my point. They are a separate entity that has sort of a regulatory function, and they are ideally an

honest broker where trades are executed and market data is made

available and it is highly regulated. So wouldn’t we be better in

this instance in having this regulated structure where if there’s a

pricing issue and a cross-subsidy issue, that the regulator ought to

be doing this so that we maintain the national market system as

fair and open structure? If there is a problem, if there has been

market disintermediation and shift to more discount brokerage and

an uneven pricing structure, shouldn’t that be the purview of the

regulator and, say, your pricing structure is messed up?

39

Mr. CALLCOTT. That is certainly a possible result of the system

we have now. We have identified what we think are some problems

with that system in terms of pricing and innovation, both of which

are skewed by having that kind of monopoly, but I certainly do

agree that as the markets move more toward a for-profit competitive structure on their market side, there is a real problem with

them keeping the traditional regulatory responsibilities that they

have had since the 1975 Act amendments, and indeed, since the

1934 Act was first passed in the Roosevelt Administration.

Mr. BENTSEN. Well, I would agree with that aspect and that is

why I wonder if we are not, I mean, I guess the feeling is nobody

comes up here and offers anything for free. Any agreement would

probably mean give us something in return and giving something

in return might upset what is otherwise a pretty efficient model

and which could, where you might otherwise find a remedy to your

concern.

Mr. CALLCOTT. And my only suggestion would be that it is already happening. I mean, Nasdaq is going to for-profit status. We

are a shareholder in Nasdaq. New York announced that they were

and then they withdrew that.

Mr. BENTSEN. But they are not, to my knowledge, and you are

much more knowledgeable on this than I am, but to my knowledge,

they are not trying to become a broker dealer or anything along

those lines, are they? They are just trying to create a for-profit

model of their exchange, which will still be a regulated entity.

Mr. CALLCOTT. Well, in the Pacific Exchange context, you know,

Archipelago, which is now basically a broker dealer, is basically becoming an exchange. Island has also filed to become an exchange.

So I think the distinction between brokerages and exchanges is, in

fact, currently breaking down.

Mr. BENTSEN. This is my last point, but the difference would

seem to me that the 1975 Act doesn’t necessarily recognize Island

or any other as this sort of standard bearer exchange, nor does the

marketplace at this point in time. Now maybe the marketplace will

ultimately, but I don’t think the 1975 Act does, where there are

sanctioned exchanges and there are market created exchanges,

which sophisticated investors, at least, do know the difference of,

but it is a topic that is obviously going to take some time to figure

out.

Thank you, Mr. Chairman.

Chairman BAKER. Thank you Mr. Bentsen.

Mr. Shays.

Mr. SHAYS. Mr. Chairman, you know, when a southerner speaks

like a southerner, I have no problem, but when he speaks as a

southerner like a auctioneer, I do have a problem, and I just want

to say, Mr. Bentsen, I always enjoy being in this subcommittee. I

learn so much from the questions you ask, as well as from the

Chairman, and I appreciate it a lot.

I tell people being a legislator is like going to school, a large university. The only scary thing is I ultimately have to vote on these

things.

My sense, as I have been listening to the questions and the responses, is that the bottom line is that Schwab, which is a member

of the New York Stock Exchange and a voting member and, in fact,

40

has a CEO on the board, does have impact. And then I say, well,

it is only $10 per client, but you have got a lot of clients, so that

$10 adds up. So the bottom line is you just want to pay less and

I understand that.

And what I am also hearing is that it is really take it or leave

it. I mean you, in a sense, have a vote on the board and the scary

thing could be they could double it and you still have to pay the

fee. Is that accurate?

Mr. CALLCOTT. Yes. Obviously we could complain to the SEC,

which we have done on occasion.

Mr. SHAYS. And the SEC could respond and that is where you

have to go, but it is a little scary, because ultimately the market

forces at work is an arbitrary price, and you are part of that system.

From the standpoint of listening to the exchanges, I am struck

by the fact that this has been the way it has been, and it is a

source of income, and it is a threat, obviously, to your operation,

and you would have to do some shifting if you had to charge less.

So it strikes me that some of this is somewhat of a political battle. It is also one where the SEC and you all are going to basically

charge about as much as you can charge without getting Congress

mad and the SEC mad that they ultimately step in. You shook

your head, Mr. Bernard. I am happy to hear your response.

Mr. BERNARD. Yes. I just want to remind you, at least for 70

years, we have charged essentially the same amount as a percentage, 17 percent.

Mr. SHAYS. That is not comforting to me honestly, because the

world is different.

Mr. BERNARD. But the point is, it is the users charging themselves. As Rick testified earlier, there is a lot of reasons why we

don’t want to charge too much for market data, because it is the

magnet that brings in the orders in the first place.

Mr. SHAYS. Monopolists have a monopolistic price and they can

charge that price and in a sense, you do have a monopoly here.

Mr. BERNARD. I am not agreeing with that entirely since I have

a lot of competitors. The answer is that situation has been true for

70 years and we haven’t done it. There must be something else

going on here, and that something else is the decision by the users,

the payers of these fees, that that is all they want to pay through

market data fees, and they want to get the rest of it done through

listings.

If I may make one other point, we should understand what we

are talking about here. If the nonpro and the pro quote fees are 17

percent of the market data fees and the market data fees are 17

percent of the overall NYSE revenue, then we are talking about

something like less than four percent of the NYSE revenue and we

are talking about something like $30 million a year from all broker

dealers. I am not sure this Congress should be spending so much

on this topic.

Mr. SHAYS. Fair enough.

Mr. Ketchum, you are not a mutual anymore, so how do your

customers in a sense get to impact and determine the price they

pay?

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Mr. KETCHUM. It is a good question, Congressman, and I should

clarify at this point, because while we look forward to the day that

the SEC approves exchange registration, that day has not occurred

yet. The NASD, which is a mutual, still has majority voting rights

with respect to their position in ownership of Nasdaq, but beyond

that, we remain a creature of statute, today, as an affiliate of the

NASD, in the future as an exchange, as Rich indicated earlier

under Section 6. That statute requires us to have a board that reflects our constituents. It will require us to have a board that reflects both participants in the market as well as investors in the

marketplace, as well as our issuers listing on our marketplace.

So those requirements don’t disappear and indeed we, as the

New York Stock Exchange, are now required to have a board that

has a majority not affiliated with a broker dealer. So it has to be

people that are either issuers or direct investor representatives.

Mr. SHAYS. The analogy, and I will end on this, but the analogy

is that of the telephone company, the breakup of AT&T. It can no

longer own the Baby Bells and the Baby Bells have to open up

their markets and so on. I mean, if that were the analogy, then I

would want to jump in big time, because I think that was important to do, the break up, but I don’t see why that analogy fits. Can

someone tell me how, so I don’t see it fitting. Why do some of you

seem to think that fits.

Mr. KETCHUM. Well, I have to personally say I don’t see how it

fits as well. I guess one interesting thing to note is that with respect to the entities that profit most with respect to market information, it is starting off with no markets, it is the information vendors that retail that information out. And probably indirectly the

broker dealers use that information to encourage transactions

through their customers.

The second piece is about the only piece of analogy vis-a-vis

AT&T that I can see fitting is the SEC has made a decision to

make it much easier for electronic trading systems such as Island

to become exchanges and to choose if they would rather be an exchange, become in the business of collecting data and disseminating it, among other things, and providing executions in that way

rather than being in the business of a broker. So that Congress, always in its wisdom, has never placed a quota on the number of exchanges that may exist in the United States, and now the SEC has

made it much easier for different for-profit models to become exchanges.

Mr. SHAYS. Anybody else want to respond?

Mr. SMITH. If I can comment on that. To the extent that Island

can become an exchange, while that certainly will help in competition for transaction services, I don’t know that it will have any effect on the price of market data. If Island were to become an exchange, we then become part of the consortium that sets the prices

that everyone pays, including Schwab, when they go to purchase

consolidated quotation data.

At the end of the day, I think it is important for this subcommittee to really think about the vendor display rule, because

everything we talk about it, and it is not a very sexy rule, but it

actually is a very important rule, because it distorts the market

and creates everything we are talking about today, because it

42

forces every market participant to purchase this one set of information. And what you need to ask yourself is, certainly the consolidated data is very important, it is critical to investors and I certainly believe they should have it, but the real question is should

that be the only data investors get, and we, certainly at Island, believe that investors should get as much information as possible,

and by limiting them only to consolidated information, what you

are actually doing is limiting the amount of information they can

get.

Mr. SHAYS. Thank you. Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mr. Shays. I always enjoy your

participation. I just want to make an attempt at sort of a wrap-up

here.

Obviously, we need from all sides more information. It would not

be my intention to take any significant action on any front until

we certainly have receipt of the Seligman Committee recommendations, but I think it important or fair to say that this is a concern

I believe is appropriate for our subcommittee to understand and examine. The nature of the participation in the markets has been

dramatically democratized because of technology, and therein is the

Congress’s responsibility to ensure that market participation is

based on the best information possible, fairly distributed without

prejudice to anyone.

To that end, it has been stated that the SROs are creatures of

statute, which is exactly my point of beginning, that because you

are privileged by creation of statute, there comes with that specific

duties and obligations one must discharge. One element of that responsibility is a fair and reasonable pricing of distribution of data.

Unfortunately, I don’t feel that we can determine today, based on

what I now know, that the charge is fair and reasonable, although

it is apparent that from a historic perspective, it hasn’t vacillated

dramatically, at least in the New York Exchange’s examples, but

it doesn’t necessarily relate to the provision of the information as

a condition of your statutory authority.

I think the point that Schwab makes that it does not pass on

level 2 information to all customers as an economic decision is unfortunate. When someone gets delayed tape information, and

makes investment decisions on that information alone, I have great

discomfort in feeling that that is the way large numbers of unsophisticated investors are making their decisions.

At the same time when that occurs, I think there is a larger economic concern that is warranted by this and that is, that level of

investment activity based on untimely information does, in fact,

lead to additional market volatility. That is not good public policy.

For these reasons, I feel it is important for us to engage the new

chair of the SEC, assuming confirmation finally occurs this week,

to assist us in better understanding this issue. I invite the participants here today and others who may have interest to forward additional information for us to review through our summer recess.

I can’t wait to get on the beach with an explanation of how Section

11A and other provisions of the Act affect our judgment on this

matter, but I am just anxious to get there.

But we will return this fall, hopefully, better informed with the

assistance of the Chairman of the SEC and any other appropriate

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agency, to help us understand the functions of the exchanges in relation to this important public policy matter.

Beyond that, I wish to thank you for your patience and endurance. No one would have dreamed that a hearing on market data

would have held us here until 4:45. I am sure you can’t believe it

either. Thank you for your courtesy. Hearing adjourned.

[Whereupon, the hearing was adjourned.]

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A P P E N D I X

July 26, 2001

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