Initial SEC Advisory Committee Results

October 11, 2000

FISD has been invited to help evaluate issues relating to market information by the Securities and Exchange Commission via its newly created Market Data Advisory Committee. The initial meeting for the Committee was held on Tuesday, October 10 in the Commission's main offices in Washington DC. The Advisory Committee has been asked to provide a written report to the SEC within one year. The second meeting is being scheduled for this December. According to Advisory Committee Chair Joel Seligman, "The Concept Release emphasized several points." These points are:

Broad public access to consolidated market data was the result of planning and a concerted effort by Congress, the SEC and the exchanges. Prior to the 1970's, the exchanges decided who would be entitled to receive market data and the terms of that receipt. The result was the creation of the national market system including a communications infrastructure to disseminate consolidated market data.

The economic context of market data has changed dramatically since the early 70's. The most significant changes are the implementation of new technology that allows retail investors the opportunity to get access to real-time data, the growth of ATS/ECN and the advent of for-profit exchanges. Market data is critical in each of these areas.

Professor Seligman outlined the six key policy questions to be considered by the Advisory Committee:

1. Ownership of market information,
2. appropriateness of the governance structure,
3. definition of the appropriate data to be consolidated and disseminated by each plan,
4. determination of the appropriateness of vendor and subscriber fee structures,
5. appropriateness of pilot programs, and
6. the value of adopting a cost-of-service approach for market data fees.

There were 33 comment letters filed with the SEC in response to the Concept Release. Almost all supported the importance of consolidated market data. Several suggested that the SEC reexamine the single consolidator plans currently in place. NYSE reinforced its intention (pending SEC approval) to withdraw from the CTA/CA plan. Seligman suggested the Advisory Committee consider two fundamental options:

1. Whether the current arrangements for disseminating market data through the CT, CQ, Nasdaq/UTP and OPRA networks are outdated and whether a new system is needed. If the Advisory Committee recommends this we have to explain the need for a change, why the new model is preferable, how it would work and whether it would require a new legal framework under which to function.
    
2. The current networks should be retained, but that reforms are needed to network governance, fee structures, fee determination, pilot programs, SEC filing requirements; agreements; market data policies, etc.

Seligman also outlined the two core issues underlining the options above:

1. The transparency of quotes and orders and the terms of competition among market centers. In essence, does mandatory transparency yield the best market structure? Should exchanges continue to be required to make their market data available to everyone on fair, reasonable and nondiscriminatory terms or should they have discretion to decide who gets the data and under what terms and conditions?
    
2. Should the SEC continue to require that market data be displayed in a consolidated format? Or should market participants separately obtain the information made available by the various markets?

During the open discussion, a number of themes emerged:

1. Transparency is good but there is no consensus on the definition of transparency -- particularly by firms that don't want to expose intentions that can move the market,
    
2. transparency has a real cost (in terms of update rates and capacity) -- its important to make the distinction between more, good, accessible and actionable data,
    
3. competition (rather than government mandates) will best determine what information will be made available -- with no consensus on whether there should be a comparable and level playing field on the data that is made available,
    
4. it's important to make a distinction between the means of consolidation (i.e., who and how to do it most efficiently) and the value of consolidated data (i.e. display of limit order book).

The focus of the next meeting is on alternative models of consolidation. Please contact Mike Atkin at matkin@siia.net with any questions or comments.