Chairman Harvey Pitt
Commissioner Isaac Hunt
Commissioner Laura Unger
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549

Re: Report of the Advisory Committee on Market Information

Dear Chairman Pitt and Commissioners Hunt and Unger:

Over the last year, the Commission’s Advisory Committee on Market Information invested considerable time exploring ways to reform the current system for disseminating market data. The undersigned firms, all participants on the advisory committee, appreciate the efforts of Dean Seligman and the Commission staff in drafting the report of the committee’s deliberations. We write separately, however, to explain our views about why certain recommendations emphasized in the report will not introduce meaningful reform.

Competing Consolidators

One of the principal themes advanced by committee members was the importance of fostering competition in the dissemination of market-data. In this vein, the report recommends a model under which multiple consolidators could compete to collect and resell market data from the exchanges. This model, however, introduces competition to only one segment of the chain in which market data is collected and distributed.

The current proposal will not introduce real competition because the exchanges will still have the sole right to sell market data to vendors, and broker-dealers and vendors will still be compelled to buy it from them. The exchanges would retain exclusive control over access to, and fees for market data, and would face no competitive pressure to provide data on a more efficient and useful basis at more affordable rates. By analogy, no one would expect television news to be competitive if multiple competing television networks broadcasting the news were nevertheless required to obtain that news from a single, government-authorized bureau.

Impediments to Real Competition

The crux of the market data issue is that SEC rules first require market participants to give the market data they generate to the exchanges (the “Quote Rule”), then require them to buy that information back from the exchanges in consolidated form if they distribute any quotation information to investors (the “Display Rule”). This government-established monopoly means there is no incentive for exchanges to innovate and offer competitive new market data products, no invisible hand of the market to ensure competitive and efficient pricing, and no incentive for exchanges to streamline administration and otherwise provide good service. This system also prevents firms and vendors from offering competing products (such as depth of quote), because SEC rules prohibit vendors from distributing their own data products unless they also purchase and distribute the exchanges’ monopoly data along with their own data.

One of the goals of the committee was to explore ways to increase the amount of information available to investors, especially in light of decreased quotation depths as a result of decimals. This objective received widespread support among committee members. But the approach recommended in the committee report would not result in any more market information being made available, and could even reverse recent advances, such as initiatives by market participants to display their order books for free on the Internet.

The Commission’s formation of this committee a year ago was driven in large part by concerns about the reasonableness of market data fees and the discriminatory impact and effect on competition of the current fee structure. The report does not explain how the recommended model would mitigate these concerns if competing consolidators (and ultimately firms) were still required to purchase their data exclusively from the exchanges. The report also does not explain how this competing consolidator model would address other concerns raised by committee members about the process of licensing market data from the exchanges – such as expensive and unwieldy administrative burdens, a marked lack of transparency in the licensing process, and the “pre-approval requirement”, which forces firms to vet their business plans and obtain approval from the exchanges (which in many cases are also their competitors).The committee did not explore how market data is distributed in other markets (futures, foreign exchange, etc.) or other countries.

In our view, a competitive, market-based solution that deregulates market data is preferable to increased government oversight and supervision of the licensing and fee-setting process. As we have outlined here, a truly competitive and efficient model requires elimination of regulatory obstacles that prevent vendors from competing with the exchanges on a level playing field, and the ability of vendors to purchase data from many competing sources – either directly from broker-dealers or through exchanges. (Indeed, an added benefit of a competitive model is that it would promote networking and the availability of multiple sources of market data, in contrast to the current centralized regime with its single point of failure.)

We respectfully request that any action by the Commission or its staff as a follow-up to the Advisory Committee report not assume that the report reflects industry consensus or that all views have been heard. As always, we appreciate your interest in this important issue, which involves perhaps the most essential feature of our national market system – the transparency necessary for investors to participate in our markets with confidence.

Sincerely,

Edward Nicoll
Chairman and Chief Executive Officer
Datek Online Holdings Corp.

Michael T. Dorsey
Senior Vice President, General Counsel
and Secretary
Knight Trading Group, Inc.

Devin Wenig
President
Investment Banking and Brokerage Services
Reuters Group

Carrie E. Dwyer
Executive Vice President and General Counsel
The Charles Schwab Corporation