December 28 , 2000

The initial meeting of the SEC Advisory Committee focused on the core issues of transparency and consolidation and was driven by the announced intent of the New York Stock Exchange (NYSE) to withdraw (pending regulatory approval) from the Consolidated Tape Association. That discussion generated a significant amount of debate among participants on the both the concept of transparency and on the mechanism of achieving data consolidation (see FISD summary). As a result, Dean Seligman asked participants to submit written proposals on alternative plans for achieving consolidation -- to be used as the basis for the December 14 meeting.

Five organizations (NYSE, Reuters, Island, Schwab and Archipelago pdf files) provided comment letters in response to Dean Seligman's request. FISD encourages all members to carefully read the submission letters. They are all very well done and reflect some significant and creative thinking about the future of the National Market System. From our perspective, there seem to be two consistent themes among all five alternative model proposals.

The first is the promotion of efficiency through competition among multiple consolidators for the collection, processing and dissemination of best quotation and last sale data. Virtually everyone makes the point that competition would enable the industry to achieve more efficiency and lower costs in data consolidation. Central to achieving the efficiency objective is the recognition that continuing to adhere to mainframe technology (embedded in the current system of monopoly data consolidators) -- rather than using network technologies to collect and disseminate market data -- will hinder, rather than enhance the goals of the Securities Act amendments of 1975. Competition among security information processors (SIPs) would promote efficiency through the use of distributed architecture and industry-standard protocols, minimize exposure to a single point of technology failure, and promote investment in greater distribution capacity. NYSE summarized it succinctly by stating that "technology has evolved to the point where CTA is no longer needed to consolidate data."

The second essential theme focused on the definition of transparency and the benefits of information competition. According to the discussion, transparency is about a "view of the world" and does not mean the same thing to everyone. The concept of one-size fits all was uniformly described as "archaic." The value of transparency is better measured against an investor's ability to assimilate data, make investment decisions and execute trades.

Not surprisingly, there was little support for the notion of the government continuing to mandate the appropriate level of transparency. And while everyone supported the continuation of non-discriminatory access to the national best bid/offer -- most believe that mandates are not necessary because the marketplace will demand that participants reveal multiple levels of liquidity and information competition will ensure the greatest degree of information flow to the marketplace. The essential point was that information competition should be promoted and that consolidators should have the freedom to offer a broad range of robust data services beyond the NBBO.

In fact, the discussion went a lot further. Most participants favor multiple, competing quote products -- including the dissemination of non-consolidated, properly-identified market data -- to the industry. Most agree that a distinction should be made between the NBBO and richer quote formats reflecting depth at multiple price levels. The emerging recommendation seems to be that the SEC should do what it can to promote the creation of more value-added information -- and provide incentives to improve dissemination and content -- through unrestricted information competition. In such an environment, prices, terms and conditions would be left to the marketplace (subject to the existing fair and reasonable statute) with compensation based on the value of the data. In essence, competition will reduce the dissemination of unnecessary information and will result in the best data, the best processing and the best order routing.

FISD did an analysis of the five alternative model proposals and produced this rough comparison chart:

(Printable version pdf file of Alternative Model Proposal Analysis)

There was so much "a priori" synergy among the Advisory Committee that Schwab was motivated to pose the core question -- i.e. do we have a defender of the current system? The general tone of the meeting was captured in the comment letter by Archipelago. "Unfortunately, the current model for collecting and disseminating market information reflects all the telltale signs of a legacy model, untouched by competition and innovation, designed for a different place and time. Costly, inefficient and unfair -- and operated under the purview of a poorly-conceived governance structure -- it is rare to find a major constituency that genuinely supports the status quo model. Change is in the air."

And that, I believe will be the orientation of the March 1 meeting! It is not so much a debate about whether a new model is needed. One is! But rather a debate about what form of change can be facilitated to encourage vigorous competition without overly shocking (or perhaps seriously jeopardizing) the U.S. securities industry. This is where the skill of Dean Seligman will be brought to bear. The assignment for March 1 is to examine ways to improve the existing system. The issues to be considered are likely to be: the definition of minimal mandated levels of data; improvements in the technological infrastructure capabilities of an exclusive SIP; pricing inequities and alternatives to revenue-sharing by static formula; essential changes to the existing governance structure (such as elimination of the single vote veto); market data administration, and the basis of determining fee levels for market data (including the SEC's role in fee regulation).

Left to a future discussion are the (more) important issues of a new model for market data dissemination, the introduction of competition among SIPs, marketplace approaches to capacity management, the role and value of information competition; and the essential debate over data ownership.

Stay tuned.

Please contact Mike Atkin at matkin@siia.net with any questions or comments.