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Division of Market Regulation:
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| I. | Introductory Remarks
Joel Seligman
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| II. | Discussion on Market Information that Vendors and Broker-Dealers Should Be Required to Provide to Customers |
| III. | Discussion of How Market Information Should Be Consolidated |
| IV. | Discussion on Governance of the Consolidators |
| V. | Discussion on How User Fees are Determined and Revenues Allocated Among Plan Participants |
| VI. | Public Questions/Comments |
| VII. | Summary/Next Steps
Joel Seligman |
Mr. Seligman: Let me thank you all for joining us this morning and particularly thank those who forwarded memoranda and other correspondence since our last meeting.
I would like to start with a game plan as to how we are going to proceed from today with the conclusion of our open meetings and the ultimate publication of the draft.
Under our charter we have four more public meetings, four counting this one today, and let me give you a schedule first for those. I have already indicated our next meeting will be April 12. I would like to announce we will have a meeting on May 14th, which will address the topic of competing consolidators. It is the topic that Don Langevoort's subcommittee will focus on between now and then. We will talk about the subcommittee a little bit more later, but there will also be two potential subcommittee meetings between now and May 14, one scheduled for March 26, same place, a second scheduled for April 16, again same place.
Our final public meeting will be, unless there is any reason to seek additional ones, on July 19. The purpose of the July 19 meeting will be to address options.
Now the game plan I am going to propound to you is that we are going to employ what I will characterize as a judicial model for proceeding, and what I am going to do is build on the analogy by which appellate courts including the United States Supreme Court proceed.
You typically have an initial conference – think of these as large initial conferences, in which the Judge or Justices state their views with respect to each issue. You then largely proceed to build consensus through the round-robin circulation of drafts.
It is my intent between today and April 12 to try to go through each material issue with respect to how one might renovate the current system. I will ask – and we are going to have most of today for discussion by the members here - - each of you to state your point of view on a series of questions I will propound. They are the ones indicated in the agenda. I may tweak them a little bit.
I will ask everyone to recognize that he or she can supplement oral statements with written statements that will be received later.
At some point after April 12, I will take it upon myself, working with the Division of Market Regulation, to begin preparing the first draft of the chapter or chapters which will address how one might renovate the current systems. There will be a successive circulation of drafts to the members of this committee. Some of you may find you are entirely comfortable with what is circulated, and you can so indicate. Many of you I suspect will find areas where you think either facts are wrong or you disagree or you feel amplification is necessary and will use the circulation of drafts as a process to try to build consensus.
Now what happens if you ultimately disagree with what the consensus appears to be? That will be recognized in the ultimate document. It can either be recognized in the text or be recognized in footnotes. Each of you have the opportunity to prepare a separate statement to accompany the ultimate report.
My intention is to attempt, first, to begin the process of round-robin circulation of documents on the equity side. It may begin with a draft before or after the May 14th discussion on competing consolidators, but the queue would be we will first address the issues, and there are many difficult ones, on the equity side, and begin a process which may take several months of document circulation before we reach a document that will be a final statement.
On July 19, which is a significant interval after the last public meeting on the equity side, we will have a meeting with respect to options. I have chosen that date with some care. I would like to see how far along we can be with respect to building consensus on the equity side. My anticipation is that the July 19th meeting will focus on what are the appropriate differences in the rule regime that should apply to options relative to the proposals we'll make on the equity side.
Under our charter we are required to deliver a final report on or before September 15, and as I said before, I have never missed a deadline and I don't intend to miss this one.
There will be a good deal that will become clearer as you see successive drafts and this will be a process where the ultimate work product and all of our public meetings are public, and the public is invited to comment and certainly will be invited to comment at the conclusion of today's meeting, but that the work product, the circulation of documents before we get to an ultimate report will not be public. That is, I will circulate documents to the members of the committee and ask you to review them and give me comments. The document that will ultimately be delivered to the Commission obviously will be a public comment. The public can comment on it. The Commission action on it will also go through a public process as well.
Now that is the game plan I want to pursue. Let me offer anyone on the committee an opportunity to comment. All right.
Let me then ask Don Langevoort, who will be chairing the subcommittee looking at competing consolidators, to tee up that subject and focus on how they will proceed. I will just add one other prefatory remark. We will circulate at some point in the near future a memorandum to all members of the committee on the procedures for the subcommittee. They are still being reviewed by the Office of General Counsel at the SEC, but what we want to do, and Don will explain this, is have those individuals on this committee who wish to participate in the subcommittee identify themselves either today or in the next few days. Before March 26 we will circulate to everyone a statement of procedures with respect to the subcommittee.
Don, let me turn things over to you.
Mr. Langevoort: Thank you, Joel. Obviously, the subcommittee has a lot of work to do and my expectation is what we are going to try to do is begin developing a work product that can be delivered to the full committee by the May meeting.
Obviously the subcommittee cannot make decisions that preclude anything that the full committee does, and I don't want to in any way interfere with the ability of the full committee to decide these questions. What I do think will be helpful for the subcommittee to do is to ask the question of if you want to go in the direction of competing consolidators or some alternative model, what are the key decision points – what is the series of questions you have to ask in order to design the system.
If there is consensus on answers to those questions, that would be good, and we will certainly make that recommendation to the full committee. What I do want to get is a sense of what those questions are, what has to be asked.
Once we have a list of those questions I think it then becomes important for the committee to consider the costs, the risks and the benefits, depending on how you design the system and make sure we have a complete sense of what the costs, risks and benefits are not only in terms of presence of those costs and risks, but magnitude.
If the subcommittee believes and comes to a consensus that risks are manageable, that is useful information to convey to the full committee. If there is disagreement about the magnitude of the risks, that too will be communicated.
That is what I want to accomplish in the two meetings, March 26 and April 16, that the subcommittee is going to have. What we are going to be creating, in essence, is a decision structure – so as Joel said, the most important thing to do first is if you want to be on the subcommittee let Annette Nazareth's office know, hopefully by next Monday, of that decision. Many of you, six or seven I think, have already volunteered to be on the subcommittee, but we want to get a complete group. Once we have the group established and the General Counsel's Office has given us final guidance on the process by which subcommittees do their work, we will be circulating an agenda description and other materials in advance of the March 26 meeting.
Mr. Seligman: Thank you, Don – and let's be real precise. If you want to be on the committee, it will be very useful if either today you either reaffirm or indicate you will be able to participate at least on the March 26 meeting, conceivably also on the April 16 meeting, and you can do so through e-mail or subsequent correspondence up till next Monday.
I would like Director Nazareth to just comment on the Reuters case, in which the SEC filed an amicus brief which has some overlap with our activities here. I think a couple of members of the committee either in written comments or otherwise have indicated some interest in the relationship between the Reuters matter and what we are doing here.
Ms. Nazareth: Thanks, Joel. I basically am just going to reiterate what we said in our materials that we sent to you. Obviously a number of you had been following this matter and had made inquiries about receiving copies of the amicus brief that had been filed in this matter, so we thought it was beneficial to send it to everyone just so that we are all on the same page in terms of what is happening in this very dynamic process as we continue to address market data issues.
As you know, the Commission filed an amicus submission in an arbitration that was brought by the OPRA plan participants against Reuters and the matter, the issue at hand in that case was interpretation of the contract between Reuters and OPRA that related to the ability of the vendor to convey market information.
The issue in that case was the manner in which Reuters was disseminating information. In this case it was disseminating only the information it had an option among its, with its market participants that it would, it permitted them to get only information with respect to last sale and quote information for that market that had the greatest volume or the dominant exchange for the prior month for each option series, and the question was whether or not that was consistent with 11A and with the interpretation of the contract provision. The Commission did file an amicus brief saying that it did not believe that under the current model and the current interpretations that that was consistent and that what should have been done was that information on all of the markets should have been conveyed.
The Commission also expressed the view that it would have been consistent with 11A had an NBBO been produced and the best price been conveyed, but that choosing to convey the data only with respect to the market that was basically the dominant market for the prior month was not consistent.
Again, I think what we want to emphasize is that, you know, it was a little bit inopportune that we felt it incumbent to address the issue at this time, since we are obviously in the midst of rethinking a lot of these issues. We just wanted to make clear that this was an articulation of sort of what we view as consistent with the current interpretations but don't want to in any way give you the impression that we are not open to the additional thoughts and input from this committee.
Mr. Seligman: Thank you, Annette.
We will be meeting until approximately 5:00 p.m., and then public comments at that point. There will be a lunch break for approximately one hour at some time at Noon or slightly after that. For members of the committee, if you wish to join us in Room 1C50 – do I have that right? – we will not have a meeting there but we will provide lunch for the members of the committee. The lunch will be no more than one hour.
Let me bring us to the matters at hand. We circulated earlier a draft agenda, an agenda for the March 1 meeting, and the first issue on our plate in effect deals with the question of should there be mandatory information requirements, and if so, should we retain the current NBBO structure on the equity side or should we amplify it in some identifiable way.
For those of you with the draft agenda, I circulated four possible ways that we could address this. I would like to first focus on Questions A, B and C or Options A, B, and C.
(A) would be simply we retain the current display rule requirements; (B) would be that we would retain them and amplify them, increasing the mandatory information; (C) would be in effect we eliminate the display rule altogether.
I would like each of you to address those options and try to speak no more than two minutes on this, again reserving the right to amplify your comments through subsequent written statements. If you wish to make written statements on this issue or any other issue we will address today, I would ask that the written statements arrive no later than March 16, Friday, March 16.
I am going to go around the room in alphabetical order and I will in the interest of absolute fair play the next time go around the room in reverse alphabetical order, so no end of the alphabet feels discriminated against in any way, shape or form.
Let's start with Mike Atkin and have his views on this mandatory information component we are addressing.
I'm sorry – when you speak, the button at the front here, you need to press it forward or away from you, as Annette said.
Mr. Atkin: In reading all the comment letters, I thought there was a pretty clear consensus that the NBBO was still vital and needed. I thought there were three core issues that needed to be discussed amongst this group.
The first one was the New York Stock Exchange idea of – is it a must display or a must offer the data. I thought that was a very important question.
I think there is still an open question of whether the vendors can implement that or not.
The second thing was this idea of information competition, whether you can offer your own data separately –
Mr. Seligman: Let me hold that question. I promise we will get to that in a second sweep around the room – which is an important question, believe me.
Mr. Atkin: Well, I could just cut it off there. I think that, you know, clearly the NBBO looks like it is valid according to everybody and the open question I think is is it a must offer or is it a ability to offer.
Mr. Seligman: Thank you, Michael. I appreciate that.
I'm going to turn to Harold Bradley – forgive me, I am very nearsighted – Harold Bradley.
Mr. Bradley: It is interesting as a payer in all circumstances for market data, our views are a little different than a lot of others who aren't collecting somewhere in the stream and/or sharing in the revenues from that stream, and we think – and again, we have been involved in a lot of discussions at a very broad level with the ICI and others regarding the buy side use of information that the NBBO and a decimal environment as currently constructed is insufficient for public good.
We need a depth of available quotes, and the way I have seen many of the proposals structured, it's let's just get the NBBO from the exchanges but we'll repackage it and mark it up and sell it to the end-users, which is always us, so I am a little concerned in terms of how we structure this, that the data is available and it is available because of the way the rules in the various exchanges work for their members.
The idea that they would willingly display that information or sell that information I would argue, for instance, at the NYSE that the depth of book – the orders, bids and offers, away from market, are very, very valuable, and it's what forces everybody to go to the floor to get that information and they market that as one of their great abilities, to go and get that information, and many on the buy side, my firm specifically, would not like to have to do that in order to get information, so is it a public good?
In our view we should see a greater depth of book and we do believe the NBBO is insufficient. We need more and that last sale data is critical to an efficient public functioning of markets and price discovery.
Mr. Seligman: Now, Harold, let me just take your statement and pose the obvious question: If you wish to mandate more, are you able to identify what precisely more you would mandate?
Mr. Bradley: I think all of these things change in the market, but when we have a market that now moves in penny increments, our view would be that there would be two possible ways to address that.
One would be five levels of price, and that five levels of price could be where the orders reside. Another way to do that, because of the great wonders of automated technology now and all the various proposals I am seeing, would be the ability to aggregate a certain amount of data – let's say 10,000 shares or 20,000 shares – and you would require displays that would aggregate displayed limit information. That might be another way to get to increasing the display of limit orders, which I think continues to be a major problem that is implicit in all of this discussion.
Mr. Seligman: And you should again on this topic reserve the right to try to amplify those points through correspondence.
Bob, I know you sent in some very useful correspondence but you –
Mr. Britz: Yes, I am just a little confused, sir. Are we answering – limiting our remarks to letter (A) or beyond?
Mr. Seligman: Focus on A, B, C – that is, it's a question of NBBO, no NBBO, and obviously that includes the last sale reports as well, or NBBO plus additional mandated data.
Mr. Britz: Okay, fine. Given that we are talking about a display rule and we are not per se in the display business, there are folks around this table who are a whole lot smarter than myself and my colleagues at the New York Stock Exchange as to what is best to do on the display side, and the market data business is a rather long end-to-end chain, and you can picture the stock exchanges as being on the production side and the vendors really being on the display side.
So we sort of, to be perfectly candid, punted on this question. We raised a question or two as to whether or not the vendors ought to be obliged to display or simply carry that so that it is available to the customers who want that. We certainly do think that consolidated information is important for investors to have. We certainly do think that the SROs like the NYSE need to comply with the various requirements in terms of production and making it available to various one or more consolidators so that that is available to the vendors to display, but we think probably the vendors could weigh in on whether or not this is a must offer or a must display kind of environment going forward.
As regards to data beyond the NBBO, the NYSE is on record that we are going to publish the entirety of the contents of the limit order display books in June of this year and perhaps even sooner. Beyond that, we are working through, even as we speak, with various pockets of the investment community.
What we might do very quickly to deal with the reality or the perception that the NYSE market has become less transparent over the last three or four weeks on account of decimals, we have got any number of other information initiatives on the docket so I think, and I said this at an earlier meeting, I think markets sort of compete on the basis of the information they provide, as they compete on any number of other services, so the NYSE I think, to draw this to a close – I am violating the two minutes, I'm sure – is in favor of a minimum level of mandated information.
Over and above that, we think the markets ought to distinguish themselves on the innovative information products they provide.
Mr. Seligman: And the minimum level that the NYSE supports is what we have characterized as the NBBO plus last sale?
Mr. Britz: In terms of mandate, I think that's right, but as I said, there are any number of products that will come to market very shortly over and above that that have nothing to do with being mandated by any governmental organization.
Mr. Seligman: And I think we all appreciate that. Andrew?
Mr. Brooks: Thank you, Joel. I think I would like to just amplify a little bit of what Harold said. It is our opinion that the NBBO, though important, really doesn't give an accurate reflection of the marketplace, and for institutional investors especially to trade in the marketplace today you need broader access to information.
I think we would be in favor of mandating not only the NBBO and last sale and volume but also as much of the book, as much of the limit orders, as much data as is available, and leave it up to the market centers or exchanges to provide the data and the vendors to capture it and distribute it and compete on that basis, and so you would choose your vendor perhaps on its display abilities and its ability to give you data in a way that is most functional and useful to you, but I think that all market centers, anyplace where trading takes place, ought to be required to provide as much data as they have.
In other words, the data should be accessible by all and shouldn't be resident just on that floor or that box or that facility. If we are really interested in transparency, it seems to me we have to allow people to see that and how they access it is their choice.
Mr. Seligman: And again, to try to characterize what I think I have heard, clearly you are in favor of at least the NBBO and last sale reports but you also want more.
Mr. Brooks: Yes, so in your scheme I think Option B is the one preferred, is that we would recommend increasing the minimum level of information and that minimum level would be way beyond the NBBO and last sale data.
Mr. Seligman: We will come back for another sweep on data, focusing on what we do beyond the minimum. Conceivably the way I may frame it is, you know – how you re-articulate the minimum if we don't pick that up enough the first around.
But one of the – the real struggles here is, can we trust the marketplace? You have both the NYSE and the Nasdaq coming forward with all sorts of new data at this point.
And second, there is a question, if you try to mandate beyond the NBBO and last sale reports, how do you frame that? In other words, to say I want as much as is possible is useful or as much as the exchanges have is useful in one sense. But it's not terribly useful for drawing a rule or trying to craft a statute.
Mr. Brooks: Just to respond to that, perhaps a way to think about that, Joel, is to think about technology that would aggregate things and take all data from all different centers and aggregate it. So that as you looked at a quote you would see down 32 cents, there was a total of 6,500 shares bid for from 14 different forces. That might be a way to think about it.
Mr. Seligman: Thank you, I appreciate that. Matthew?
Mr. DeSalvo: Yes, thank you, dean. I agree with both Andy and Harold on the insufficient of – insufficiency of the NBBO at its current status of one level in a decimal environment.
We are in favor of option B in your agenda. We are cheered by the fact that the SEC passed the SuperMontage which addresses just that issue. The only addendum I would add to that is it can't be built fast enough. We're also cheered by what Bob mentioned about the opening of the book and the recognition that we deal in an environment that is really two tiers – one on one hand at the retail level and one at the other – and an aggregate of the retail level on the institutional side.
We would prefer to see the SROs show two levels – at the 10,000 share level and at the 25,000 share level – in addition to their expanded books that Bob and the SuperMontage will bring about.
A lot of the difficulties that we have is that to the 500 share and under customer he sees no problem with the decimal environment. But to the institutions that Harold and Andy and the rest at the table represent, that is insufficient. And so we have to recognize that we're trying to deal with a retail institutional environment and the SROs would help us if they would show what was sufficient for the retail and the institutional level by showing the book three to five levels down from the inside market. In addition, if they could show where those levels accumulate at 10,000 and 25,000 shares.
And one last comment also is that in the introduction of decimals in this environment, the fact that a regional exchange can come in between the New York book simply because we're at the penny level, it precludes the importance of the ITS system, which I don't mean to turn this into an ITS argument, but the importance of rolling up an NBBO with the inclusion of regional and third market and listed securities is extremely important to disseminating a true NBBO.
Mr. Seligman: Thank you, Matthew. Carrie?
Ms. Dwyer: Well, Schwab submitted a response to this in writing, so I won't go over that in detail except to say that the NBBO is a useful piece of information. We have no problem with it continuing to be displayed, to be mandated with the caveats that we put on that, we think that should be done in a competitive model. I understand you don't want to talk about that right now.
We talked about most favored nation pricing and sunshine on the pricing structure as being critical to maintaining transparency in this market.
I would also say that we – our customers also, the 500 share customers, 1,000 share customers want to see greater depth of book, more value added market data products.
I was very heartened to see the competitive spirit evidence in the Nasdaq and New York Stock Exchange white papers. I find myself in agreement with Bob Britz in his remarks. But we think that the best way to have the best value-added data products in the market is to have a competitive market for those.
And the exchanges – the primary markets are willing to compete. I think the vendors are willing to compete. I think everybody would win in that kind of scenario.
Mr. Seligman: Thank you, Carrie. And again, when you say the NBBO is an important piece of information you would suggest that you would favor a mandatory minimum with the NBBO and last sale reports?
Ms. Dwyer: With the caveats that we put in our response, otherwise not.
Mr. Seligman: Okay, and there will be opportunity, obviously, through round robin circulation perhaps to pick that up, as well.
Mr. Colby: Can I ask a question?
Mr. Seligman: Absolutely.
Mr. Colby: Carrie, when you say competitive – you support the competitive – making of this information available, you mean that that would be done on a voluntary basis in a voluntary dissemination?
Ms. Dwyer: For other than the NBBO. Value added products of many kinds – whether it's the book or a graphical depiction of the current state of the market, so on and so forth, yeah, I think that that – there ought to be an opportunity for innovation there – that it would be a mistake to mandate something like the NBBO for a larger slice of data and then have that frozen in time when it may not be the most useful product than an investor could use.
Mr. Seligman: Appreciate that, Carrie. Joel?
Mr. Greenberg: Thank you. Our view is that the minimum is not going to change. So we think that the committee should work over that base and then make decisions going forward as to what should be done with this process.
We also – as a specialist and market maker both in stock and options – we don't have an issue with displaying more information. Thank you.
Mr. Seligman: I appreciate that. Bill?
Mr. Harts: Thank you, Joel. Let's make no mistake about it. When it comes to information more is better. So I guess, the short answer is that we would support increasing the minimum level of information and – while at the same time we recognize that different market structures could ultimately make that additional information less useful.
For instance market structures that allow or encourage hiding orders or having orders not represented on the book, which is also a danger. But I would disagree a little bit with Matt DeSalvo in that I think that the markets should disseminate all the information that they have on the book and let's let the – either the end-user or the user's data vendor take care of aggregating prices and sizes at different levels. Thank you.
Mr. Seligman: And again, just to focus specifically. The theme is more is better. You clearly favor at least the NBBO and last sale reports. Would you favor mandating additional information? Or would you rely on the markets to produce it?
Mr. Harts: I think at this point we can place additional mandates on the markets for more information.
Mr. Seligman: And if you were going to mandate additional information, do you have a sense of what you would mandate?
Mr. Harts: As I said, full information about the limit order book, including depth and size – I'm sorry, depth and price.
Mr. Colby: Bill, do you differentiate between what the markets – you would expect the markets to produce and what would have to be given to the customer?
Mr. Harts: Yes. I think as Matt pointed out, again, that we could easily get into a position of information overload. But I think that the customer really in this age of highly advance technology, the customer is in a position to dictate what he wants to see and how. This sort of touches indirectly on what Annette said earlier about the Reuters arbitration. Ultimately it should be up to the customer to decide how much information he really wants to see. But if the information isn't there in the first place to be collected or disseminated, then that becomes very difficult.
Mr. Seligman: Thank you, Bill. George?
Mr. Jennison: Thank you. We are in favor of increasing the minimum standards and making them mandatory. Aggregation, I think, is very important for your basic retail investor out there. I find it a little curious to hear some SROs say they're not in the display business. And, Bob, I'm not 100 percent sure if that's what you really meant. You kind of went the opposite direction later.
But from the retail investors standpoint the display of the information is vital. And so for that reason we would say increase the minimums. Our viewpoint is three to five levels of price will be important. Aggregate the orders at those prices with the combination of some indication of where size resides outside of the quote.
I'm not sure – we're not sure if it's 25,000, 50,000. It may vary based on the stock and the liquidity in the stock. But we think that would be important, as well.
Mr. Seligman: Thank you, George. Simon?
Mr. Johnson: I agree with many of the previous speakers that if you're going to maintain a national market system and really stick to the principles of 1975, I think you have to mandate the display of more than the NBBO because the way the market has changed, the NBBO is not a sufficient statistic of market quality at this point.
So if you believe in the 1975 reforms, you would have to mandate more than that. And my presumption would be mandating the display of the full limit order book, unless there are compelling reasons – either on the technology side or in terms of games that you think people may play in terms of hiding orders.
But I would tend – I would actually rather – I would like more discussion on that, rather like to shift the presumption, the rule-making onto the SEC through its usual regulation of SROs and vendors to make this happen.
Mr. Seligman: Thank you, Simon.
Mr. Colby: I ask the same question, do you differentiate between what you would require from the markets to make available and what must be given to customers?
Mr. Johnson: Yes, I'm sorry. I was doing that – what must be given to customers. Now the way in which it's given to customers – how you package it – is obviously up to the vendors. But what must be available to the customers, I think. That would be my presumption.
Mr. Colby: But could I – there must be a difference between what must be available to customers and what must actually be given to customers?
Mr. Johnson: What must actually – I'm talking about what must actually be given to customers.
Mr. Seligman: Ed?
Mr. Joyce: Yes, thank you. I would come out somewhere between A and B in that I believe strongly that we have to maintain the minimum requirements just in a sense of fairness to continue what the national market system – especially with the expanded focus on best execution. And I am in favor of competition generating deeper levels of data with one exception.
I am concerned with the impact of decimals. And I believe that we should be very careful to evaluate that impact on the markets and consider whether another level of information should be required.
I would not go so far as to say that all five levels of the book – or I think competition will generate additional information to the public and to the vendor community.
Mr. Seligman: So when you say you're between A and B, what you're saying – if I understand it – is you clearly favor the NBBO and last sale reports. You're intrigued by more information but you would rather rely on market forces rather than mandate?
Mr. Joyce: Yes, and that – prior to this decimal experience, I think the minimum would have worked fine as is. I think the system works as is. But I do see the need for additional information. I just would be concerned about mandating it and the information overload that might result from that –
Mr. Seligman: Thank you, Ed.
Mr. Joyce: Especially as you relate it to the options industry.
Mr. Seligman: And we will separately address the options.
Mr. Joyce: Understood.
Mr. Seligman: I appreciate that capacity issues there and overload issues there are particularly acute. Rick?
Mr. Ketchum: Thank you, Joel. Just briefly without reiteration since time is short. Consolidate best bid now for information remains relevant, useful information in the existing environment or the decimal environment – certainly for retail investors, and, indeed, I think for everyone. So the requirements should remain the same as they are today. Undoubtedly the points made here are correct that there is need for greater transparency away from the best price.
I think – I would amend it to say that there is need for greater transparency – for knowledge of available prices, speaking of an environment that is open and distributed rather than concentrated in a single place. There is also a need to know where you go to get that. And the same when you aggregate multiple markets that are not the same. So I think the information you need is not just how much there is to buy or sell at any particular price point away from the market, it's where you can get it.
Otherwise you're going to create expectations in customers that can't be fulfilled. We've always tried to do that to the amount of information Nasdaq has had. We've always provided as a separate feed our consolidated information with regard to all information we have and all information that the markets provide us in a single data stream, whether it's at the best price or market makers or ECNs who are not at the best price.
I don't think you ever want to require that to be the only service that can be available to investors because that service will cost more – no matter what the standards you decide. And investors shouldn't be deprived of being able to access the best bid and offer because they're unwilling to pay for the cost of the full data stream of all orders without making their own evaluation of value.
The last piece is I don't believe at the moment that, certainly from a Nasdaq situation where we always pass through every information we've got and where with respect to SuperMontage we intend to again make that available and have indicated to the commission that we'll make available every information we have with respect to SuperMontage as much as possible on a dynamic basis, the rest on a non-dynamic basis.
If there's any – I'm not – it seems to me right now there's tremendous incentive for markets, for people – other liquidity providers – to provide more information and attract orders. So it's not clear to me that additional regulation is needed away from the best bid and offer.
It seems to me that we have a lot of incentive. And, indeed, certainly the major markets have indicated they have every intention to provide everything that they've got.
The last thing I would say is that I think that in this area people should provide value-added products and provide value-added information any time they're providing something that people can access. So I think that it's equally valuable that an ECN or a market maker provide the depth of their book if that book is not required to be shown in a marketplace. And we don't propose that it should be. And there shouldn't be any question that that is both legal and desirable that people should have the flexibility of doing, whether they happen to be a market or a broker dealer.
Mr. Seligman: Thank you, Rick. Bob, Annette, do you want to make a point? Don?
Mr. Langevoort: I think if I understand Rick right, I agree with him. I take him largely to be endorsing A as the standard. And that's where I would come out with a relatively minimal level of regulated information and an expectation that through a variety of strategies the market can be encouraged to provide the kinds of information that people have described.
Mr. Seligman: Thank you, Don. Bernie?
Mr. Madoff: I concur that last sale information and the NBBO is inadequate and I believe that you have to show the complete depth of the book. I'm not worried about information overload. My feeling is that people will – vendors will very quickly distribute what people want. So to me that's not an issue.
I also applaud what New York and Nasdaq are doing as far as opening up both of their books. That being said that could change at any given time. So I don't take great comfort in knowing that for competitive reasons somewhere down the road one or both of them could determine that for competitive reasons they will change how or to whom, to display this information.
So I start with the basic concept that all of this information belongs to, at a minimum, the firms that gather that information and probably the investors that produce it. And that being said, if you go on a concept that this information is really not a market centers right to distribute that information as it sees fit and it really belongs to the public, then you just have to have that information out. And it has to be mandatory that it's going to be made available.
I agree with Rick that you have to know where liquidity resides because having the liquidity out there but not knowing where it is, is probably you know, not very much help to anybody.
Mr. Seligman: Thank you, Bernie. Brian?
Mr. McNelis: I think that Reuters would like to see a more flexible approach on market data. We certainly agree that originators need to provide that information so that it is available to anyone who wants it. But on the other side in terms of those who actually purchase the information as end-users, that they should have the right to choose what information they would buy and manage their costs and their networks accordingly.
So we would favor an approach that would permit the vendors and their customers to determine what the display should be and how they would receive and manage that data to fit their business needs.
Mr. Seligman: And this sounds similar to the position that you've taken in certain litigation I've read about. In other words, you would, in effect, favor eliminating the display rule as it currently exists and having a more freewheeling kind of approach?
Mr. McNelis: Pretty much, yes.
Mr. Seligman: Okay, I appreciate that. Mark?
Mr. Minister: Yeah, I think Bob Colby is asking, in my mind, the important question to various people. And that is, we certainly don't think there should be any less than the current minimum displayed to clients. Whether or not there is a mandated additional amount of data that is required to be made available by various SROs that can be displayed at the option of the user or the vendor, I think becomes an relevant question.
Certainly, for people active in the marketplace the existing data content is insufficient to function well. So one would assume, as Rick said, that the competitive nature of the business would force people to bring that data out.
But like Bernie said, it may or may not in the long run. So we would certainly favor a minimum display rule as it currently is and would certainly be interested in exploring a mandated level of additional data that isn't necessarily required to be displayed, but is required to disseminated.
Mr. Seligman: Now, do you have a sense of what this additional mandated data might involve?
Mr. Minister: We do. We carry all of the global exchanges that do put out an order book. And it varies by country in terms of the data available and who is allowed to view it. So in certain countries you can actually see what brokers are representing what orders on the order book. But only brokers can see that and not the public.
So there are certainly – and the level of depth – five levels is typically the level of exposure that's there. So I think we can – there are examples – I don't need to go into them right this moment – but I think it's very possible that one could have a minimum mandated data quantity that would be made available.
Mr. Seligman: Appreciate that, Mark. Ed?
Mr. Nicoll: Well, I thought I was going to be the only one to advocate for C. And that's certainly our position. We agree with Reuters. I think everybody should understand that as soon as you mandate a display you inevitably put the SEC into the rate-making business. And I don't see any way to avoid that fact. It is – we agree that the NBBO as it exists now and the mandate of the NBBO is insufficient.
We further agree that markets will quickly compete and provide information to their users that their users demand. We agree that greater transparency is needed and is desirable. But we just disagree on how to best get there. We don't believe that we ought to get there through a regulatory mandate. We think we should get there through competition and that this mandate – this regulatory mandate – at the end of the day is a very heavy handed one that has prevented competition from occurring and delivering more useful information to users.
So we agree with Reuters. We think there ought to be more flexibility. And we think that essentially the display rule should be eliminated.
Mr. Seligman: Ed, I appreciate that. Bob Forney initially began representing the Chicago Stock Exchange. For various reasons, unfortunately part including health, he will not be able to continue. Paul O'Kelly is taking over for the Chicago Stock Exchange – excuse me he's retiring, as well as what I alluded to.
Mr. O'Kelly: The person has changed but our position hasn't changed. We come out somewhere between A and B. We think that if you're going to have a mandatory NBBO it has to have some utility to it.
We've had some recent experience with decimalization, but it's fairly recent. And we don't know exactly what the right level of data that should be provided mandatorily is right now. We believe it's more than the NBBO. But we're still fairly early on in digesting what it means to operate in a decimalized society.
And we think that we should at least look at expanding it to some level of the book. Again, we haven't talked to our users about this – what would be the most useful to them. We're not saying it's the entire book. But at some level, we think it ought to be expanded to make sure that everybody has useful information.
Mr. Seligman: Paul, let me also thank the Chicago Stock Exchange for the paper by – I think it's Professor Barclay. It's very useful, as well. To the extent you focus on what additional level, at the moment you're just intrigued? Or is there any one you would like to put on the table for consideration?
Mr. O'Kelly: Again, we think this ought to be driven to some degree more by the user community. They have to tell us what is useful for the customers, what are the necessary minimums for their customers.
We're not in the best position to decide that, they are. And we would be happy – I have heard several views today. The view that we want everything is not particularly useful, I think, in the analysis because everything costs a lot of money and not everybody wants everything.
And one has to ask who is going to bear the costs of getting something they don't want. We think there's a balance between giving them just the NBBO and giving them everything. And we think the cost of providing that mandatory information ought to be weighed against the benefits. But we just don't know what level it is.
I would like say five down, three down, two down. I just don't know. The user community knows that better than we do.
Mr. Seligman: I appreciate that. Ken?
Mr. Pasternak: I'm going to keep my comments pretty short. First off, we would recommend B, which is increasing the level of the NBBO. We think the NBBO is the holy grail. You have to show depth of market.
The second suggestion we would talk about is – and I'm actually going to quote one of the comments before – a distinction should be made between what I might call the producers and the displayers.
While I'm a big believer in competition – and I think you alluded yourself that there's a certain element of distrust that there's enough competition at the SRO level to make that information available in its completeness. We would say that the standard should be on the producer side to make that available. On the display the aggregators will then decide I think to answer a lot of these questions about who needs to see information at what level. But I think one needs to set a minimum standard of availability of the information and let the marketplace take – let the competitive element at the aggregator level to decide how to aggregate that, how to cost it out and who wants to pay for it, frankly, in the marketplace.
Mr. Seligman: Ken, two thoughts. First, I hope I haven't reflected distrust of anybody in any context. I don't feel that. Second, again, to the extent one focuses on how one would make B operate, do you have any thoughts you want to put on the table?
Mr. Pasternak: Well, the example I would give about overhead and about technology difficulty. We talked about technology. I think in some ways it's a mirage and in some ways – it's a big hope. And then the deployment of technology is always challenging.
There's a big difference – and I'll get really simplistic – about displaying information and broadcasting it. An example would be streaming quotes versus an input-out quote or quote on request. So one can get a lot of information.
I think in the Nasdaq montage they talk about three levels on a streaming basis. And complete availability on a request basis. I'm not suggesting that I'm that rigid on how one would approach that. But I think you have to bifurcate information that you display on a streaming basis, if you want to call it that, and the availability of additional levels of information to either aggregators or who aggregate it free – Andy Brooks, for instance – in ways that you might be willing to pay for. Or other kinds of constituencies who would buy that information that would have either – I would call it an aggregated manipulated or more in-depth of information basis to it.
But I think the marketplace could certainly decide that.
Mr. Seligman: And when you say the marketplace could decide that, that's different than a mandate?
Mr. Pasternak: Well, I think the mandate of availability has to be mandated from information.
Mr. Seligman: I see.
Ms. Nazareth: Could you clarify that?
Mr. Pasternak: So what's displayed would be a much lower threshold.
Ms. Nazareth: So could – could you clarify that what would be the minimum –
Mr. Pasternak: Say in the NBBO you might have three levels – any customer in the United States could see full depth of book on a request basis and maybe pay a premium for that.
Ms. Nazareth: But there would be a mandatory minimum of – the NBBO would be mandatorily available?
Mr. Pasternak: Three or five levels – but I don't have that answer here.
Mr. Seligman: Okay, so is that mandatory minimum on display? Or mandatory minimum on availability?
Mr. Pasternak: Display.
Ms. Nazareth: Display.
Mr. Seligman: Appreciate that. Gerald?
Mr. Putnam: Good morning. We definitely fall into the more is better camp. We do think that competition is the best way to get there. And I guess, our view falls closest to alternative – to B. Although we would make some modifications to the vendor display rule.
We think that vendors should be permitted to disseminate non-consolidated information. And the reason for that is that we think that's the only way that you can get –
Mr. Seligman: Gerald, I promise you we'll get to that option for vendors and marketplace solutions, as well. But focusing for the moment on mandate, you know?
Mr. Putnam: Yeah, as I said, we think that vendors should be able to display non-consolidated information. And I think that one – there's always going to be a demand for consolidated information – most notably a broker's need to provide best execution to its clients. And then there's the users themselves who demand consolidated information.
Modifications to the vendor display rule. One, we think that if a vendor were to disseminate non-consolidated information certain – serious disclosure levels would be required, possibly even a proactive acknowledgment by the data subscriber.
As far as consolidators are concerned a level of disclosure to the SEC would be necessary so that the consolidator would have to report – sort of like on reg ATS, maybe a form vendor, where you report on your method for consolidating, reliability of your system and that sort of thing so that we can ensure that there is good consolidated information.
Mr. Seligman: Thank you, Gerald. Peter?
Mr. Quick: Quite simply, the AMEX is in favor of retaining the display rule and would certainly be amenable to looking at possible modifications. We believe it's essential to the NMS goal of centralization of trading interest. It ensures that the consolidated data is widely available to the investing public.
Eliminating the display rule could certainly lead to market fragmentation. In terms of possible modification to the display rule, the AMEX believes that the committee should examine whether it's feasible to expand the minimum level of information. And of course, with that would go associated costs which would have to be examined.
You know we don't really have a robust representation here of, quote vendors. You know we have one of the large quote vendors, Bridge, in bankruptcy. And one of the essential things – and certainly for confidence in the markets, the way the system is right now we believe has a lot of strong points. And we strongly believe at least that minimum level of display should be retained.
Mr. Seligman: Now, Peter, to the extent you are at least intrigued by expanding the minimum, do you have any particular suggestions you would make to us?
Mr. Quick: Well, if you expand the minimum certainly there is a competitive question of whether or not the exchanges with their specialist system, if they were to show the book what would be the requirements for the ECNs that aren't exchanges to also show a like level of display of orders, as well as the accessibility of the markets. Because right now the exchanges are at a disadvantage in regard to access to the ECNs market for execution of orders if they would like to, in a sense, ITS an order. And they surely don't have that ability now at I think a reasonable cost.
Mr. Seligman: Thank you, Peter. Eric?
Mr. Roiter: Thank you. At Fidelity we would vote for A, retaining the current display rule requirements if the question as it is, is framed in terms of what the SEC should mandate.
As a general rule we think the SEC should compel the display of information only if there is an appreciable risk that the information would otherwise not be available to market participants on reasonable terms.
The display rule itself has not inhibited competition in the display of market data. Rather it's been the absence of an SEC requirement that would require SROs to make available depth of book market data to vendors.
And I know that's not the way the question has been framed, but I don't see the two as mutually exclusive. The SEC I think need do no more than mandate the NBBO display. But if there were to be change it would be to require that SROs be required to make available the depth of their book to vendors and then let competition drive the development of different applications for the display and the accessing of that information.
I think a critical point here is the fact that we are dealing with self-regulatory organizations. SROs occupy that netherworld or gray zone of private and quasi-governmental. And until the SEC revisits the status of ECNs and broker-dealers generally, the latter don't have those quasi-governmental responsibilities or powers.
And hence, I think when we speak in terms of competition it shouldn't be confined to the SROs. The SROs as quasi-governmental entities ought to be subject to some level of public function. And in this context I think it means opening up their limit order books and letting truly private entities access that on a competitive basis to develop products.
And I think if that were to be the case, the SEC would have no need to adopt rules to coerce the display of market data beyond NBBO because market participants would demand. And so long as the broad data was there to competitors to use, it would be, in fact, a fact of life that it would be available to market participants.
Mr. Seligman: Thank you, Eric. My suspicion is that the SEC would prefer the verb require rather than coerce. But I'll leave that to others to analyze.
Mr. Roiter: Okay. Can I edit my remarks?
(Laughter.)
Mr. Seligman: What I'm reasonably confident I heard in this first sweep was the following:
There is a consensus but not unanimity in favor of some mandate of information. Clearly Brian and Ed would like to eliminate the display rule. I didn't hear anyone else subscribing to that. Although Carrie has a conditional enthusiasm.
My instinct is probably at the end of the day we will favor some form of display rule and we will reflect the basis of Brian and Ed's disagreement in the document. And you may want to focus on articulating that in a specific comment letter so we can get your precise phraseology.
The real issue that seemed to emerge – or I shouldn't say the real issue – but an issue that seemed to emerge was an a disagreement in the committee between those who favor the NBBO and no further mandate and those who favored more information. And I would like to flesh that out more.
I want to go around the table once more on this issue. And I want to ask specifically two questions. For those of you who don't favor going beyond the NBBO, why not? In other words what are the costs and risks that would be involved if you went beyond the NBBO and last sale reports and augmented more information?
For those of you who do favor more information, I guess, I'm asking a two-part question. First, again, while we've heard references to the full order book, to aggregation, to going three to five levels down – and we all know that the SuperMontage is three levels down – I would like any further guidance as to how one might frame what more information would involved. And I would also like any further guidance as to how one responds to concerns about costs and risks in requiring more information.
And I'm going to suggest rather than going alphabetically, let's start with those who simply favor the NBBO and last sale report in its current form and ask them to explain why they oppose further information. And then we'll go back to those who favor further information.
Mr. Colby: Joel, could you distinguish between whether they favor it as a minimum, a required minimum that goes out to everyone or whether they favor it as a required display that the vendors could then make available?
Mr. Seligman: How would you like me to frame it?
Mr. Harts: I think that's the fundamental question. Frankly, I think that's the most important one that we've all be talking about.
Mr. Seligman: Yeah, I thought we were dealing with the vendor display rule.
Mr. Colby: Because I thought that – it was difficult to know sometimes whether people thought there should be a minimum that everyone had to receive if they received anything and whether they thought there should be a minimum, in a sense, in the quote rule that said you have to make it available – an augmented minimum. And then it was a question of whether a vendor sold it separately priced.
Mr. Seligman: All right, in fairness, that is a very important distinction to draw. I would – I guess, I have assumed we're dealing with both. And some of you may want to make it very clear you're not dealing with both.
I have assumed that the required minimum would have to be produced by the market centers. And I've assumed that we're also dealing with the display of it. If anyone wants to amplify that they're only dealing with part, that would be very useful.
And again, please feel free to amplify either orally or in writing. But let me start – let's go around the room for those who basically said they favored the equivalent to option A, the current display rule requirements the current production requirements, what's the case against augmenting that?
And maybe we should start with – should we start with Mike? Excuse me – fairness. I refuse to discriminate the end of the alphabet. I said we'll start with Eric this time.
Mr. Roiter: Thank you. Well, we think that if you don't need to mandate the display of anything beyond NBBO. And I think the risk – I think Carrie alluded to it earlier – is that trying to engineer what beyond NBBO must displayed and how it would be displayed I think would tend to limit innovation and how market data is manipulated – to use a benign sense of the word.
Mr. Seligman: I'm not sure it's benign.
Mr. Roiter: But there is a risk that we would inherit a system that would freeze the format and process of this information availability circa 2001, which may look fine today, but in very short order might be seen to be antiquated. I think it's particularly true in light of the very recent shift to decimalization. I think the market itself is still trying to figure out how to cope with decimalization and how far down you need to go in order to get a good sense of where the depth of the market is.
And for those reasons I don't think the risk – I don't think the benefits of forcing the markets into any particular display format is something that the SEC has to mandate.
As long as the information is available to vendors, then the vendors can find ways to present that in the most useful fashion to the participants in the market.
Mr. Seligman: I think there might be some anxiety as to whether or not if it was mandated it would be available. How would you adjust that?
Mr. Roiter: As I said earlier, I think the SEC could adopt a separate rule that simply requires SROs to open up their books and let vendors access their limit order books and do with that information as they will.
Mr. Seligman: Peter?
Mr. Quick: Certainly, I raised the question of the quote vendors capability or what the expense would be involved in terms of displaying this additional information.
Just as an aside, the American Stock Exchange is displaying option quotes with size now. And for the most part the vendors are not able to display that yet to the member firms and to the investing public. So we're talking about extending this to all the equities.
With regard to the discussion of three price increments, you know, up or down, displaying the books, I'm not sure that that's really that meaningful in terms of in a penny world, that's half the old increments. So I'm not sure that that's a real depth of book. And I don't know what would be involved to go many more increments on either side of the market with regard to displaying the depth of the book.
I certainly agree with Rick Ketchum in terms of when he alluded to the cost, what the appetite would be for the investing public and for the members firms to bear additional costs with regard to this information.
Mr. Seligman: Appreciate that. Gerald, I think you were favoring an expanded mandate.
Mr. Putnam: Yes.
Mr. Seligman: Ken, I think you were favoring an expanded mandate. Paul, do you want to comment?
Mr. O'Kelly: I'm still straddling the fence so I guess I got two chances to answer the question. We get back to the point – and by the way I answered the question before assuming it was going to be mandatory production and mandatory display of the information – that's why my concern about costs about pushing all of this information out to people I thought had to be part of the equation.
We think – but it's still early on – that the NBBO as it exists now that that requirement is not going to be particularly useful to people in the future. We don't know how much more information will get to that level of being useful to people.
And there's others that use that information that are in a better position than we to answer that question and we think that they ought to come forward and answer it and help formulate what mandatory minimum ought to be.
We're kind of intrigued by this notion of, well, let's take the SROs and have them mandatorily provide all of this information to vendors and then vendors can decide what's good and what's bad and sell it. And so the exchanges bear the expense of producing the information to the vendors, and then the vendors can decide whether or not it's of any value to them. And if they use it one or the other, they can kind of pick and choose what information I'm mandatorily required to produce to them for their own purposes.
That seems to be driving the decision – we bear the cost of – the regulatory cost of producing it. They're under not any regulatory responsibility for any – using any of that information I push onto them. I'm a little troubled by that prospect.
Mr. Seligman: Thank you, Paul. Ed, you are opposed to the current display rules. So presumably you'll be opposed to augmentation of it, as well, for the record?
Mr. Nicoll: That's correct. I'm just – you know, it seems to me that we ought to have a preference to allowing the markets to operate freely, that when we impose a regulatory mandate that there ought to be clear evidence that it is necessary and desirable.
And I would – you know, it is our strong view that what we ought to do is let market centers compete freely among themselves. And once we engender that competition that we will have the proper amount of data delivered to the users of those market centers because that will be a key criteria of that competition what those market centers choose to display, how much they choose to charge is going to be a key criteria of competition.
And for us to impose some kind of regulatory structure which freezes into place one notion of what the proper level of display is that will create the most efficient marketplace I am very troubled by that without an awful lot of thought and study.
So obviously there's very little consensus here for – and we did not expect there to be any consensus for doing away with the current display rule or the rule for an NBBO.
And if we take that as a given that that is likely to – that our view is not likely to prevail then we certainly would take the position that we ought to mandate as little as possible and letting the markets compete beyond that and that that will create the best results in terms of what information is displayed and what information – by the producers and what information is used and how much people are willing to pay for that information by the users of that information.
Mr. Seligman: Thank you, Ed. Mark, I think you were –
Mr. Minister: I appreciate Peter Quick's concern for the vendor community. And I can assure that my largest shareholders financial problems aren't related to their ability to take in and disseminate market data. That's a whole different discussion.
I think if you look at the dissemination of the minimum vendor information – if you look at the various means it's disseminated and take it down to the hand-held level – although I can get your full streaming quotes on my Palm Pilot, I think that to expand it too much will make it difficult – I'm not saying from a vendor's ability to supply it – but just to be able to disseminate – much beyond the current NBBO and last sale requirements – the current vendor display requirements.
And so from that standpoint I think from a mandated vendors display basis for us to fully service the broad community that we're trying to do that we would advocate staying at that level. We still like the idea of an expanded availability, whether mandated or not – for other users.
Mr. Seligman: Okay, let me focus on the word "it will make it difficult". Why will it make it difficult?
Mr. Minister: Well, I think the display mechanisms – whether you're getting your information off of the TV set, off of a Web site – there are a number of ways now. I mean, there are millions of people now who view market data. And if there is a mandated minimum of market data.
Like I say, as a vendor, we don't have any problems. We can give it to the TV stations. We can give to the brokerage firms to put on their Web pages. But I think to understand and to assimilate dept of market and that sort of thing, it becomes very difficult.
I think at a minimum that it should be the current NBBO, last sale and exchange of trade data.
Mr. Seligman: Thank you, Mark. Brian, you're in the same position as Ed. You don't even favor the current rules. So presumable you oppose expansion?
Mr. McNelis: Well, that's true. But I would like to just comment a little bit about the concern that Paul raised. And that is that he would be forced to produce vast quantities of data that vendors would then ignore.
We had really no intention of ignoring the data. And, in fact, we feel we can make a very good business of providing that data in its full compliment where a customer actually wants it.
And that's the distinction we would like to make is, let us be able to provide the customers the level of content that they feel is appropriate rather than being mandated to deliver the Nth degree to everyone who may not be interested in that depth and intensity of data.
Mr. Seligman: Bernie, I'll come back to you in the second sweep. Don?
Mr. Langevoort: I think most of the points have already been made. My sense is that market is sufficiently dynamic now that you would have to amend the rule every year in order to keep it current and that that's not administratively feasible.
I think that what I want to do – and it's maybe getting to D and two and three and four – is create an environment in which we could even wean ourselves from the threshold NBBO requirement.
That may take time. I wouldn't suggest doing it right away, but I want to create that environment and not put the SEC in a position of constantly having to rethink a new mandatory requirement all the time.
Mr. Seligman: Thanks, Don. Annette?
Ms. Nazareth: I just wanted to make one point in response to Don and in response to the points that perhaps we need a minimum at all, and that we should let the market decide.
One thing I think that's implicit in the views of those who believe that we should at least have some mandatory minimum – even if it's just what we have today, even if it's just the mandatory NBBO – is that when we talk about who is the market that's deciding what information is minimally mandate, as you know particularly on the retail side, those decisions are not really oftentimes made by the principal themselves, but by their agent.
And so one of the reasons why we're very concerned about what is this mandatory minimum is because we're basically saying regardless of the interests of the agent in this situation there is some minimum that the principal will always be able to receive.
Mr. Seligman: Rick?
Mr. Ketchum: Joel, if I can let me address Nasdaq securities and AMEX and New York listed securities separately because my market is in a different place with respect to both.
With respect to Nasdaq securities, to clarify what I said earlier, we don't just have a governmental mandatory minimum of best bid and offer in Nasdaq securities today. We have a Nasdaq rule that indicates that we will pass through the quote/orders – the best quotes and/orders of each market marker and each ECN, which we do – albeit in a separate stream in which there's a different charge to vendors.
And I'll get back to that because the points made here are very important vis-a-vis what you mandate versus what you offer. So I think the only question in Nasdaq securities is with respect to competing markets today enjoy an increasing but still small market share, whether they should be forced to do so.
The prospective competing markets and Nasdaq securities clearly seem to view it in their interest. And, indeed, their basic model involves display of this information. Whether other markets should do it or not I think when you get into a governmental requirement, you're requiring them to do it whether, indeed, the information viewed is going to be picked up and useful to vendors or not.
I respectfully say that despite the earlier statements, in the past vendors have picked and chosen as to whether they find information useful to customers. And I think until you see more you should let the market decide whether they have a useful product to get out when you're talking about a secondary non-primary market competition environment.
In New York and AMEX listed securities we're in a different position. We are a competing market with small market share than the primary market. I think that there are a variety of competitive factors and I would agree with Ed's clear needs standard.
There – just as the Nasdaq securities – suggest that there is a clear need for regulation. New York has indicated the direction they're going to go. I think that probably means the AMEX will have to respond and it probably means that each of us in a secondary market environment will have to do a careful analysis of whether it's in our competitive interest to display this information or not – and part of that will be, will the vendors pick it up? Is it likely to attract orders to our marketplace?
And I think that we probably ought to be allowed to do that competitive analysis recognizing that making those changes costs real money to us and to vendors because when you – and that gets, I guess, to my last point.
When you start reporting more than the best bid and offer, you geometrically increase the message traffic that a market or a SIP must process and vendors must handle and process as well.
You do not want to have a single requirement that all that information must be provided to everyone whether they want it or not because it will cost a lot more. That's true in Nasdaq when it's just the – the best bid is just the stream that involves market makers quotes.
I can tell you in analyzing SuperMontage it's true on another geometric level when you're talking with respect to providing the book information. And, indeed, none of us – until that information becomes transparent and we see how we can evaluate it – can confidently say how much message traffic that is.
So it seems to me there is a lot of competitive juices right at the moment setting force encouraging increased transparency. I think that's a good environment for the government to step back.
But whatever this committee does, it would be a tragedy for customers if, indeed, there was a requirement – not matter what the cost – that all the information had to be passed through or none of the information.
Mr. Seligman: Thanks, Rick. I think I've got Ed.
Mr. Joyce: Yes, I agree with Rick. I'll add one thing that the minimum as defined previously has worked for quite some time. My concern is the impact of decimals. And I think we need some time to analyze that. That clearly the minimum for some segments of the market is not sufficient. How far we go beyond the minimum in my mind is what we have to wrestle with. And we should keep in mind the cost of going too far.
Mr. Seligman: I think I go next to Joel.
Mr. Greenberg: Just a few points. On the mandatory production versus mandatory display, we would be in favor of the mandatory production not the mandatory display because – just to address Annette's point on the principal versus the agent – if the customer is at home and is not getting the information that you think or someone thinks or they think – more particularly – that they should be getting, they're free to switch to another broker dealer who is going to give them that information.
I think with this whole process as we're trying to define what exactly the information that the exchanges or the market centers should be forced to produce, it seems to me we're further complicating the issue because until we get back to what I thought was the fundamental reason for this committee as to how you should price that information once you can require the mandatory production of the information – once you require the mandatory production you're setting up – one the one hand a monopoly-like power, on the other hand to address, I think, Paul's point that maybe they're being forced to produce information that no one is going to pay for.
So until you get to how that information that you're going to mandatorily require to be produced is priced, then all we're doing is further complicating this committee's goals. I think we should be starting at the point of, what exactly is the pricing mechanism for that information before we decide, well, we have the NBBO, now let's lay on four or five other levels of information.
It's just going to take us a lot longer to decide how to do that.
Mr. Seligman: Joel, I agree we have to ultimately deal with both. I think, though, it's easier to focus on pricing issues when you know exactly what information is involved. And I promise you we'll get there.
Mr. Greenberg: Okay.
Mr. Seligman: And hopefully today. Carrie?
Ms. Dwyer: So I would heartily second the remarks of Ed Nicoll and Rick Ketchum and Joel's, as well. You know, I trust the markets. We think that competition is going to bring huge advances in this area, better information for investors.
We believe it's going to be a competitive necessity for market centers to offer better market data. It's already happening – Nasdaq, New York's plans, Island, I believe and Redi Book give their limit order books away for free right now. This is the direction the market is moving in. I don't believe there is a need to mandate the display of this data.
I wonder if firms would have a problem of sending order flow to a market in the future that only gives NBBO and no depth of book. How do we fulfill our best execution obligations in that kind of a world?
So I think that it will be – it will be a necessity as markets evolve and compete. I want to say as a producer of market data I think that we also have to think of brokerage firms who accept orders from customers and are legally required to transmit them onto market centers.
I wonder who the producer is. But as a producer that's required to send this data, the reason we're sitting here is about price and the inflexibility and the secrecy of the current pricing structure.
So our comment on this point was that if you are going to mandate data, then data that is made available by an SRO or anyone who regulatorily receives data should have to be made available to anyone on the same terms. And that's why we suggest most favored nation pricing because we believe that if a market furnishes data, the book, whatever it is and is required to publish its prices and give the same price to anyone for that data, then we'll have a flourishing competitive situation.
Mr. Seligman: Thank you, Carrie. I think next would be Bob.
Mr. Britz: I think the most compelling argument again from our point of view is that it will actually do nothing. At least with regard to the New York Stock Exchange this will by definition be a retroactive mandate if we're talking about the book.
For the less trusting souls around the table, the good news is you get a couple of looks here because we will be sitting around this table in July or September and either the New York book will be out or it will not be out.
Mr. Seligman: Not September.
(Laughter.)
Mr. Britz: Well, you will get at least one look. And so that the notion that the markets might not be up to their words, this committee gets to weigh in post the June deadline for the New York Stock Exchange.
I would echo certainly a couple of points that Ed has made. And I think Don made the point that there are no free lunches. There are costs – cash and non-cash – and maybe the non-cash are the heaviest here – burdens associated with regulation. And so you need to weigh the sort of cost-benefit analysis.
And again, as regards to the New York book – and I believe the equivalent of the Nasdaq book and perhaps the AMEX, it seems to be all on the cost side because the New York cannot – if the SEC were to mandate this, we cannot give you any more than we are proposing to give, which is the entirety of the contents of the book.
And to the point where you would have to revise this regulation constantly I think that's absolutely right now. I will tell you that we've talked about NYSE open book, which is the book, in my view it's probably the least interesting information product that we have in the pipeline.
And so if you mandate that book, are you then going to nationalize our order database and other information products that we have coming down the stream? And maybe you are. You know, you wonder then whether one of the burdens and one of the prices you pay is that you stifle innovation and you stifle the incentive to create innovative new information products which markets naturally have if it can be one of the bases on which they compete.
So if I may make one other point, Joel, there have been a couple of comments about decimals. And I think it's absolutely right that the ultimate recommendations of this committee have to be weighed against delivery in a decimal environment for sure.
But having spent the last 15 days with a cross-section of our customers on decimals, they've made it very clear they're not waiting till September or any time post September for us to deal with the informational problems that decimals have created.
We have ideas subject to working with – working through the community and working with the SEC where we will deliver products to the market in the next three weeks that – I don't pretend – solve the decimal issue, but at least create aids to the opaqueness that seems to be in the market vis-a-vis decimals.
So if any of us thinks that part of our charge is somehow make recommendations that will deal with the decimal problems, I would suggest that's probably going to be too late.
Mr. Seligman: I appreciate that. And I think, Michael, were you –
Mr. Atkin: Yeah, it's hard to not want to comment on the conversation as it shifts as it goes around the room. But kind of bringing it back to the original question I think you asked – and holding aside the question of fees and holding aside the question of capacity which are clearly what we're here to discuss – I would like to just go back and reinforce what I think Eric very articulately said, which is, there is a clear distinction between availability of data and display of data.
And I heard Reuters and Bridge say the same thing pretty clearly. I think it's very worthwhile that we have a debate on, do you mandate availability? Or how do you assure that the book gets known to the vendors?
That you let the competition exist on transparency, view of the world, what customers find value, and things of that nature – so you have kind of a separation, Joel. One is on what's available. And one is how you display that and make it available to the users.
To the degree that there is a minimum, you know, it sounds like, you know, NBBO – maybe add size is a thing that people were talking about. But then you got that same capacity problem and you got the same question that I think New York posed, which is, is it a must offer? Or a must display?
So I think the bottom line for me is, it would be reasonable to not stifle competition on the view of the world. You allow the vendors to compete on the things that they do well. So, I think that the bottom line for me is it would be reasonable to not stifle competition on the view of the world. You allow the vendors to compete on the things that they do well, which is presenting a view of the world to their customers, you let the customers demand what they want from what's available. I think we heard on this side of the room early that display depends on markets you serve and it depends on liquidity and it probably will depend on lots of things. So, mandating display sounds like a risky thing. Mandating availability sounds like a useful thing.
Mr. Seligman: Thank you, Michael. I'm going to go back through the room. There were several who proposed a greater mandate. And again, to reiterate, I'm asking a two-part question. We've heard a lot of concerns about the costs and risks of increasing the mandate; and not pretending to be able to reiterate all of them, but it's everything from competition is usually very good – it's innovative. It may be, as Carrie suggests, that in the future market centers will have to voluntarily produce a good deal more data to be effective. There may be costs involved in increasing a mandate.
There is certainly an inevitable regulatory rigidity. If you define a rule now in an environment you think you understand the environment is going to change. You will have to amend it from time to time. To what extent might that risk stifle innovation?
Finally, the point which the different views on as to whether or not we're dealing with a kind of lack of experience with the new decimalization context. So, to the extent those favor more mandate I think you need to respond to the degree you can, those comments now, and again you can comment further in correspondence. I would also like any further guidance as to what a broader mandate might involve. We've heard a number of ideas. Some of them were suggested by SuperMontage. But they range from the full limit order book, aggregation, going through the five levels down and so on. And again, we've now had some time to reflect on this; if anyone wants to augment that that will be helpful.
Finally, the distinction between mandated production, if you will, from the producer and mandated display by the vendors needs to be also something that may be commented upon.
So, let me start with Harold. I think I have something like eight or nine names of people who favored a greater mandate. If I miss anyone please pipe in.
Mr. Bradley: So, you're not going to start on the back-end of the alphabet here?
Mr. Seligman: No, I sweep both ways.
Mr. Bradley: I think that as we get into this inevitable it always goes to economics. And I want to respect what you've set up as the discussion charter today and say I don't want to talk about cost. I want to talk about what we need in order to discover price in the marketplace. And that to see each market, and again we get into who is a vendor and who is not – is an ECN a vendor? Is Bridge a vendor? Where is a market center? These are all terms that are shifting and sometimes hard, even in the context of a conversation that's very specific, to understand does it mean SRO and non-SRO? And is that even an appropriate – I mean there are all these levels of interpretation.
As a user in the marketplace, a portfolio manager, an institutional trader, we need more data from the market. It has been restricted by certain market centers historically because it raises its value and it controls the access to that owner, "owner" of the data. And again, I defer to Bernie who says, "who really owns the data," I think it's produced by the people who are willing participants in the market.
Historically that's been in, the major SRO centers – I think technology is changing that. So, I would say that mandating the availability of data from those exchanges is important. I would say the display of the data, again, may rely at a minimum – or should exist at a minimum level because – I'm not in the retail business but most retail people don't understand what they're seeing. So, they need some protection. But that the mandated display of that data then can be used by vendors and others providing the service and it can be then competed for.
The aggregation and the cost is a different discussion.
Mr. Seligman: Let me just take it one more step. You've got New York about to come forward with lots of new forms of data on a voluntary basis; the SuperMontage, which was approved by the SEC is augmenting the data – are there data beyond what New York and the SuperMontage will provide in the equity side that you would propose mandating?
Mr. Bradley: Well, if New York is providing, or making available, the full depth of orders in every security at all price levels – is that what I'm to understand? If I'm understanding it, it's kind of hard to envision what more is available. Sure, probably somebody will think of something some time. But that's a pretty good start.
Mr. Seligman: Okay. I appreciate that. Andrew?
Mr. Brooks: I'm fascinated by this discussion because at some point we've got to get back to who is providing the data and who owns the data. I think we need to acknowledge that all this data has value. And to Harold's point, if you limit access to it or limit display of it it perhaps changes the value of that data.
So, I think we're very much in favor of allowing access to the data. I do think that the data display should be – or data access ought to be mandated – but the display of that, I agree, competitive forces should be able to provide that.
However, it must be that we can get to all of that data if we choose to pay for it. So, perhaps as the data vendors have today, there will be tiered data access. You will have one price for the NBBO and there will be another price for the expanded book and everything that you might want.
I wonder, when we talk about things larger than the NBBO and access, don't we need to think about best execution and don't we need to think about access to the data and to all these different market centers if, in fact, the national market system is still a law, a requirement, an obligation. So, I think, Dean, as you asked for what more data I think any data that a market center has ought to be able to be processed and delivered to an end-user provided that end-user is willing to pay for it.
Mr. Seligman: Andrew, two points. First, it's Joel. I found, particularly in dealing with my faculty, when it's Dean it's not as good as Joel, and when it's the administration it's really sullen. (Laughter.)
Clearly, the 1975 Security Acts Amendments and the rules that were adopted under them are the law. And we can propose, if we wish, that changes occur. But we're starting with that as a kind of baseline.
Let me pose the same question to you that I posed a moment ago to Harold. Above and beyond what New York is intending to voluntarily produce and what Nasdaq is now producing, or will be producing through SuperMontage, is there any other data you would suggest we consider for a mandatory mandate, or for mandatory disclosure at the production level?
Mr. Brooks: If all market centers, exchanges, ECNs, what have you, are mandated to provide access to any orders that they hold it seems to me that will get us 99 percent of the way home as we know the markets today, and as far as my crystal ball goes.
Mr. Seligman: I think we have a couple –
Mr. Britz: May I pose a question to Andy on that last comment?
Mr. Seligman: Go ahead.
Mr. Britz: Andy, we have a rule that is about to be enacted, Rule 123, which says that we have to systemically capture every order in a system, in a database essentially, before it is represented at the point of sale, including your orders.
Mr. Brooks: Right.
Mr. Britz: And that will be a – for lack of a better word – a giant order database. Now, you won't know anything about the disposition of those orders, but you will know that there is an order, it's an institutional order, it's for a certain size.
Mr. Brooks: Who will know that?
Mr. Britz: The database will know that.
Mr. Britz: I'm reacting to Andy's point that any information that a market center has it ought to blast out to the community. And I wonder if you want us to blast your orders out?
Mr. Brooks: No, what I would think –
(Laughter.)
Mr. Brooks: We want our cake and we would like to eat it too, we know that. There is a big difference between, you know, having an audit trail for an order so that you make sure a customer's order hasn't been compromised, and that customer willing to have his or her order brought to the marketplace and displayed – so, I think we're talking about orders where a customer has willingly allowed his or her agent to bring the order to the marketplace. Is that the clarity that you –
Mr. Britz: It is.
Mr. Seligman: Thank you, Andy. I think Matthew.
Mr. DeSalvo: Some of the – you asked, Joel, the minimum that I would like to see given the fact that SuperMontage and opening up the book, what else is there is what you're asking. I would like to see at a minimum a 10,000 and 25,000 share increment level with which we can view – our clients are obviously asking for that at the institutional level.
The question becomes, then, do you leave it to the auspices of the vendors to do it or the SRO? If you choose to leave it to the vendors then that means that I must employ several vendors, and at some point – and if I have a framework of how I want that data to be received – if one vendor goes down I now have to talk to the other vendor to make sure that he is giving it to me in the same way. And that's difficult to get competing organizations to do that.
So, if you ask for a minimum I think the SROs should, to help out both the retail and institutional community, put a 10,000 and 25,000 – if people have other numbers that's fine – but at least something – there should be at least a minimum standard that the SROs provide as to the depth. Because as Bob puts out, you could be down 50 levels and not reach 10,000.
The SROs should have some obligation to us to provide the investing community what the book means. I don't want to have go and coerce multiple vendors to provide that minimum when they have their own day jobs.
Mr. Britz: If you had your druthers, would that simply be the book or would that be the book augmented by what the dealer wants to do and what anyone in the crowd wants to do, so the market as opposed to the book?
Mr. DeSalvo: I think that – well, I applaud both exchanges opening up the book.
Mr. Britz: There is going to be a tremendous amount of disappointment when you –
Mr. DeSalvo: That's my point. I agree that the disappointment will be there. Decimals tend to flush that out a little bit, but at least some level when you do open up the book it may become meaningless, as you're alluding to, so I'm trying to say great, you're opening up the book but add a baseline to it. Where is 10,000? Where is 25,000?
And if you leave it to the vendors I have to talk to all my vendors to provide the same level of service. And that can be a difficult challenge.
Mr. Nicoll: I just wanted to point out that we are alighting over a significant question, which Bob's question really brings up, and that is the question of what an order is that we are mandating displaying. Okay? And the point about – Bob's point about are we mandating that we're going to look at the book – an order is an intent to trade. It can be displayed in the book or it can be in the pocket of a floor broker standing on the floor or it can be in the pocket of a market maker operating in the Nasdaq marketplace.
And the more we display the book or mandate the display of the book the more incentive there is going to be to hide people's intent to trade. And this is a huge trade off that we have to think about. The more that we mandate the electronic display of orders the more that we are going to incentivise (sic) other kinds of trading other than electronic display.
I would argue, for instance, that the New York Stock Exchange – if the New York Stock Exchange were allowed to not display all of the trading intent of the crowd standing around the specialist and the Island ECN, okay, was not – was mandated to display all of the electronic orders, and it is in fact a virtual marketplace of electronic orders then all that you're doing is absolutely standing in the way of competition between these two markets. And for us to find which is the most effective forum to trade securities in. And we have to be very, very careful about these kinds of regulatory mandates which can have enormous consequences on the shapes of our marketplace. I think this is a critical distinction that we have to talk about; what is an order that we're so blythly talking about mandating.
Mr. Seligman: I appreciate the point, and it's well taken. Bernie?
Mr. Madoff: First of all, I think it's very clear what an order is. An order is – I'm not going to give you the definition, I think we all know what an order is. I think it's sort of silly to ever envision any sort of mandate to display interest that's in a crowd or in a broker's pocket. I mean, if an institution or a customer chooses not to display his order he should not be required to display that order. That being said, if there is an order that does not have that condition attached or that the customer expects will be displayed then it really should be displayed. So, I think that issue is clear.
I just want to go back to some of my initial comments. I'm more concerned about market centers making the data available then I am about them displaying it. And also, I want to make sure that that data is available to firms as well as to vendors. I mean, I may as a firm, or others may as a firm, may choose to want that data taken raw, as we presently do from SIAC and generate – use that data myself. So, I think we have to be careful to make sure that if we have a definition of who it's going to be available to it can't just be vendors. It should be the firms themselves who, as I said earlier, take the position that that data really belongs to them to begin with.
The other concern –
Mr. Bradley: Bernie, how do you define firm?
Mr. Madoff: A firm would be a registered broker/dealer.
Mr. Bradley: Why?
Mr. Madoff: Well, because I'm – as a registered broker/dealer I am required to take those orders, I'm required to display those orders, I'm required to – I have various other requirements. Now, if an institution says that they want to get that data I have no real problem with that. I'm not taking exclusive – as far as I'm concerned you could open it up to anybody as long as –
Mr. Bradley: It could be a QUID, a qualified institutional data user?
Mr. Madoff: What I'm suggesting, and I don't want to get into a debate as to who gets the data – to me, more is better as long as it's at a reasonable cost. I also don't expect people to provide the data, whether it be a market center or anyone else, as a loss leader. So, data has to be made available to whomever wants that data.
If the buy side wants that data that's fine with me also. I think people should pay a reasonable cost, but it should be made available.
As to the display of the orders, I think it's already been said that just going six places really gets you back to where we were originally, which was not something that everybody was thrilled with. I think it's more sensible to look at Matt's issue of somehow or other coming up with some size issue.
And finally, it's not that I don't trust New York and the fact that they're going to open their – that the book won't stay open – maybe it's because I'm probably older, as I look around, probably than almost anyone here, I've developed – I have learned from experience that the firms themselves, in spite of the fact that we all want competition, the firms themselves have been quite unsuccessful in numerous instances in getting market centers to respond to their needs.
I can talk about ITS and I can talk about linkages to point at examples. So, I think it's naive for us to think that while competition is great and it works, and I certainly believe that it does, I think if there are times that regardless of how much you want to rely on competition the exchanges, market centers, can throw a lot of obstacles in the way of getting what the firms themselves want. And therefore, I think it's unrealistic to think that the SEC will be able to deal themselves out of this issue at all; I think to have a lesser role, but not all.
Mr. Bradley: You don't have to be old to believe that, Bernie.
Mr. Seligman: Let me just step in. I have, I think, five more speakers on this point and I would like us to take a break. I find that, not so much the longevity, but the endurance of a typical committee is rarely at its highest peak after two hours in a meeting. We will take about a ten minute break and then continue.
To keep focus, though, I want to continue going around the table with those who favored the more data. I've got Bill Harts, George, Simon, Ken and Gerald and then we will go to our break.
Mr. Harts: Thanks, Joel. I am as much pro competition and free markets as anyone, but let's – on Bernie's point it's true that everyone, all of a sudden, has gotten religion and they're going to display the book and they're going to open everything up. But let's not forget it's taken over 200 years to get there. I don't think I have that much time left in the business.
I think that the issue of mandated production versus mandated display – I want to clarify what I said earlier, I think that on the production side the market centers should be mandated to provide the additional data in terms of the entire book and so on. As far as mandated display that's a trickier issue because it does involve capacity issues and so on.
But specifically to your question about what else would you want to see mandated – I think retail investors are becoming more and more confused these days because of the issues of flickering quotes and – many of which of the issues have been brought on by decimalization, which by the way another regulatory mandate. But I think to hopefully alleviate some of that confusion you might also want to mandate the high and low price of the day, the high and low price of the past five minutes and possibly the average price of the past five minutes.
The static bid and offer at any given time is almost meaningless now, especially for a retail investor.
Mr. Bradley: Bill, that's on the vendor's side you said? Or did you say the market should do that?
Mr. Harts: No, I would say it should be mandated that that information should be available at a minimum, in addition to the NBBO on any display station.
Mr. Seligman: I appreciate that. George.
Mr. Jennison: I guess I would – in my opinion price discovery and informed execution are what I think is a great goal for your typical retail investor type person. Specifically about mandating either display or production I would say mandate both. And let me flesh that out a little bit.
When I talk about mandating the display by vendors – I mean my thoughts there are we should mandate a slight improvement, a slight increase above the NBBO that we have today. Slight in my mind is three to five quote levels. I don't know if that five pennies, given that it's not quite to six cents we used to have, Peter, is going to do it or not. You know, we don't know, quite honestly, none of us know, because we've just gotten into the decimals and all we can do is watch and see and watch how finely prices get sliced there.
And I think to Matt's point, some aggregation of where you could move 10,000, 25,000, 50,000 whatever the number of shares is the right way to go as well. I think you need both. Concerning the production of data, I'm concerned about that because it sounds like socialist state. However, I think Bill is right. We waited 200 years – it took a long time – I think the state we have now with some ECNs and market centers and exchanges providing their entire book and others not – that concerns me. That has in my mind perpetuated the fragmented nature of the market we have today. I would much rather see clearly what is a very high bar put on a minimum there, which would be full production of the entire book. I think the direction that New York is going is great. That's a very high bar. Beyond that I think, you know, innovation will take it from there. But I think the minimum there will be important as well.
Mr. Seligman: Thank you, George. Simon.
Mr. Johnson: Thank you. I think Annette's focus on protecting investors, particularly small investors, and seeing this basically as an issue of consumer safety is essential here. And I think that the right way to regulate, and the way the regulation generally works in the United States in this kind of market where people are concerned about consumers and about protecting these ultimate principles, as she said, is the regulator has a right to look around the market and to see what the best practices are and to watch as best practices evolve and then to decide which ones you mandate.
So, for a long time it's been illegal to sell a dangerous car in the United States, however, the definition of a dangerous car has changed dramatically. So concretely on this point I think from what I've heard and what I've seen it sounds like mandating the full disclosure of the order book, preferably at the display level, is something that's entirely reasonable and clearly the NBBO is not enough to protect investors at this point. So that seems completely reasonable.
I think that the point New York makes about nationalization of innovation is a valid one. I think that is in part what happens in this kind of situation. I think there are many ways in which you can benefit from your innovations, both by reducing your costs and by creating intellectual property to which you have the right to charge when people use it.
So if you invent a better seat belt you get part of the value from that. You can get that also from your information products. I think that this – rather than pinning it down and saying now we can specify for the next five years exactly what the mandates are I think start with the limit order book. I don't think it's too costly because we see a number of people doing it voluntarily. Say that's the bar at this point, of course you may have time to meet that standard, if the SEC certifies compliance, and the SEC has the right – and, in fact, even the presumption is that the SEC is going to change these standards and make them tougher with an eye to protecting individual consumers as we go forward and as innovation takes place.
Mr. Seligman: Thank you, Simon.
Mr. Pasternak: I will maybe take a few comments and just kind of meld them together with a different viewpoint. First off, I'm a strong believer, as everybody is, in competition. Many people here – a few people have made comments about the levels of display that are already occurring as a competitive element. Another comment was it may be impossible to do business without that level of display. In fact, if all that's true, and I believe it is true by the way, then the bars that we're talking about on production are really relatively irrelevant and a reasonable safety net, meaning produce the whole book in its entirety. I could tell you from a personal practice that we're already in the very early stages of doing that and it's not cost prohibitive in my opinion to do that.
The second comment, which I think is a little ignored here even though people have touched on it, is the evolution of the market – and I will go through just a little hopefully, not too boring, homily in my own life – the first knowledge I had of the market was about 30 years ago when I was a young boy where I actually saw a ticker tape and I saw a last sale coming through this – this stream of paper coming out with all these prices, this person was on the phone buying and selling stock on these prices and I was totally fascinated.
The second exposure I had to prices was an old Quotron machine where I saw last sales and NBBO now, because it was post-1975. Today – and then I started to – along with those two other periods I actually visited New York Stock Exchange and from the booth I got to look what was going on. And then I joined a fine company called Speer Leads and Kellogg and I actually got to go down into the crowd and saw discovery happening.
And what I would propose today is that we have a virtual crowd, that we're moving to virtual crowds, and the discovery process has many, many participants. And how we display this information is a critical element to how pricing formation occurs. It's not just about display, it's not just about cost. It's really about how the whole markets work. And frankly, every single person who can push a button and buy 100 shares of stock could be a participant in this virtual crowd. And that really wasn't reasonably possible, certainly in 1972, for instance, when I was a young man, and probably not that possible until frankly the Internet and post-1995.
So I think the minimum elements are critical and then we will find out in this vast discovery process whether some variation of Ed's model is the winning model, some variation of the New York Stock Exchange crowd with a lot of information relief is the best model. But we need to set a – frankly, a high bar – a high bar of production of information to let that competition answer this question about discovery.
That's really the – why I'm in favor even though, again, my natural inclination is to let the markets completely take care of what's appropriate. But in this case I'm going to take a very interventionist approach.
Mr. Seligman: Gerald, the last word before our break.
Mr. Putnam: As far as mandating information, we think that the production of the information should be mandated. I mean a marketplace should have to provide its best bid and offer at a minimum and it should have to provide its last sale.
At that point we think that vendors should have the right to decide whether they want to be a consolidator, at which point they have to accept all of that last sale and best and offer information from various marketplaces, or whether they just want to provide non-consolidated data. At that point the end users get to decide whether, with disclosure non-consolidating information is the value that they would like to pay for or whether the consolidated data is most important to them. And then we would obviously get to price later – but how that gets determined, we would argue, should be by competition.
We have a case study here on how depth of book emerges.
The New York Stock Exchange, you know, would be, in my opinion, the most likely marketplace to resist providing more information, since it has such a dominant position there, but that's not what they've chosen to do.
Bob, you can answer whether it was, you know, competition, responding to customer demands, which I guess that's the reason why you would certainly do it, not necessarily because you thought that that was, you know, some gift to mankind, but it was, you know, responding to competition. That's why it happens.
So, you know, I think it is happening. We're seeing it in both forms of the consolidated and non-consolidated data, non-consolidated data being provided for free on the Internet by Yahoo Finance with disclosure.
Some people, a lot of people use it. We get feedback from that website, because we're one of the contributors to that data.
But, you know, we're already here, so competition will decide how much data a marketplace will produce, but at a minimum, they should have to produce a bid and offer and a last sale. If you don't do that, I don't know what you are.
Mr. Seligman: Okay. Thank you, Gerald. What I'm going to suggest is, let's take a break. We'll go no later than 11:30, and I mean I will be in my seat, rolling, at 11:30. We'll then go for about an hour before lunchtime.
(A brief recess was taken at 11:15 a.m.)
(11:33 a.m.)
Mr. Seligman: Let me see if I can recap where I think we are, and then tee up our next topic.
With respect to the question of mandating information, the consensus favors a mandatory rule of some sort.
There was a division between those who, on the one hand, favored kind of a minimum mandate with the NBBO last sale, and then in effect relying on market forces to generate additional data, versus those who took the point you needed to augment the mandate, and there were a variety of ideas as to how this might be done.
For those on the minimum mandate side – and let's just by way of shorthand refer to the NBBO last sale report kind of approach – I am proceeding, on the basis of inference and assumption, that they would take the position that they would like to leave the rest of the world basically free for negotiation, free for what the market will produce, and how producers could negotiate with vendors and so forth, but in the vendor display side of things, there would be a requirement that the minimum be disclosed and whatever else the vendors would want to augment that with.
So that, in effect, you might have, under this approach, an NBBO, and then this could be augmented by what the vendors negotiated, whether it's the whole book, several orders down, and so on.
Now, the area of discussion so far this morning, where there are the most open ends, it seems to me, is what you would mandate in addition to the NBBO and last sale price if you go that route.
I will particularly encourage the proponents of going that route to use their pens, or use the laptops to augment.
I think, on the one hand, there were some serious questions raised about the costs and risks of augmenting the production side here.
On the other hand, there were those who said, in effect, if you don't mandate, what's voluntarily disclosed today might disappear, or what have you, and there were concerns there.
So if you want to augment the mandatory minimum, it will be very, very helpful to frame precisely how you do this and to precisely respond as best you can to, I think, you know, a series of concerns dealing with costs and risks involved there.
What I would like to do now is to turn to our second topic, which is one where we may spend some time. This is the question of, we're starting with the assumption we have some mandatory information. How do you consolidate it?
Separately, Don Langevoort, through his subcommittee, and on May 14th, will focus on the kind of more free market world in which, in effect, there would be multiple competitive consolidators.
The way in which I've tried to frame the questions under Part 2 would initially focus on should we just retain the SIAC and Nasdaq systems pursuant to the current type of joint SRO plans, or should we envision a world in which we replace the joint SRO plans and then focus on how we go about doing this.
Let me focus your attention initially on Points A and B, and I want to go around the table at this point, just focusing on those.
The question I'm really posing to you is should we retain the joint SRO plans, more or less, we have now with or without a mandate in some form of competitive bidding?
And I know, in effect, the SuperMontage is moving in that direction. The New York Stock Exchange has made the point that it's certainly something they could do in the periodic review of the SIP arrangements with SIAC.
Or, is there a case for replacing the current type of CTA/CQ Plans, and if so, what is that case?
I think, in fairness to the alphabet, we'll start with Eric and go this way, this direction. We'll get to other points under subpart 2. We may get to them after lunch.
Eric?
Mr. Roiter: Yeah. Thanks, Joel.
Well, our view is that probably Option B is the optimal choice here. It's actually a two-part question, because the decision to go to competitive bidding and the decision to maintain or retain an existing joint SRO plan are really separable.
There is an intermediate question that one could pose, and that is, is there room for revising the joint SRO plan? We think that there probably are parts of the plan that could be revised, particularly the unanimity requirement, to do –
Mr. Seligman: And we will separately address that.
Mr. Roiter: I think in this area we do want to move cautiously, incrementally. Let's see what happens when you put out the consolidation function for competitive bid.
That may address many of the problems that the market participants have had and might, by simply going through the function of a competitive bidding process, ameliorate some of the difficulties that people have experienced with the joint SRO plan.
Mr. Seligman: And you would require competitive bidding?
Mr. Roiter: Yes. That doesn't presuppose any particular outcome. It might even, at the end of the day, mean that the existing consolidators retain that function.
It might mean that perhaps the bids that are submitted don't meet the requisite levels of reliability of service and dedication of sufficient resources to give the SEC the ability to make a judgment that the function ought to be given to somebody new.
But assuming that the SEC does set some minimal standards for reliability, sufficient resources, contingency planning, in the event that a particular system goes down, then yes, we think that you could only benefit the market by going to a competitive bidding process.
Mr. Seligman: Thank you, Eric.
Peter?
Mr. Quick: We certainly think, for 24 years, SIAC has done an admiral job in terms of making sure that quotes get out to the investing public.
We see no advantage in having multiple competing consolidators of market data. We think it would introduce complexity and inefficiencies.
The possibility of different data streams we believe is fundamentally at odds with the NMS.
The AMEX is willing to explore opening the exclusive process function to competitive bidding. However, cost should not be the sole determinant factor. System up time, ability to hand future capacity demands are also very important.
Mr. Seligman: When you say, just to bring you down a bit, when you say explore, that's different than require?
Mr. Quick: Yes.
Mr. Seligman: Okay.
Gerald?
Mr. Putnam: We think that the plan should continue to exist, but they should be open to competitive bidding, and that some revisions, which we're going to address later, like governance and who is allowed to participate in the plan, we would make some revisions there, to allow other participants, like broker-dealers, in the plan.
Mr. Seligman: Appreciate that.
Ken?
Mr. Pasternak: We also support B, with a little more caution, subject to a better understanding of how pricing would work and corporate governance – subject to understanding better how pricing would work in that world and how corporate governance would work in that world.
Mr. Seligman: Okay. And we'll get to governance a little bit later.
I think, you know, when we say we would support B, which I would suggest means a requirement of competitive bidding, there would have to be minimum specifications that would be delineated, that would deal with everything, such as the integrity of the validation of data and so forth.
Mr. Pasternak: The same kind of benchmarking on whatever you carved out. It's somewhat unclear to me what you would carve out and what you would leave in.
When you talk about production and supply and consolidating, I mean, you need to have a little more specificity as to what's being carved out of present reality for the competitive side.
Certainly there are standards now, an assumption that the standards would be equivalent to or exceed the reality we live in today.
Mr. Seligman: Appreciate that, Ken.
Paul?
Mr. O'Kelly: We would support Alternative B, as well. I think events may be overtaking us here.
In the Nasdaq submission, I think they indicated that they intended to get out of the business of being a consolidator, so I don't see returning to Alternative A as being a viable option for us.
Just for a point of clarification, when we use the term "consolidator" here, I take this to mean what would be put out for competitive bidding would be not only performing the SIAC-type function of consolidating the data but also responsibility for vending the data.
Under the CTA plan now, SIAC consolidates the information there in the SIP, but under the plan, New York and AMEX are actually performing an administrative function of vending the data, and what I understand this to be is a proposal to take out to competitive bidding somebody who will consolidate the information and vend it on behalf of all the plan members.
If that's not correct I'd like to kind of better understand what consolidator means in this.
Mr. Seligman: I think that sounds correct, yeah, unless I'm missing something, I think that's right.
And again –
Mr. Britz: If I may, that's a very different view than what I have.
Mr. Roiter: And I would ditto that.
Mr. Britz: I think Ken asked the operative question here, and we should get on the same page.
If you're talking about – I'll stick with SIAC, it's what I know.
If you're talking about holding out what SIAC does today to competitive bidding, the process and the plans allow that to happen today, and it has been the notion of the participants that, for 24 years, that hasn't happened, but it's free to happen today and embedded within the plans.
But you're talking about a model today where the various participants pay SIAC a fee to do that, and essentially, vend the data themselves, if you will, through certainly the facilities of SIAC, that is to say, the markets, the participants engage in contracts with vendors and customers.
SIAC is performing a service for a fee, and by the way, a very modest fee. I wouldn't hold my breath waiting for anybody to compete in the bidding process for the relatively small amount of service fee that is presently going to SIAC.
Mr. Seligman: Bob, let me – I think we can all be on the same page relatively easily.
What B really contemplates is using the SIAC model, the SIAC function, but choosing SIAC or it's equivalent by competitive bid, so exactly the kind of operation SIAC currently runs would be selected in that fashion.
Mr. Britz: Just the prospect?
Mr. Seligman: Yeah.
Mr. Pasternak: I have just one question. I don't know if you know the answer or anybody knows the answer.
But my notes say in 1998 SIAC had revenues equivalent to 303 million and had net income of 9.2 million. Is that the same SIAC that you're talking about?
Mr. Britz: It's the same SIAC, but understand that the lion's share of those revenues come from data processing and software development for both New York or the American Stock Exchange for ETC and so on.
Mr. Pasternak: Does that include Sector 2, Bob?
Mr. Britz: The only profits come from a commercial subsidiary of SIAC called Sector, which is a telecom and outsourcing subsidiary.
I think it's a matter of public information that the participant markets – and I'm going to get in trouble if it isn't – pay SIAC in the neighborhood of about $7 million for performing the service of consolidation.
So that's, if you're talking about opening that up to public bid, that's fine. There's provision for it in the plans today. But we all need to know what we're talking about.
Mr. Pasternak: That's why I asked those questions.
Mr. Britz: I understand. This is – the function that SIAC performs here as a consolidator is a not-for-profit function.
Mr. Seligman: Ed.
Mr. Nicoll: Well, I suppose between A and B, we would choose B.
Mr. Seligman: Okay. Mark.
Mr. Minister: Yeah. I think we would vote on the side of B, and I guess I was always under the assumption that the SROs could choose whoever they –
Mr. Seligman: Let me be real clear. You could basically, you know, we'll get to it. I don't want either.
Mr. Minister: Yeah.
Mr. Seligman: And that's what we're really –
Mr. Minister: I'm sorry. I thought you asked us to restrict –
Mr. Seligman: It's a compound question.
Mr. Minister: Okay.
Mr. Seligman: Do you want either?
Mr. Nicoll: We have already said that we would prefer that there be a much more wide open competitive process in which there would be more than one SIP.
I took your question to mean if we are going to have one single SIP, should it be – should we allow, you know, the current environment or should we put that single SIP function out to bid on an annual or a periodic basis.
After examining this, after thinking about this, we have, and we – you know, I think it's clearly laid out in our interests to the SEC's questions that we published, and I don't want to repeat ground that we've already gone over.
You know, we would much more come down on the side of competitive SIPs then the current model, which I took to be C, in your – Option C, in which you also footnoted that it was beyond the scope of this current discussion.
Mr. Seligman: And again, what I'm trying to tease out here is, you can basically tell me that you don't want any form of single consolidator, or if you do want to retain one, and focusing on A and B, it would either be with or without a competitive bid function.
Mr. Nicoll: We do not want a single consolidator.
Mr. Seligman: Got you, and that's very useful.
Mark?
Mr. Minister: Okay. We think we would say B, but I was always under the assumption that the SROs continued to look at who did their work for them, and it was, you know, available for competitive bid at any time, so to mandate such a thing didn't seem to be necessary.
Just as Nasdaq has gone out and decided that, to me, that's something they do in the course of business, not something that would need to be mandated, that they have to go out and make themselves more efficient.
Mr. Seligman: And Mark, again, to focus on the point that Ed very clearly highlighted, you would favor a single consolidator rather than a competitive approach?
Mr. Minister: We would accept a single consolidator. We're open to competition. I don't think we would dictate that we have to have one. If there wasn't one, we would gladly compete.
Mr. Seligman: Okay. Brian?
Mr. McNelis: In our submission, we obviously would prefer the open competition route, and so we would prefer not either A or B.
Mr. Seligman: Bernie?
Mr. Madoff: B.
Mr. Seligman: Don, do you want to go on record on this one?
Mr. Langevoort: Assuming there's a single consolidator, B, also.
Mr. Bradley: So I understand here, B really means no change from the current system?
Mr. Seligman: Well, what I would like to focus on is it would mean a requirement of competitive bidding, not merely the option.
Rick?
Mr. Ketchum: SRO's that choose a new environment to be part of an existing plan – although as we've said, we think the SROs should have that choice, as to whether they sell their data separately or be in a plan – that SROs that choose to be part of an existing plan, the existing plan should ensure that the SROs jointly make the decision on the SIP.
I think competitive bidding is probably a useful tool, but in the end, I think if the SROs jointly make that decision and there's no presumption that any particular body continues to deliver the service, it's of sort of limited importance.
Mr. Seligman: Okay. And Rick, on behalf of the Nasdaq, produced kind of a bimodal approach, where he favored a multiple consolidator system, but basically outlined how a single consolidator system would act as a backup, and obviously, that will be taken into full account.
Mr. Joyce: I agree with Rick in that sense, that if I heard it right, that I wouldn't require competitive bidding.
It's in the best interests of those involved, from time to time, if they choose to open it up for competitive bidding, to do so, and I think that would be A, in my mind.
Mr. Seligman: Okay. Simon?
Mr. Johnson: I would be in favor of B, but I would want to – I think running the auction or competitive bidding every two years seems reasonably consistent with what you have already, but I have some concerns about whether we should be asking for a more arm's length relationship between the information processors, consolidators, and the SROs.
It's not clear to me from what people – remarks made today and from what I've read that having these rather complicated relationships that exist now really are in the best interest of the people, and I'd like a little bit more discussion on that point.
Mr. Seligman: Now, when you characterize the relationships in those terms, are you taking into account the evolution of SuperMontage at this point?
Mr. Johnson: I'm not sure that I know enough to judge exactly the current status of this, but I think that, you know, there's a fundamental difference between saying that the consolidator has to be completely separate in terms of ownership and interest from the SROs.
That's a very fundamentally different thing from saying the SROs themselves can consolidate the information, and I'd just like that question to be on the table.
Mr. Seligman: Fair point.
George?
Mr. Jennison: B.
Mr. Colby: And this means that you would favor a form of single consolidator but want competitive bidding or does it mean something else?
Mr. Jennison: I was hoping to get by with no added verbiage, because I have to admit my ability to express an opinion on this is nil, and my interest is perhaps close to nil, in this aspect.
(Laughter.)
Mr. Jennison: You've stated it exactly as I would mean it.
Mr. Seligman: I appreciate the illumination.
William.
Mr. Harts: Bill.
Mr. Seligman: I'm sorry. Bill.
(Laughter.)
Mr. Harts: Actually, I think A is the better choice.
I think that, you know, it's nice to sit here and talk in hypothetical terms – well, if we had an open bidding, and open competition – but let's think about the practical mechanical aspects of changing the SIP every year or two.
I just, it sounds like a horrendous process, with a lot of overhead and a lot of pain involved in communications lines and computer systems and everything else.
I think the present system works all right.
Mr. Seligman: Joel.
Mr. Greenberg: Thank you. I just wanted to clarify the numbers.
In terms of what the New Yorks said and the AMEX said, and the SIAC income statements said, there was $7 million of revenue or $7 million of income?
Mr. Britz: $7 million of revenue.
Mr. Greenberg: What's the approximate income?
Mr. Britz: Oh, I haven't a clue.
Mr. Greenberg: Okay.
Mr. Britz: That's done on a – but SIAC is performing that function on behalf of the national market system, on a cost basis.
Mr. Greenberg: So to us, it doesn't seem like it's a big deal. I hate to sound like a broken record.
I still think all these questions that you have to get back to the bottom line, as to when you're starting to talk about the production of the information, what is the cost of that information, because obviously, in this – in the whole cost scheme, the numbers are right. There's very little being attributed to SIAC.
So if you put it for competitive bidding, it doesn't seem all that relevant, but the real issue is how much and who gets to charge what for the information.
Mr. Seligman: I promise we'll get there.
Mr. Greenberg: Okay.
Mr. Seligman: Carrie.
Ms. Dwyer: We did lay out in our letter what we thought should happen, and it was neither A nor B, but it was multiple competing consolidators.
I don't think competitive bidding would be meaningful, given the narrowness of what we're talking here, but I think the whole consolidation and vending function would be.
I just want to be clear. You know, our position is that the exchanges, the SROs should go out and prosper and make money in any way they can, that they have a lot of new and innovative products on the table. Many of those are forced, by competition, but our attitude is, God bless them.
However, we don't think that they ought to be able to retain Government-mandated monopolies over utilities like market data.
So our view would be that the plans be dissolved. New York suggested that. We think that's a good idea. We think that anyone should be allowed to be a consolidator, with two caveats, and I've mentioned them before.
If you are a consolidator, you should have to have a most-favored-nation pricing so that any entity who buys the data from you would pay the same price, enterprise fee or other pricing structure.
The other is that we have sunshine around pricing, so that we all know what it is and who is paying what, and I think that would bring a lot of competitive vigor to the situation.
So that's laid out in our letter, but –
Mr. Seligman: And I appreciate the letter. Thanks, Carrie.
Matthew.
Mr. DeSalvo: In this question, we agree with the Schwab proposal that anyone should be a consolidator. I'm struggling with which one, A or B, that fits into, so I'll let you do that, Joel.
Mr. Seligman: Basically what you're saying is, in effect, you don't want to retain the current system with or without competitive bidding, you want a new multiple consolidation –
Mr. DeSalvo: I think the issue of cost, which you want to come back to later, obviously plays an important part of that, but the overriding factor is anyone should have the ability to consolidate.
Mr. Seligman: Appreciate that.
Andrew.
Mr. Brooks: Andy works, too, Joel.
Mr. Seligman: Okay, Andy.
Mr. Brooks: Maybe we'll all get new name tags. That might increase our budget, though.
I'm sort of torn here, because on the one hand, it doesn't sound like this is a big deal, and all we really care about is the Integrity of the data.
Changing contractors on this every two years, seems to me, would probably, without much benefit to the marketplace, challenge the integrity of that data process.
And so I'm wondering if – I certainly want to be prom-competition and open bidding, but it if's really a utility, then all I guess I'm in favor of is that the utility is – there's oversight to this utility function, and maybe that's Part A and maybe that's Part B.
Mr. Seligman: Okay. But – and again, Andy, you would favor, in effect, this utility function being with a single consolidator rather than competitive consolidators?
Mr. Brooks: Yes.
Mr. Seligman: Okay. Bob, you've written eloquently, but you may want to summarize what you've said.
Mr. Britz: With the caveat that we're in the competing consolidator camp on the one hand and our board has given us an unambiguous directive not to be a part of the consortium's going forward, so maybe it's semi-inappropriate for me to comment, but with your indulgence, I will.
I think that – and I speak for, again, CT; I'm less familiar with whether Nasdaq, as part of Nasdaq, although I did read the white paper and I guess that's sort of an artifact of history – as regards CT, whether you mandate or not is probably not terribly interesting for the New York, and I guess probably other CT participants.
The capability to do it today exists, and, you know, I could pitch or catch as to whether or not the SEC wants to mandate that we ought to go through that process every year or two.
Mr. Seligman: Harold?
Mr. Bradley: I've been reading the stuff you've been sending me for months, and I'm still terribly confused by all of this SIAC and how it relates to pricing and SIPs and how they relate to SROs and how they relate to exchange functions that are for-profit trading systems, like Nasdaq SuperMontage, what the competitive ramifications are of that.
My feeling, my sense is, from reading through all this and being a user of the market, is that it doesn't work as well as it should.
From the first meeting, I recall a lot of discussion about the cost issues, and at the very minimum, mandating competitive bidding every two years would fully open the books, and put sunlight on how these plans are functioning, what their costs really are, whether or not the exchanges are goosing costs or the other economics that very, very smart people in this business around the table don't seem to have a real strong grasp about.
So I guess in the absence of blowing things completely up, I would certainly think that would be the least risky way to approach it.
Mr. Seligman: Appreciate that.
Michael.
Mr. Atkin: Yeah. I'm glad to – I'm glad to hear that I can stop worrying about exposing how naive I was in asking the dumb question of, "What's the question we're worried about here?"
I've listened and read diligently, and I think there were three questions, none of which have been talked about.
One, is there a technology problem that we're worried about?
I mean, we mentioned earlier on industry standard protocols and distributed architecture and whether we are giving incentive to invest in distribution capabilities and all of that stuff, and I don't know the answer to that.
I have had some experience working with marketing industry and SIAC and have never heard anybody say that SIAC does a bad job, so I'm not sure what's the issue.
I had a little conversation with Schwab over the telephone to find out whether this was an access question, which is what the problem might be with a monopoly control, and if there's an access question that is a function of the consolidator, that's legit, we should talk about that.
Other than that, I'm just afraid I can't be of any assistance.
Mr. Seligman: Okay. Well, I appreciate that and I appreciate all the comments.
What I have heard is I think there appears to be more who favor a single consolidator model, but some who favor exploring, and exploring seriously, the multiple consolidator.
There is a division also with respect to those who favor competitive bidding being mandated versus just an option for either the plans or whomever.
Let's keep rolling. This is all going into the record. You'll see it come back, and it will seem more articulate when it's framed in a document.
(Laughter.)
Mr. Seligman: But I'll tell you, I'm a lawyer, I've been a lawyer for a while, and there's a big, big difference between how you present evidence and how you summarize it when you get to the jury phase.
What you guys are ultimately going to be dealing with is the jury phase summation, and you'll see, it will seem more coherent and it will seem more focused. We're flushing a lot of issues out. We're making good progress.
Let me focus you narrowly on SIP at this point, and we may want to go around the table fairly crisply.
Those of you who basically say, "I want multiple consolidators" don't have to answer this one.
Those of you who want to stick with a single consolidator, the question is, shall we just choose a consolidator through competitive bidding and in effect dissolve the CTA/CQ type plan and just have kind of a bilateral relationship between market centers and whomever is ultimately chosen by competitive bidding, or alternatively, do we have the intermediary organizations, the CTA/CQ plans? And that's what C was meant to flush out.
Michael, you're up first, again.
Mr. Colby: Can I ask you a question?
Mr. Seligman: Of course.
Mr. Colby: Is this a question of whether you bargain for all the data at once or you bargain individually for the data?
Mr. Seligman: I'm focusing on C, and the question is –
Mr. Pasternak: Consolidation still occurs in C.
Mr. Seligman: Consolidation occurs. We would, in effect, choose the equivalent of an ECIP, as Rick put it, through competitive bidding.
The question is, do you have what I've referred to as an intermediate organization, the CTA CQ, which would, my suspicion is, be an organization which would have much greater capacity and much greater opportunity to review the technical details and the governance and operational issues than just working straight from the exchanges.
But nonetheless, it's an option out there. We could basically say, let's eliminate the intermediate organizations and just deal with the ultimate, competitively chosen ECIP and the exchanges.
Mr. Colby: I'm not sure, but I think this might have been something that grew out of a New York suggestion, but could I just clarify?
Does this mean that if you wanted to get this information, that you still – there's one fee that gets imposed on you, or do you need to go to each of the different markets whose information is consolidated and bargained separately for their information?
Mr. Seligman: I would assume, through an ECIP, there would be – you just would have one provider of the mandatory minimum, and then above and beyond that, you could bargain with specific markets potentially.
Mr. Colby: Okay.
Mr. Seligman: Now, do you think that's not a useful articulation? Perhaps you would like to suggest an alternative one?
Mr. Colby: I'm not sure where this idea came from, so I certainly don't want to espouse it, but is this from you, Bob?
Mr. Britz: I don't think so.
Mr. Colby: Well, let's call it yours, anyhow.
(Laughter.)
Mr. Britz: Nice try, though.
If this is the notion of you have a single consolidator simply for the distribution capability but the markets don't joint together in a consortium to set prices and fix capacities and so on, if that's what this is, it is a valid idea, but it's probably the best idea, second only to competing consolidators.
Mr. Ketchum: I think it did show up in your latest paper. I thought it was – I agree with your characterization.
It seems to me, if we're going to talk about C, the way Bob just described it is the only sort of relevant thing that I – I just don't see what's relevant, other – if we are separating out the determination of getting together and making pricing decisions versus making separate pricing decisions, then that seems like a relevant thing to talk about, and I would suggest you would probably want to talk about E at the same time.
Mr. Britz: Where I got off the track here was this notion that there would still be a unitary price, and that's CTA. That's business as usual.
Mr. Ketchum: So the suggestion is, in effect, we take up C and E together. The notion may be better articulated through E.
Mr. Atkin: E is a completely different issue, though, isn't it? Can you make your information available separately as well as consolidated, which is an important question.
Mr. Ketchum: No, I'm sorry. Let's just focus on C.
: Bob, re-articulate what we think may have originated.
Mr. Atkin: I thought it was Island actually. Maybe I was wrong, but I thought Island was the one who articulated that.
Mr. Nicoll: C totally confused me, and I'm confused. Although, I do – maybe we do actually have an understanding here. What I think you're saying, and maybe I can just re-articulate it, is do we want to – if we're going to have a single consolidator, is that single consolidator's sole responsibility to be the consolidator rather than the pricer and the owner – I want to get away from those terminologies, okay, but will that single entity then – you know, where does the bargaining occur? Does it occur between that single entity and all the exchanges? And then you get all of your information from that single entity, or is that single entity simply bargaining to be the consolidator of the information and the sources of the information still control, and are they allowed to then bargain separately with the users of that information? Is that –
Mr. Atkin: That's correct.
Mr. Seligman: That's nicely phrased. With that as an appropriate amplification of C – to make it operational, what this boils down to is where does price negotiation occur? Does it occur at the level of the ECIP? Does it occur at the level, in effect, the exchanges? Does it occur at some intermediate level, which might be CTA/CQ?
Mr. Britz: If I may, I think it's more than price. If I understand this, this implies that New York would vertically deal with SIAC, for example, and bargain for its capacity needs from SIAC, and Chicago would do the same, and X would do the same, and so and so. I think there are a host of issues beyond simply price.
Mr. Seligman: Okay. Let's call it price and operational issues. So the question is at the current time, the negotiation is in effect between CTA, a CQ plan subject to various levels of direction from member organizations and SIAC.
The question is do we in effect retain a current model, albeit the equivalent to SIAC, to keep it simple, could be chosen by competitive bidding, or do we replace this current framework with a new model in which the negotiations will occur from the exchanges from the Nasdaq directly to the ECIP? We just dissolve the intermediate CTA/CQ type plan and proceed on that basis.
Mr. Bradley: Could I get a point of clarification from Bob? When you say in a vertical way you would negotiate for services, does that basically mean that if you wanted additional programming services or other issues, that you would then shut down by bidding up – if you – I don't want to frame the question, but your inference from your remark was you could literally own SIAC through your own needs and the ability to pay market price for those services?
Mr. Britz: No. All I'm saying is you bust up the cartel, if I'm understanding this characterization.
Today, the markets jointly engage SIAC in this case for a fee to provide a service, and the markets jointly deal with the vendor community and with the various – and user communities represented around this table in terms of the price. SIAC is nothing other than a service provider to the markets for a fee. And if I understand this correctly, this implies that we would continue to use SIAC or a SIAC-like vehicle for a fee to provide that service, but we would no longer sit around the table and say here's the price for market data. We would no longer sit around the table and jointly do capacity planning, which has people nervous for lots of other reasons, and it would be competitive. Chicago would go to Reuters and say here's the deal, what do you think? Chicago would in turn go to SIAC, for example, or whoever the SIP is and say we think we need X megabits of band width or whatever.
So when I say vertical, I mean rather than a joint discussion and a single answer both to the user-payor community and the service provider, it would be a series of sort of one-on-one discussions.
Mr. Seligman: Now, there's one other feature to this that we shouldn't lose track of. There would be a requirement on the part of the market centers to file a separate transaction reporting plan, which would be subject to SEC oversight.
Including fees and those –
Mr. Bradley: That's part of the –
Mr. Britz: This is break-up CTA but retain a single consolidator.
Mr. Seligman: Exactly.
Mr. Britz: It's nothing more complex than that I think.
Mr. Seligman: I'm not sure we'll say it's nothing more complex than that, but that was I think where we're trying to go with this.
All right. So let's use the metaphor, are we better off with the intermediary, the CTA/CQ, or do we dissolve it, try to have sort of a bilateral discussion between exchanges and other market centers and whatever the exclusive process would be? Bear in mind there is one practical difference that instantly leaps out, which is you go from filing one plan to filing multiple plans as you dissolve a CTA/CQ.
Michael.
Mr. Atkin: I will try this. On the first half of the systems and operations side of SIAC, I see no reason why we would want to dissolve that. It seems to work, and we like to have people get together and make sure that the capacity –
Mr. Seligman: Excuse me for one second. We're not talking about the SIAC, we're talking about the CTA/CQ plan.
Mr. Atkin: Excuse me, I thought it was the same thing.
Mr. Seligman: One's the process, the other is the governing body.
Mr. Atkin: You're right. Okay. I don't care. On the other side, which is the value equation discussion about the information and revenue splitting and whether you can contract separately, I have to say I have more questions than I do answers or positions. I think there is a risk benefit discussion that should be had, which is on the danger side, you know, you could have more complexity to fees and more complexity to admin, both of which I think are bad things.
On the benefit side, I think the opportunity for information competition and improving the value equation for data is a good thing, and I'm – if you'll allow me just to hear the discussion –
Mr. Seligman: Sure.
Mr. Atkin: – because I have comments on both sides, but I'm not sure which way we're going to go on this conversation.
Mr. Seligman: Harold.
Mr. Bradley: So you're reserving your time? Can I do the same?
Mr. Seligman: No. I think you're perfectly capable of saying in two words I don't have an opinion. I guess that's more than two words. Or I don't have an opinion yet. And if that's how you feel, feel free to say it.
Mr. Britz: You know, I would just suggest that we are around this table in part because there were criticisms that the problem is the single source monopoly. That's that cloud CTA, that's not SIAC. That's that cloud CTA that sits between the individual exchanges on the one hand and SIAC on the other side. You know, from my point of view, that's the comment that sort of leads us to this table, and this is an imperfect, a less than perfect way of on the one hand taking a conservative approach on the operations and processing side, sticking with a 25-year proven solution but getting things like price discussions among otherwise competitors and fixing capacity on a joint basis and so on getting those out of the equation.
Mr. Seligman: So you would in effect favor the dissolution?
Mr. Britz: This is the best of the theories of –
Mr. Seligman: Okay, I understand. Harold.
Mr. Bradley: I'm back up. I have just one comment as I listen to this. It worries me, and our friend from MIT earlier talking about other business examples, anybody who has more than an 80 percent market share is typically considered a monopolist. Therefore, when they start advocating for competitive structures, they win. And I really worry as we talk about this, that with the birth of several new potentially competing structures, that the perfect time to opt out would be – and they didn't really want to opt in as I remember in '76 anyway or '77 – would be that there are a lot of risks to the system. And yet, I'd agree that if we want to have some Justice Department examination of over market share and maybe how to break up the exchange, that wouldn't be in anybody's interest.
Mr. Seligman: Harold, forgive me.
Mr. Bradley: These are issues I'm worried about. I mean it's a Hobson's choice. I just wanted to state that.
Mr. Seligman: Okay, and I take your point it's a Hobson's choice, but we may be wandering a little far afield.
Andy.
Mr. Brooks: Thank you, Joel. I guess the only question and concern I have is if we break up the CTA/CQ model, I wonder – and we acknowledge that SIAC has really worked very well for 24 years, and nobody seems to be having a problem with the integrity of their process and the reliability of their data, which after all is what we really need from them, who will provide this oversight function? And that kind of scares me. I'm worried about a monopolist situation. Harold, you're right there, but who's going to negotiate? Who's going to make sure that what is being done is reasonable? In other words, who would service as the public service commission in this utility context, and that's my question.
Mr. Seligman: Good question. Matthew.
Mr. DeSalvo: Very briefly, at the top of number two, we still believe in multiple consolidators. To echo Andy's comment, who ends up being the oversight? We're not too concerned about it because we believe that the existence of multiple consolidators won't in effect be beneficial to us on a cost basis. I'll leave it at that.
Mr. Seligman: Carrie.
Ms. Dwyer: I think we answered this question pretty specifically in our letter. I think we all agree SIAC isn't the problem.
One issue I'm a little concerned about listening to the discussion is, you know, this committee hasn't done any factfinding other than what was previously on the record. I'm not sure everybody here has firsthand experience in the administration of the plans, the contracting process, the negotiating process. I'm not sure it's clear everybody understands where SIAC ends and the individual exchanges leave off. That might be something worthwhile doing and distributing so that people get a better understanding of what some of the issues are here.
But in terms of multiple consolidators, you know, the CTA plan was set up to force the New York Stock Exchange to share data in an era when it was fairly enclosed. There is no problem with the New York Stock Exchange wanting to get its data as broadly disseminated as possible anymore so.
Mr. Seligman: Forgive me, Carrie, I'm having a little trouble hearing which may be a consequence of too many plane trips.
Ms. Dwyer: I'm sorry. My last point was that the predicate for CTA in the first place no longer exists.
Mr. Seligman: Okay. On the point that Carrie made that we don't have the capacity to do factfinding as other types of inquiries might, but it might be very worthwhile for the Division of Market Regulation to perhaps prepare a short summary of the relationship between say CTA – it really should be among the exchanges, CTA/CQ and SIAC by way of background for the group.
Ms. Dwyer: What I was suggesting even more was an explanation of the contractual process that end users have to go through now. I think that's something that I'm not hearing that that's well understood here.
Mr. Seligman: I appreciate that. Joel.
Mr. Greenberg: Again, I don't think you can answer any of these questions until you decide – at least we don't have an opinion on any of these – most of the questions until you decide what process you're going to use to price the information, because if you decide it's going to be priced one way cost plus or it's going to be free market, then that answers a lot of these questions. I think we should be starting at the back and working forward in terms of the outline.
Mr. Colby: Joel, could I just point out that this would multiply the question, because whatever standard you apply now is not applied to one plan, it's applied to each person contracting under the plan.
Mr. Greenberg: That's true, but even going back to the discussion this morning, in terms of what information you're going to require to be published or made available, how can you decide that until you know the cost. I mean you can't decide what you want to bill until you know what the cost is. So on this situation, if it's going to be – every market is going to do it on a cost plus basis, that will answer a lot of these questions.
It seems to me we're spending a lot of time trying to figure out how to do certain aspects of it, and the fundamental issue is what – whose information is it and what can they charge for it given that there's some type of utility that's being required to be put in place by the SEC. And I'm not expressing a view at this point whether it's right or wrong, I'm just saying that's driving almost every answer here, and I think that's why people are not expressing – cannot express real opinions yet until they know what the basis of the cost is going to be.
Ms. Dwyer: I think it's – Joel makes a really good point, availability is a function of pricing, and we have to get to that question sooner or later.
Mr. Seligman: We'll get to that question, I promise, and we'll be able to return when we get back. Bill.
Mr. Harts: I would agree with that. And also, I mean, all things being equal in terms of pricing, I think that there is a value to having a single entity that can be a negotiating entity. It's served us fairly well. The last thing that I'd want to see is additional bureaucracy for dealing with these bilateral negotiations or, even worse, a whole new bureaucracy for dealing with that.
Mr. Seligman: George.
Mr. Jennison: Joel, I guess I'd say monopolies in general worry me, but I wonder – I'm unsure about what we're trying to accomplish, and I'm unsure to what extent competition would help here. And if we talk about price for a minute, if I could ask a question, if we have competition at this level, does this mean that the data providers to the entity would then negotiate back with, say Nasdaq, for example, individually on – negotiate about what our – what their price would be for their market data to us, and I might negotiate with all market data providers in that same way? I mean is that kind of what we're talking about?
Mr. Seligman: Potentially I believe an aspect of what this might involve – in other words, as I think Bob put it accurately, there have been concerns expressed about CTA/ CQ as a single source. The term monopoly has been used and so forth.
One approach would be in effect to dissolve or eliminate that monopoly and just have a consolidation in this model chosen by competitive bidding and by a kind of processing function.
Mr. Jennison: What I'm confused about is are we really getting rid of the monopoly if the only source for Nasdaq market data is Nasdaq, and the only source for AMEX market data is the AMEX? There is no – I don't – intuitively I feel like we're not bringing competition in. There's no way to get one entity to compete with the other to affect price.
Mr. Seligman: The New York Stock Exchange list is to some degree multiply traded. So you would have a situation where while a large percentage of listed stocks on the New York Stock Exchange are traded there, there is a significant percentage traded on say regional exchanges.
Mr. Jennison: True. However, if with 85 or 80 percent of the volume on the New York, and if the stocks are duly listed and, you know, listed multiple places, if I get the Chicago order book data, does that do me any good if 85 percent of the order book or the volume is on the New York? I'm not sure to what extent we affect competition.
Mr. Seligman: Good point. Joel.
Mr. Greenberg: Just to follow up on George's point, the fact that the display rule requires you to display every market center's bid an offer or last sale at some point. That makes almost every market center in this model a monopoly, and if you're required to display the information, they can charge what they want unless you have some governor on it.
So, again, it goes back to what I've been saying, if that's the basic premise, you have 10 market centers that are basically monopolies, and that's going to drive the pricing structure.
So I completely agree. It's about inherent market power that comes with the nature of the business that you're all in. There – because there's market power, it's going to have to be regulated. That's what happens when you have monopolies, at least in the United States. If you're going to regulate it, I think that the joint SRO plans are actually a very sensible, effective way of doing it.
If everybody has their own little plan, which you can do, the SEC is going to have to hire a lot more people, there's going to have to be a lot more coordination, and so on. So, I think it comes down to one of administrative burden and regulatory effectiveness. I think keeping the joint plans is quite compelling on those grounds.
Ms. Dwyer: Can I just offer a point of clarification now? I think that it's intended, when people talk about a competing consolidator model, that the SRO's are enabled to be retailers, as well as retain their function as wholesalers of market data.
So that you would have – and if, as wholesalers, most favored nation pricing, you would have competitors, vendors, other brokers, other kinds of entities, Yahoo, possibly, in this business, providing a check on that market power.
Yes, New York Stock Exchange, Nasdaq, you know, have huge inherent market power here, the central markets for their stocks. But if you are purchasing a service, there can be active competition there, and that will drive the pricing down. It will not be as it is today, whatever they say it is.
And that's where we're trying to go, and that's why the pricing –
Mr. Bradley: If you – Carrie, you're saying if you break CTA up, that's what happens?
Ms. Dwyer: Absolutely. But I'm also saying that you've got to have checks on the pricing. It can't simply be monopoly pricing, unregulated. You don't want to deregulate this the way that California deregulated electricity, which is sort of halfway, and the system blows up.
Dean Seligman: There is unanimity at this table that that would not be our model.
(Laughter.)
Ms. Dwyer: We seem to be going there, though.
Dean Seligman: I think we heard Simon. We're up to Ed.
Mr. Joyce: Yes. I think that what we have here is, under the A-B approach, is relatively the same as today. The C approach that we're talking about now is a half-a-step forward, and it may deal with some administrative issues, or it may deal with Department of Justice issues, but in the end, if there's a single consolidator, which I believe there should be, and it comes down to pricing again, and everywhere you go in this conversation you end up with pricing.
And I believe there should be single consolidator, and I would support C if A and B weren't alternatives. A is today, B is A with a requirement to compete, have competing bidding, and C is just one more step with each individual entity setting their own pricing, in my mind.
The key to A, B, or C is the oversight of the price setting. And they're just different forms of achieving the same thing.
Mr. Bradley: C, though, implies there is no revenue sharing, correct? And if we have no revenue sharing, then implicit is that you wouldn't have 10 exchanges selling data. I mean, that's another –
Mr. Joyce: You wouldn't have – repeat the last –
Mr. Bradley: That a lot of exchanges would fail.
Mr. Joyce: Not if you go back to the beginning of this conversation. If that data was required, they wouldn't fail.
Mr. Bradley: Oh, okay, okay. Right, that – okay.
Mr. Greenberg: Excuse me, Dean. If the data is required, you can – that market setter can set their price at whatever they want, to make sure they survive. There's no balance or check on that.
Mr. Joyce: That is the reason I say that the key issue then, in today's world, there is a price-setting mechanism. I know I'm more familiar with the other side, but the structures are similar.
And we go through a process that includes substantial input from the industry in setting prices, and there is an oversight function in place.
Dean Seligman: I want to, just in fairness to the entire room, be a little more disciplined in proceeding in order.
Let me start with Rick, and I'd like to just go through the entire room and allow everyone to have a comment.
Mr. Ketchum: C, as I understand it, is far better than B and A. It has a number of good things to say for it. It first eliminates our consolidated determinations on price and capacity, and that's good. And particularly with respect to capacity, it will also have the benefit ensuring that capacity demands are actually priced out, and people make decisions on how they use capacity without subsidies. So, that's good.
Those are both good things, and it's arguably a good thing to have a single consolidator that provides some additional degree of consistency and reliability. Although when that information is handed out to multiple vendors to disseminate, it's not clear to me that's very important. But it could be put on the plus side of it.
All those pluses would lead me to conclude that this suggestion that this should be lumped in with Don Langevoort's subcommittee, and should be evaluated vis-a-vis competing consolidators, because I think they are essentially choices among trying to address the problems, and I would personally vote to extend that subcommittee to allow it to think of those things.
The bad things about it, it strikes me, that I think deserve to be at least thought, is how it actually works. First piece of it are there are some things that, on a joint plan basis, sort of make sense, like how you construct the best bid and offer. And you can leave that to the SEC to do it with separate plans and the rest, and vendor display rule, and the like, but I'm not sure that consolidated – you might not still want some consolidated plan to figure out those types of things.
The second, more significant, thing is I don't know how it works in placing the exclusive consolidator in the intermediary position of dealing with vendors. What if – to choose my own market – Nasdaq and the InterMarket concludes that they have a billing problem with a particular vendor, or have a disagreement with respect to price – albeit all of this should go through plans and the SEC approving those prices – but we conclude that we have a problem.
We tell the exclusive processor that they should not disseminate the information of all the markets, I guess, since there's a consolidation requirement to – or, at least not to disseminate our information through to that vendor.
Is the exclusive processor supposed to mediate the situation between the vendor and us? Does it just simply take our instruction, notwithstanding what impact that means, with respect to how they disseminate consolidated information of every other market?
I'm not sure how that works, and I think, you know, history would suggest some time in here we will have a dispute, an individual market with a vendor, and you're going to have to, at least, figure out how that works.
So I guess I still probably lean towards E as a way to get most of the good out of this without getting into those complications. But I think it's an interesting enough idea that it deserves to be considered at the same time you consider E.
Dean Seligman: And certainly I think, Don, the point that Rick made that when you focus on a multiple consolidator, you would obviously want to address this as well.
We can talk about where it belongs. I agree it should be considered. Just to express my own view, I find this to be an awkward middle ground, partly because I haven't heard a good answer to Andy's question of what is the process of governance or supervision of an exclusive processor, and it does strike me that those are very daunting issues, that probably would suck the Commission into an even more active role than it's at right now. Bernie?
Mr. Madoff: I would agree with Rick's analysis of how we should proceed on this.
Dean Seligman: Brian?
Mr. McNelis: I don't think that it, from our view, makes much sense to break up CTA and still have an exclusive processor. I guess it comes back to some of the comments made on the other side of the room, but there's got to be, you know, an independent way of the pricing to be organized and sorted out among the participants.
And if you have direct agreements with the exchanges, why do you need the intermediary? You know, the vendors can do that directly and, you know, multiple processors take care of that.
Dean Seligman: Thank you, Brian. Mark?
Mr. Minister: Yes, I think the other side of the room has argued the case well, and I think Simon and Joel hit on the key points, and that is, if there is a mandated rule that all SROs contribute to an NBBO, then the regional stock exchanges, if they can freely price their information, have huge dominance, more than they'll ever gain from trading advantage. They'll sell market data at unbelievable prices unless there is some oversight.
So I do think you have to almost flip the discussion, and say, "We're going to have mandated requirements to display data. There has to be some control of price, or it gets silly."
Dean Seligman: Well, believe me, we're going to spend time on price. We'll get there soon enough. Do you need, in effect, an intermediate organization to deal with other aspects of governance?
Mr. Minister: It's one form of doing it, or it can be mandated. It can be each person required to answer to the rules of the game, or they can collectively sit around and do it with oversights. I think it's in different –
Dean Seligman: Ed?
Mr. Nicoll: I would agree with Rick, too, that it's – and I guess with Don – it does seem a bit like an awkward middle ground.
I would just, once again, like to point out to everybody how not requiring a consolidated NBBO solves all these problems, allows competition to occur. But I guess that argument is lost.
Dean Seligman: Appreciate your not letting us forget it, however. Paul?
Mr. O'Kelly: I agree with Joel, and others, who said I think this is really a question of price. I'm afraid those who are concerned about a single monopoly out there, if they go down this far, are going to find themselves in a world with multiple monopolies, each – not to say the regionals would, but the regionals, if you're going to have an NBBO, would be in a position to sell their data at a most favored "New York Stock Exchange" kind of value to their data and I don't see – and that would then immediately call for the SEC to get back into the rate-making business across all nine exchanges.
And then with respect to the actual oversight of the SIP, today the CTA's plan does that – the OTC/UTP plan – now we would all file our separate plans with the SEC, and how we're interacting with SIAC, or whomever the SIP would be, and the SEC would have to involve itself more in those processes.
Are sure that you have enough information? Are you sure you're getting enough capacity to solve your problems? Does SIAC have enough capacity to address what you're requesting of them?
This, to me, is going to vastly increase SEC involvement in this process, including in the rate-making process – something that I don't think anybody, and I think particularly the Commission, thinks is a desirable outcome.
Dean Seligman: Thank you, Paul. Ken?
Mr. Pasternak: We don't have a strong opinion until we get a strong sense on where three and four are going to be. So we'll reserve our comments until three and four are more developed. We think when we understand that, to many of us, and certainly to myself, the answer to C will be more apparent.
Dean Seligman: Appreciate that. Gerald?
Mr. Putnam: Actually, Gerry, just so we can finish the name thing in the room. I think I'm the last one.
Dean Seligman: Gerry.
Mr. Putnam: Thank you. The – I'm going to limit my comments, just to clarify what – my earlier answer. I mean, we support B. We also see merit in D and E.
We think that the reason to preserve the existing plans with revisions is just as a contingency, if competing consolidators don't emerge.
Dean Seligman: Okay. Peter?
Mr. Quick: We don't believe in multiple consolidators, and I think it's very difficult for the other people on the panel here, I guess save a few – Bob and Carrie, you used to work at the AMEX, and some other folks – knowledge of the CTA and CQ plans and exactly what they do.
These are plans that have been in existence for years and years, and have seamlessly produced quotes for the market participants. And I certainly don't think it's broke.
I know we're eventually going to get around to Joel's question. I sat on the other side of a table when Schwab was looking for some support with the New York Stock Exchange in terms of fair pricing of quotes. We didn't choose to engage in that endeavor with Schwab, but certainly understood the point from which they came, in terms of having fair prices that disseminate quotes to individual investors was a large part of it.
So we do need to get around to the quotes, but I certainly think that an explanation of the CTA plan and the CQ plan to the folks who are sitting around this table, since most of them are not – don't have much knowledge at all of it – would be very enlightening.
But certainly in the multiple consolidator scenario, would that increase the requirements on the exchanges in Nasdaq in terms of personnel and oversight? I don't think that would be very helpful to the system.
Dean Seligman: Thank you. Eric, you get the last word before lunch.
Mr. Roiter: There is a lot of pressure here, being the last, but –
Dean Seligman: You can handle it.
Mr. Roiter: I think at the end of the day, there will always be a role for some body or entity to perform an oversight function, because there is, at the end of the day, a regulatory or, if you will, a self-regulatory role to be exercised. It's embedded in the 34 Act.
And dismantling the CTA would mean one of two things. Either the markets themselves would have to find some other mechanism to come together in a self-regulatory way to ensure that standards are set that promote integrity and reliability of this market information dissemination function, or the SEC would have to increase its involvement in this.
And given those choices, whether CTA, in its current form, continues or not, I think it's preferable to have the regulatory aspect of this be performed at the SRO level, subject to oversight of the Commission, rather than putting on the Commission the direct responsibilities of coming up with the protocols to govern the operation of the system.
I think what people are really struggling with here is that there is, and has always been, an inherent tension in the self-regulatory model. There is the governmental function, and then there is the proprietary function that each market has.
And in the past, that tension has arisen in different ways. Commission setting is one, I think, classic example. I think the right approach is to keep in mind that every time a question is asked, there really are two questions. What is the self-regulatory aspect of the question, and then what is the proprietary aspect of the question.
And so when one tries to analyze the current issue from that perspective, my, I think, answer is two-fold. From a regulatory function perspective, I think there is a role for something like CTA, I think you're going to need that.
That doesn't mean, however, that the CTA or something that replaces CTA perform joint pricing. Rather, I think, the pricing function should be dealt with at each level in the distribution chain. And at each level, one needs to ask, "How can we bring competition to that level?"
Therefore, I don't see a role for a CTA to set prices. There's no need for a joint market center – I don't mean to be pejorative, but cartel – setting prices for consolidating data. So you strip away that price-setting function at the cartel level. That doesn't make pricing issues disappear, but at least you've dealt with one level.
You then have to proceed to the next level, and that is what is the appropriate way to ensure that pricing by each market center is fair and reasonable? One answer might be let's let the anti-trust laws solve that.
Dean Seligman: You know, and in fairness, we will focus on that aspect of our discussion much more –
Mr. Roiter: Right.
Dean Seligman: – down the line.
Mr. Roiter: Okay. So to summarize, I don't think you can dismantle CTA without either creating a new joint market, self-regulatory mechanism, or placing a greater burden on the SEC. And for that reason, I would say might as well retain CTA. If it has to be revised, its mission has to be revised, let's revise it.
Dean Seligman: Fair point. Okay, this has been a very, very productive first half of our day. Let's take a lunch break for one hour. We'll regroup here at 10 to 2:00.
(Whereupon, at 12:50 p.m., a luncheon recess was taken.)
Dean Seligman: Our friends from the Division of Market Regulation will be here momentarily. They're comfortable with us starting at this point.
Let me continue our discussion on what's sort of big point II, where we are addressing consolidation and focused specifically on sub-question D.
Under the current regime, broker-dealers, ECN's, and so forth, do not report individually to SIAC or to processors, but do so through an SRO. Question has been posed, should we change that aspect of the regime so that, let us say, broker-dealers or market-makers or ECN's could report directly?
There were a number of comment letters which addressed this. Let's go around the room, and I'd like to see the extent to which this committee believes we should retain things as they are, which basically recognizes there is a fundamental difference between an SRO with a number of responsibilities and obligations, and a broker-dealer, and so on, or whether there are members of the committee who believe we should change the rules of the game here, and in effect, have the ECN's, in particular, be recognized as kind of market centers and focus on how their responsibilities might or might not change.
Mr. Nicoll: Joel, excuse me. Can you – I didn't hear. Where are we? Are we on question III?
Dean Seligman: No, we're still on question II.D.
Mr. Nicoll: Thank you.
Dean Seligman: We'll get to III soon. Let's – I think, if my memory is right, is it Eric's turn? No? Michael's turn? All right, let's go back to the beginning of the alphabet. Your thoughts on this, Michael?
Mr. Atkin: Joel, I'm not qualified to comment on this, so I'm going to just go ahead and pass on it.
Dean Seligman: All right. Harold?
Mr. Bradley: I'd like to listen to what others have to say.
Dean Seligman: Bob, do you have any thoughts on this one?
Mr. Britz: Playing a little catch-up here, myself, Joel. I'd be happy to yield, if you would.
Dean Seligman: I think you may have intimated views in correspondence – go ahead, Harold.
Mr. Bradley: I'll take a stab, because this is probably closer to anything I know anything about than anything else we've talked about today.
But my concern over this is, again, related to all the structural conversations this morning, and the implications. If you allow an ECN or a market-maker to report directly to the consolidator, then it seems to me on the one hand, you're eliminating an intermediator who is gathering the data and then re-transmitting the data.
On the other hand, if you consider that the SRO function is important in terms of audit trails and aggregation and all these other issues, I mean, clearly it's an embedded question. If we're going to a multi-SIP environment, I think that the ECN's and market-makers should be allowed to choose how they report, and they should be able to report directly.
Dean Seligman: Okay, within the structure of an exclusive –
Mr. Bradley: Within the structure of an exclusive SIP, I think, it starts to look like a super-SRO, and again, that's a whole other discussion.
Dean Seligman: So you would favor, in effect, that the ECN's would report through –
Mr. Bradley: I think the way –
Dean Seligman: – or what have you?
Mr. Bradley: – if we have an exclusive SIP, the way it works now, probably, is okay. I think with a competing SIP, they should be able to choose how they report.
Dean Seligman: Okay. I do agree, it is embedded to some degree in the conversations Don will be leading in the subcommittee. Bob, have you caught up with us?
Mr. Britz: Hopefully, Joel. I think we would have no issue to the extent that they wish to report in addition to, but in lieu of is something that we would not think is appropriate.
Dean Seligman: Okay, so you would retain the current requirement, and then in addition to. Andy?
Mr. Brooks: Well, I guess if there were – if it seemed that there were some benefits to opening this up to competition, to have competing models going, I guess I'm in favor of that. But I'm feeling a little bit – this is out of my element, so I need to listen a little more to others.
Dean Seligman: Matthew had to handle an office issue. Carrie?
Ms. Dwyer: Yes, I really have no opinion on this. I think, you know, we have – this is an issue of sort of micro-structure, so the answer depends on resolving all the big questions, and until we get to those, I don't know that it matters what I think about this.
Dean Seligman: Okay, Joel?
Mr. Greenberg: I would have the same comment I had earlier. I think before we get to this issue, we have to resolve the price issue. So, thank you.
Dean Seligman: Bill?
Mr. Harts: To the extent that ECN's are acting as agents for customer orders, they should basically be handled the same as agency brokers, essentially, which is what they are. So I don't think that there should be any special mechanism for an ECN reporting outside of the existing SRO's.
Dean Seligman: Okay, George?
Mr. Jennison: I guess my only thought would be, if I understand what we have correctly today, you have some ECN's that want to become exchanges, because if they become exchanges they can collect market data fees. Isn't that one of the drivers, Gerry? Is that a fair statement?
Okay, so I guess I would say, as it relates to this item, I would say, you know, why do we have a structure that – why do we have that structure? In other words, you know, I would say if we can kind of unbundle that and let – you know, let an ECN, for example, sell its market data on its own, perhaps through the consolidator, you know, then that will spur on more innovative trading platforms and structures in the market. I think that's a positive thing.
Dean Seligman: Okay. So, even with an exclusive processor, you would favor allowing the ECN's to sell directly to the – okay. Simon?
Prof. Johnson: I would prefer to keep it all running through the SRO's. I think the SRO's are so central to the regulatory system, and the relationship between the SEC and the SRO's is so important, that I don't see any point in changing it. In fact, I think it might actually complicate matters and make the SEC's job much harder.
Dean Seligman: Bill, did you want to augment what you said?
Mr. Harts: Yes, thank you. I just – I wanted to elaborate a little bit. If ECN's are allowed to report directly, report the aggregate of their customer orders that are on their book, then broker-dealers should be allowed to do the same.
Dean Seligman: Ed?
Mr. Joyce: I think that point makes it clear that this quickly – the SRO function – quickly gets watered down, and that it's important for the confidence in the markets that we have the audit trails and the regulatory responsibilities that currently exist, and that people should have to come in through an SRO.
Furthermore, I'd like to add that if an ECN wants to become an SRO, that's very doable, as we've seen. Maybe Gerry would say it's not as easily doable, but it's doable.
(Laughter.)
Mr. Joyce: And that route should be afforded them.
Participant: Can you give a single example?
(Laughter.)
Mr. Joyce: I said they can become one, I didn't say easily.
Dean Seligman: Rick?
Mr. Ketchum: I think this comes down to why markets have information, and why they don't. Markets today receive information because people are putting out orders and quotes in order to get executions. And part of the way they get those executions is for people to be aware that their orders and quotes are there, and so they put that information out and they make money on it.
ECN's are estimable organizations that provide terrific transparency, and a significant amount of liquidity, and – except for one time on Monday in one case – excellent order-routing capabilities that are very competitive and have moved the market very competitively down.
But I think an ECN or a market-maker, or anything else, should make a choice. If an ECN wants to use a particular market's execution facilities, whether that be in Nasdaq's case, Selectnet and SOES, or whether it be in the New York Stock Exchange's case, DOT, or whatever, they, just like any other broker, are basically looking to improve their chance of executions and in many cases with ECN's, that's the majority of their executions, as opposed to those occurring within their system, and they have essentially handed that order over to the SRO to display.
If an ECN wants to operate as a discreet exchange, and not use a market's execution facilities to increase their odds of getting executions, then they should have every right to do that, and I hope that they will do that with the right type of regulatory requirements, and that the SEC, once all that's in, will approve it.
But it seems to me that what this is about is whether you choose to use a market's execution facilities and display facilities or not. And I think if you're going to do that, then no, I don't think that separately you should be able to recapture vendor fees, and I certainly don't think an ECN should be treated different than other participants in the market.
Dean Seligman: Don?
Prof. Langevoort: My instinct is that this question goes to the economic function of an exchange or an SRO, what they're all about. And I want to hear a whole lot more discussion on this subject, but I'm inclined to believe that the routing through the SRO system makes economic sense.
Participant: – being paid for the market information? I thought that was a separate discussion.
Prof. Langevoort: That is separate.
Dean Seligman: Bernie?
Mr. Madoff: I would echo Rick's remarks.
Dean Seligman: Brian?
Mr. Madoff: I would echo Rick's remarks.
Dean Seligman: Apparently it wasn't a loud enough echo to be heard, so you re-echoed his remarks.
Mr. Ketchum: Particularly since it's – SRO.
(Laughter.)
Mr. Madoff: I am not your examining authority.
Dean Seligman: Brian?
Mr. McNelis: I think I'm probably closer to Rick Ketchum than anybody else I've heard so far, but insofar as any participant feels that there is, you know, an economic right that they hold to the information that they're supplying, that they probably should be allowed to decide how they dispose of that, and to the degree they want to give that up for some other benefit that they receive through an execution facility or whatever, that should be their decision.
Dean Seligman: Brian, let me just be sure I understand. Are you saying basically an entity should have the choice to become an exchange and thereby be involved in the – market information to an exclusive processor or an entity should be allowed, as say an ECN, to provide the information without becoming an exchange?
Mr. McNelis: Yes, the latter.
Dean Seligman: Mark?
Mr. Minister: Let's see. I can sum this real quick. I agree with Rick and I'll say the latter, as well, as Brian did. I would agree with his –
Dean Seligman: So you would basically support the notion that ECN's could provide the information without becoming exchanges?
Mr. Minister: Yes.
Dean Seligman: Okay. Ed?
Mr. Nicoll: Clarification. It does say – maybe I can – I agree with Rick to a point, okay? And let me make – I think – since I find myself in such agreement with Reuter, here, Reuter's point, which is that oughtn't this be the result of the bargain between the SRO and its members? And you know, we have sort of danced around the issue of ownership. The whole issue of ownership, it seems to me, results from the bargain that the members and the SROs choose to enter into among themselves.
So my position would be that we don't need the regulatory mandate if – this ought to be part and parcel of the contract that members and their SROs enter into. And it would seem to me that it would be perfectly permissible for an SRO to allow its members to sell its data, to either competing SIP's or a consolidated SIP, if it wanted to, or not.
And that ought to be a range of choices which ought to be allowed to occur. And if we mandate that that not occur, we might not find ourselves finding the best arrangement between the SROs and their members.
Dean Seligman: Thanks, Ed. Paul?
Mr. O'Kelly: I also agree with the position Rick put forward.
Dean Seligman: Which one?
Mr. O'Kelly: That the SROs perform a market function for collecting and distributing quotes for a specific purpose, and that's the function in the market place, and they should be the ones that are gathering that information and providing it on to the consolidator, not allowing others to the table.
Dean Seligman: And Rick, in fairness, only articulated one – may have been more than one that was heard. Was that close, Rick?
Ken, I think you came in a little bit late. We're focusing on question II.D. The question is whether or not, in effect, the provision of market information should exclusively come from SROs to an exclusive processor, or in addition, ECNs should be allowed to communicate directly to an exclusive processor in the context of this particular question.
And I guess I'd be interested in your thoughts on that.
Mr. Pasternak: First of all, I apologize for my tardiness.
Dean Seligman: Not to worry.
Mr. Pasternak: I would say that one of the issues we have internally – we've actually floated an idea – not to say that we're prepared to do that – of copyrighting our market data, and testing whether we really own any call to that market data. This is a discussion topic only.
Mr. Jennison: When you try to copyright that, we're going to try to copyright the orders we give you.
Mr. Pasternak: Right. Just – when it comes to – we're not arguing about who owns it, but it's a complex question, and it shows how we're even troubled by it. We didn't – I'm not suggesting that we are far enough to copyright it.
And in fact, the person who could copyright it might be you, or even if you want to take the step – maybe neither one of us own it, maybe it's the guy who put up the money to buy those 500 shares, if you really want to go up the food chain.
So we're not – maybe he should copyright it – so we're not suggesting who has the right to copyright it, but we are suggesting it's complex and – but where it's more of a concern to us as we see the market deregulating, and the differences in business initiatives between SRO's, ECN's, and market participants becoming blurrier and blurrier, and one titled entity, in essence, competing – and an example would be consolidating information, publishing information, for instance the many ways – take a market Participant – has database obligations, has publishing obligations to that data that are not insignificant.
In many cases, they're almost identical to an ECN or an SRO, and are performing limited-order display functions, similar, if not identical to exchanges or ECN's.
And I think there has to be some clarity as we move forward, and I think we talked about the fact that we might write a rule today and a year from now it might be obsolete. We might take the position here as we move forward, where – and I don't have a lot of clarity, myself, about whether, for instance, our firm should be called an ECN, a market-maker – and certainly, if you talk about the rights, but also the obligations of exchanges, we're not seeking to become an exchange. We think we're an exchange. But when it comes down to market data, those things become quite ambiguous to us.
So to get pretty specific, many of the ECNs, for instance, are discussing plans to provide auxiliary market data to Yahoo, for instance. So are other kinds of market participants. Do they have the right to do that? We think they do, we think that's beneficial. It creates competition at the fringes.
We also think that we should still be providing – not instead of our market data – so should the SROs and the ECN's to this exclusive – to the consolidator, whether he's exclusive or competitive. That's not that relevant to us. So I guess we're in support of that.
Dean Seligman: You're in support of –
Mr. Pasternak: Of allowing both a primary obligation to the consolidator, and the right to either provide and sell economics on the part of all three participants to ancillary, competitive providers of – we might call it partial market data information.
Dean Seligman: Okay, let me do a follow-up at this point, then. Focusing not on what you referred to as auxiliary or augmentative market data that's not covered by a mandated rule, with respect for the moment with the equivalent to the NBBO and last sale quote, you go through an SRO.
Mr. Pasternak: Correct.
Dean Seligman: Is it your position that is what should endure if we had, at the end of the day, an exclusive processor, or is it your position that you would prefer, even with the mandated data, that ECN's should be allowed to sell it directly to the processor without going through the SRO?
Mr. Pasternak: I believe they should be able to sell it without going through the processor.
Dean Seligman: Okay. Appreciate that. Gerry?
Mr. Putnam: We believe that broker-dealers should be able to participate directly in the SIP, so all broker-dealers. We think that that participation should be conditioned on SRO sponsorship, in the interest of preserving inter-market surveillance and inter-market trading rules.
So there needs to be a buffer there, to see that the rules are being enforced, but that the broker should be able to go directly to the SIP, sell data.
Dean Seligman: Okay. Peter?
Mr. Quick: Well, the American Stock Exchange doesn't believe that market-makers should be submitting information directly, or selling information directly, that they should go through their SRO. ECNs, if they become SROs, are certainly entitled to participate in the plans.
There are other things, I think, that aren't being considered, in terms of, you know, trading halts, conversations with the SEC as SROs, when they find out information on a stock and they decide – or, trading halts. I'm not sure what you would do in this multiple source situation with putting the obligation to perhaps, you know, contacting many more people in doing this.
I think it's also dangerous, in terms of the thought that individual participants would be selling information that may not be the best biddor offer out there to third parties who would be disseminating that to the public. I think that would question the trust and the integrity in the system that I think we've earned over the last 24 years of the national market system.
And I think that allowing other than SROs to do this would really question the integrity, and I think it flies in the face of the national market system.
Dean Seligman: Thank you, Peter. Eric?
Mr. Roiter: I think at this stage, we should stick to the current model and have market information flow through SROs, insofar as what the SEC mandates. Doesn't foreclose other arrangements, but I think it is essential that you have the self-regulator involved in the process of collecting this information.
And with regard to ECNs, it has been remarked around the table that they have a choice at some point, though under Reg. ATS they don't have a choice – and I think the SEC got that one right – if the ECN gets to the point where it really has a significant percentage of the market, it should be required to register as an exchange and take on the responsibilities of an SRO.
Dean Seligman: Okay. Just to summarize where we are for Bob and Annette, we focused on question II.D. We went around the table, and it's just that we're essentially three camps.
I think there was a slight overall majority for not changing the rule here. That is, continue to report through the SRO.
There were two minorities. There were a few who said they didn't have an opinion at this time, they wanted to hear more on other collateral issues, or hear more, period. And then there were a slightly larger minority which would support permitting ECN's and other non-SRO's, including broker-dealers, to report to an exclusive processor.
I need to highlight one point so everybody has confidence in what we're doing. I am pursuing an approach that I think – I was associated with a lawyer named Edward Bennett Williams – and it is to the effect that nothing is resolved until everything is resolved.
So while we're getting tentative expressions of views, while we're getting enough to start writing a document to circulate it, you may find issues look different when you see them in writing. The detail may convince you to change your minds, and you're not locked in to positions you've held now.
I think Joel has been eloquent and consistent on a theme that issues will look different when we get to the fees, and that may cause other people around the table to revise or re-analyze how they look at these issues, and that's perfectly okay.
But we're fleshing things out, we're trying to find where there appears to be consensus, issue by issue. We're trying to focus on where we need more information and more data, and I think the process is working. It's an arduous one, when you have a committee as large as this one, but I think we're moving in the right direction.
Mr. Seligman: We turn now to question IIE. I remind everybody that to some extent, Rick Ketchum, before the break suggested there was overlap with 2C, as well. This one is to the effect that even if – let us say – SROs were obligated to provide their data either through the equivalent to a CTA, CQ plan or a Nasdaq plan to an exclusive processor, they should also have the right – when they satisfy that – to provide the same and additional data to other – whether it's vendors or disseminators of the information.
And with this one, let me start with Eric at this point and roll back through our alphabet.
Mr. Roiter: I was relaxing here hoping to hear a few comments. I think that at this point I'm not prepared to say that we would support allowing markets to make available their information separately.
It's not clear to me yet how the consolidation function would be performed consistent with the standards of reliability and integrity that is now covered under the CTA plan and the SEC's oversight. So at this point I would say that we ought to have the markets making their information available collectively to a central consolidator.
Mr. Seligman: Okay. Peter?
Mr. Colby: Joel, can I ask a quick question? Does this envision that there might well be a separate consolidator that's producing the best bid and offer. But the markets could then also separately distribute and sell their information? Is that the idea?
Mr. Seligman: Yeah, but let me real clear about the information we're talking about. One view of the world would be there would be a mandated minimum which would go through a processor or processors, and then there would be other information which would essentially be unregulated.
What 2E really goes to is, if there is some sort of mandated minimum that goes to an exclusive processor, can the market simultaneously sell that data stream to other vendors? Or must they solely act through the processor? Carrie?
Mr. Roiter: Well, if that's the case, I have to amend my remarks. Because I had thought –
Ms. Dwyer: That's – that's right.
Mr. Roiter: – yeah, I'm sorry. If that is the question, then I think our response would be don't foreclose the ability of exchanges to go beyond the mandated minimum. And to the extent that the commission makes the judgement that there's no requirement to mandate collection of a certain level of information, I think implicit in that determination is that it's permissible for markets to find other ways to distribute that data.
Mr. Seligman: In other words – and again, just it's after lunch – to be sure we're all on the same page, under this articulation of what we're about, SROs would be required to provide their data to an exclusive processor. They could provide the identical data stream, the mandated data stream to anyone else. And that's what you're saying you're comfortable with. And in addition to that they can provide other data?
Mr. Roiter: Correct.
Mr. Seligman: Okay. Peter?
Mr. Quick: I'm not sure I understand the question, but I'll try to answer it.
Mr. Seligman: Do you want me to reframe it?
Mr. Quick: Well, certainly with regard to the minimum requirements I think that they should be – they should go through one consolidator and be put out there.
Mr. Seligman: Okay.
Mr. Quick: I think a concern on the confidence and the integrity of the marketplace and the data that's being put out there, there's certainly a question of letting somebody sell a piece of data and putting it out there and having the public have access to that and thinking and not knowing without the proper disclosure that that isn't the whole picture.
So I'm certainly not – I don't think the American Stock Exchange would be opposed to – over and above the minimum requirements – the ability of the exchanges and the other SROs and ECNs, if they become SROs, to be able to sell over and above data out there on the marketplace, the minimum requirements.
Mr. Seligman: Okay, thank you, Peter. Gerry?
Mr. Putnam: This is really closest – probably closest to our point of view is that you maintain the – SIP as a guarantee that the minimum amount of information that we think – best bid and offer and last sale data – is available. Beyond that marketplaces should be able to go out and contract with competing SIPs to provide the same data, additional data to add value to the process, which is – again, this is exactly where we think things should come out.
Mr. Seligman: And you would – with respect to the minimum data – just provide through the SIP?
Mr. Putnam: The minimum amount which I guess, we talked about – I don't remember if it was in the first section or the beginning of this second section, that we thought that there should be an exchange – a marketplace should be required to produce a minimum amount of disclosure or data. So the best bid and offer in that marketplace and it's last sale information, you should have to provide that to an exclusive processor for the purposes of guaranteeing that that minimum is going to be available to everyone who wants it.
We believe beyond that, that there's going to be demand for that consolidated data – just in the interests of providing best execution to your clients or other people, it's just wanting all – all the market – or the best market information. Or where – information on where best prices are.
Beyond that, that you could then open up competition to allow, for example, the New York Stock Exchange to do what it wants to do and to enhance value in its data and to contact with other SIPs or become one themselves.
Mr. Seligman: Okay, Ken? Thank you, Gerry.
Mr. Pasternak: Well, I think it's – I would answer by making it – from a comfort point of view a two-part question.
The first part is about the mandatory element of the data. And then the second part is about the elective.
And I give you an interesting example – maybe not interesting, it might be interesting – nobody really displays odd lot information. We have a lot of odd lot information. The public might want to see odd lot information.
Mr. Seligman: SuperMontage will.
Mr. Pasternak: Will they? Yeah, I don't believe it will.
Mr. Seligman: All right. Forgive me.
Mr. Pasternak: But I just posed – so when I talked about – I guess, I would answer both questions say, yes and yes.
Mr. Seligman: What are you answering yes to?
(Laughter.)
Mr. Pasternak: Yes that we should be allowed to do that on that. But on the mandatory part the question I have – I don't have the answer for it – and I guess, I go back to Joel's comment – without understanding your comment about – about that we can change our minds.
Without knowing how the pricing mechanism works, if we could – if we were mandated to sell the required element of our data and then we could sell it through an alternate channel in theoretically a more competitive environment, how do you price that? Who controls that price? And do we undercut the ability of the consolidator or the SIP to work effectively because it can't ascertain scale properly? And do we have issues around favored nation pricing and sunshine that I think Schwab has articulated in their comment letter?
So it's hard to answer that question without addressing all those going backwards.
The second part, I think, adamantly is a yes. And I gave it kind of – again, the odd lot information because I think it was fairly innocuous, but a lot of people might consider it valuable. So where you could be creative to provide more information to investors on – and create a revenue stream out of it I think –
Mr. Seligman: Let me simplify our discussion for just one second. If you have a mandatory minimum is there anyone at this table who would oppose basically a free market for everything else?
Mr. Atkin: Joel, just a quick question. A mandatory minimum on display? Or a mandatory minimum on capability?
Mr. Seligman: Production and display, I guess, as well. But I'm focusing on it from the production side for a moment.
In other words, if you say, the exchanges – no, I guess, you're right. Let's limit it to display.
Mr. Brooks: Joel, the only issue I have with this and it gets back to the other Joel's point. But if there's some revenue sharing discussion that would happen, I'm interested in talking about it. Because what I sense – where we're going in a lot of these things – is we're trying to create a competitive and open environment that allows people to profit from further dissemination of the data, whether it's over Yahoo! or CNBC or something. And I keep wondering, okay, but who does it belong to? And who should be making the money off of this?
And if somehow we talk about revenue sharing at some later date, I think we could circle back on this.
Mr. Seligman: All right, but at the very least revenue sharing would be confined to whatever was mandatory. It would not exist with respect to the unregulated, sort of free market data?
Mr. Brooks: I don't think I'm saying that. What I'm saying is I think the marketplace as a participant – anybody as sort of a rite of passage or if you want to play, you have to agree to the rules that we have mandatory displayed information about quotes and markets and last sale.
And everybody is required to be a part of that. If you choose to then sell that in some other fashion for broader dissemination or something else, I don't think you can be the sole recipient of the revenue.
Mr. Seligman: Let me make it a much more precise question because I'm just trying to focus our discussion on 2E. Bear with me. For the moment just to focus on display, divide the world between mandatory information – if we decide that's where we want to go – and the rest of the information that could be made available.
With respect to the rest of the information, I'm posing the question, is there anyone at this table who would take a position that there shouldn't be a free market in it?
Mr. Colby: Can I just supplement that and say that anything that's produced by an SRO is subject to some standards about fees. So it would be – I mean there's standards – even if it's not consolidated, market information has to be done in a fair and reasonable and not unreasonably discriminatory manner.
Mr. Seligman: Okay.
Mr. Colby: But subject to that caveat could I go ahead?
Mr. Joyce: Whatever that means.
Mr. Pasternak: Well, we'll decide.
Mr. Joyce: Does that mean, Bob, then if you're not – if you don't fall into that category that you have none of those responsibilities to be reasonable in fee setting? Or have any responsibilities as it relates to the integrity of the data?
Mr. Colby: Technically, the fair – I'm trying to do this by heart – but the fair and reasonable nondiscriminatory standards apply to exclusive – fair and reasonable applies to exclusive SIPs and nondiscriminatory applies to vendors also – if I remember – vendors – and then, of course, SROs are subject to reasonably allocated fees, dues and –
Mr. Seligman: Bob, let me – no, it's all SIPs may obtain information from an exclusive processor on terms that are fair and reasonable. But I think what we're going to is a different point.
All persons may obtain market information on terms that are not unreasonably discriminatory. I think it's the not unreasonably discriminatory standard that would apply in the free market world, if you will, of information beyond the mandatory minimum.
All right, I just want to tease this out and make sure I understand. Is the silence at the table because everyone agrees that, in effect, there should be with that statutory obligation a free world and that's not really one that there's any disagreement on? Or is it because people don't understand?
Mr. Roiter: Joel.
Mr. Seligman: Okay.
Mr. Roiter: Just a point of clarification. An exchange, with regard to its own data, is it not treated under the statute as an exclusive SIP, even though it's not required to register as an exclusive SIP since obviously it's registered as an SRO?
So then I think it's held to the more stringent standards on how it can price that information.
Ms. Nazareth: Right, which was your – which was Bob's point.
Mr. Seligman: Okay.
Ms. Nazareth: Right, that's correct.
Mr. Joyce: The other area of concern, I think I heard Peter say that he would be concerned with data that had no standard or no quality level to meet going directly to the public, that that could cause problems, that if this – once you fulfilled the obligation of providing the minimum standard, if it then freed you to do anything else that you wanted without regulation, then I think that is a problem.
Mr. Roiter: Can I just respond to that? I think the SEC has other tools at its disposal if it feels that there's market data being put out there by nonexclusive SIPs that could tend to disrupt the market and might even be manipulative if they've got extensive rule-making power and other powers to deal with that.
But I think from the standpoint of regulating the pricing of that data, if you're not captured in the exclusive SIP category or in the SRO category, basically it is the free market that's left to operate.
Of course, there you have – in the absence of SEC oversight you've got the anti-trust laws to concern yourself with.
Mr. Greenberg: Joel, I have a question. I'm confused. Is the question whether an SRO can sell its non-mandatory information for any price it wants and then? So the answer to that is they cannot. So if an SRO wants to open the limit book it still will be subject to a reasonable standard.
Now, I'm a specialist on the New York Stock Exchange. Can I sell – assuming the exchange would let me sell it – my limit book information for whatever I want?
Mr. Seligman: I think part of what we went through in the answer to the last question would be no. I think it would be through the exchange. I mean, again, we're subject to revisiting that. Let me see if we can regroup here. I guess, the –
Mr. Atkin: Can I just ask one more question – I'm sorry – about it. Does that mean they could sell it for less than they would sell the consolidated quote? They could give it away for free, for example, if they wanted to?
Mr. Bradley: That's what really interesting about this.
Ms. Nazareth: Yeah.
Mr. Pasternak: So does that – does that mean that the ECNs that sell their data in aftermarkets are selling it through Nasdaq? Yahoo! Are providing it to Yahoo!
Mr. Colby: I don't think anybody is selling it. I think it's free.
Mr. Pasternak: Providing?
Mr. Bradley: So it's happening – are you saying it's happening now? I mean, that's another issue? Are we talking about the way a market should look? Or is it happening now?
Mr. Pasternak: My understanding – by pressing up my computer I can get an after hours directly from an ECN at 7:30 at night – unless I'm not mistaken.
Mr. Colby: Okay, I think this is going – I think what Joel was trying to say is that there was an earlier discussion about whether –
Mr. Pasternak: Oh, okay.
Mr. Colby: – who should have access to the central, the joint plan. There's a separate question about who – currently what the standards are about who is allowed to put information out parallel to the central plan. And then there's a – but I think what Joel was just trying – is that right? He's trying to jump ahead and say – instead of going all the way around the circle – if there's an established minimum information going out and that's already been agreed on, is there a consensus that additional information should be allowed to be made available subject to whatever standards it's subject to. Is that right, Joel?
Mr. Seligman: I think that's nicely phrased.
Mr. Colby: Extremely vague –
Mr. Seligman: Well, no it's not because you've got your statutory fair and reasonable and nondiscriminatory – nondiscrimination standard.
Mr. Colby: Which applies to SROs but not to –
Mr. Seligman: Right.
Mr. Colby: – to ECNs.
Ms. Dwyer: Can I just say one of the difficulties here is we're talking about recommendations and the – and whether we agree with them or not in the abstract. And so a lot of people are concerned about the fact that we haven't really laid examples out on the table. Or there's a lot of unclarity in following this method in terms of actually deciding whether you favor something or not.
Mr. Seligman: That's why, again, we'll go through a round robin circulation of documents with questions.
Ms. Dwyer: Then maybe it would be helpful for people to articulate some of the things they're worried about, or some of the things they think might be coming onto the market so that we all can make an intelligent decision. It's just too hard to do this in the abstract this way.
Mr. Seligman: Okay, I think we've done well with much of what we've discussed. And sometimes as you sharpen questions it becomes easier.
Let me go back to the way Bob just articulated a question and ask you just to re-articulate it again.
Mr. Colby: I don't know if I can.
(Laughter.)
Mr. Colby: If there's a basic minimum that's been agreed that has to go out, is there – if a market wants to make more available than the minimum, whether they should be able to do that independently, subject to whatever standards apply from a pricing standard.
Ms. Nazareth: And again, if I can understand your question, Carrie, I think all you were saying was to the extent that people do have a problem with that, it would be helpful to understand what is their specific concern with that.
Ms. Dwyer: That's all I'm saying.
Ms. Nazareth: Yeah, and I think that's legitimate. I think that's all she was saying, was because we're talking in the abstract, do people understand to the extent that they're saying they have a problem with additional information beyond a required minimum being made available in the marketplace, that you let free market forces just let that be available, if you have a problem with that, what is the specific problem, since there's no mandatory requirement that it be made available, anyway.
Ms. Dwyer: The only point I was making is that without discussing the problem that exists today, we're voting on recommendations to solve it, and I think there is –
Ms. Nazareth: So I do think it would be helpful in this one to understand if people had a problem, what would –
Mr. Bradley: So it is precluded today? A vendor, an SRO, somebody under SRO obligation, a broker dealer, an ECN reports to the SRO, they are not currently allowed, then, to distribute that data through alternative means?
Mr. Colby: It's different for trades and for quotes.
Quotes, you're allowed to distribute. The requirement is that you have to have given too your market any quote that you're giving out to a vendor.
Trades, the rule today is you're not allowed to distribute them independently.
Mr. Bradley: So this, then, is really only encompassing, including trades, if we were to argue for this?
Mr. Colby: Yeah. I think this is – I think Kenny took this question about additional information, said, "Well, are we talking about putting out the minimum separately or are we talking about putting out additional information separately?"
And Joel was trying to say, "Does anyone disagree about putting out additional information out separately;" is that right?
Mr. Seligman: Yeah.
Ms. Nazareth: Ironically, I think you started this line so that we wouldn't have to go around the room, that there was a broad consensus on this one point.
Mr. Seligman: I actually thought there was.
Ms. Nazareth: We seem to have gotten caught up on it.
Mr. Madoff: The question is to Bob. What was the logic the SEC used that prohibited a broker dealer from, or anybody from distributing this data once it had already been distributed?
I understand why they had the rule that you can't – you have to put it to your SRO as well as give it to someone else.
Mr. Colby: Well, believe it or not, it was before my time.
(Laughter.)
Mr. Colby: But if I were to guess –
Mr. Madoff: I believe that.
Mr. Colby: Maybe someone else should answer this. If I were to guess, the idea was to try to make the consolidated tape a viable product. That would be my guess, but identification for sure.
Mr. Seligman: We really, when we look at 2E, have two separate questions.
The one is, if SROs are required to provide data to an exclusive SIP, can they simultaneously sell the data, or provide the data, I should say, to other disseminators?
The second question is, with respect to information not covered by a mandatory minimum requirement, and subject to the current statutory regime, should the SROs in a sense have a free market, or a free rein, with respect to it?
Let's take them one by one. We may want to do fairly brisk answers. Let's start with this first question, the narrow one.
Should exchanges – I'm sorry – should SROs that are obligated in one model to provide information to an exclusive processor simultaneously be able to provide that same mandated information to other processors or disseminators?
And let's start with Michael.
Mr. Atkin: Yes.
Mr. Seligman: Harold?
Mr. Bradley: Yes.
Mr. Seligman: Robert?
Mr. Britz: I'm sorry to pass on the brevity, but I have mixed feelings about this.
On the one hand, customers have told us there's great demand for a New York only product, and so on some level, you would like to satisfy that demand. I also know that we would love to be able to launch, on our own web site, NYSE only data.
On the other hand, I am sympathetic to one or more folks who have mentioned the notion that a substitute for consolidated data, Brand X market center SRO, might sell that data for next to nothing; and it does raise quality issues and issues of disclosure as to whether that data is, in fact, indicative of the overall market, be it as to price, be it as to size, or otherwise.
I don't have a definitive point of view on this, but I guess I would be – other than in defined distribution systems, I do think that anybody ought to be able to put on on their own web site, their own product.
But beyond that, whether we should be able to give SIAC our data for purposes of consolidation and sending on to Reuters or Bridge, and then we would be able to turn around and deal with Reuters and Bridge for the New York only product, I could see where that might be less than desirable.
Mr. Seligman: Harold?
Mr. Bradley: I want to just backtrack one second.
If someone would suggest, as Bob just did, that data could be displayed on their own web site, there are all sorts of technologies that exist today to do screen-scraping and aggregating.
So to me, we're kind of arguing questions that are already answered. If they can display it separately, they ought to be allowed to, and my argument would be that market quality issues take care of themselves in the free market.
If it's not good data, if it's not dependable, and it's not reliable, it won't be used and it won't pose any competitive threat.
If it is efficient, and others see that there's an efficiency to putting the data in that venue, we'll also start to put pressure on the costs, as we've heard their issues, in terms of the ways the data streams are currently managed.
So I see benefits on both sides.
Mr. Britz: I agree with that last point. I agree nobody is going to sell Harold Bradley bad data. I wonder who they are going to sell less than desirable data to? It's clearly not going to be on the high end.
Mr. Seligman: Bob?
Mr. Colby: Can I just add to this? If this is being discussed in the context of a mandatory minimum, then presumably, at least at the points that that's required, people couldn't just give New York only, they would have to give the mandatory minimum.
It would, I suppose, allow creation of a synthetic mandatory minimum outside of the consolidated product, official –
Mr. Seligman: It's hard to do.
Mr. Colby: It's not impossible. And so let me stop there.
Mr. Seligman: Okay. Andy?
Mr. Brooks: Yes.
Mr. Seligman: Carrie?
Ms. Dwyer: Yes, subject to all the pricing issues we keep deferring.
Mr. Seligman: And we'll get there, I promise.
Joel?
Mr. Greenberg: I would say yes, except on the mandatory minimum, I don't think that even if you could screen scrape and obviate it, that would not be cheaper than the mandatory minimum that you would get through one of the consolidators.
Mr. Colby: It would certainly put pressure on the consolidator not to be –
Mr. Greenberg: Why?
Mr. Colby: Why? Because if you could buy it individually from 10 people, cheaper than you could buy it from the consolidator, then –
Mr. Greenberg: Who, but who – why would any of those individual 10 sell it cheaper than they can get through the consolidator? They would just be cutting their own price.
Mr. Colby: It depends on whether the consolidated prices were left too high.
Mr. Greenberg: What?
Mr. Colby: It depends on whether the consolidated prices were left too high.
Mr. Greenberg: But there's no reason for anyone who is in that consolidation to undercut the consolidated price, because they would just be making less money.
Mr. Roiter: I feel like I'm an oil minster sitting at a meeting of OPEC.
Members of OPEC undercut each other all the time. It would happen here, if there were an independent way to get that asset. In this case, it would be information rather than oil.
Mr. Greenberg: But the person who controls, or a few people who control the most information flow are not going to undercut themselves by giving it away for free on a web site where they know that would undercut a large part of their revenue stream.
Mr. Seligman: George?
Mr. Jennison: I'm a yes.
Mr. Seligman: Simon?
Mr. Johnson: I think I'm in favor of this, but if this implies that we gave the fragmentation of the information everyone is putting on their own web site, their own data, then – and which I don't see as an implication of this, but – or perhaps I misunderstood it, then I'm –
Mr. Seligman: Subject to the mandatory consolidation requirements, we're trying to –
Mr. Johnson: Right. Then I'm hesitant, because I think that – I think we know who the people are who would, you know, see and be taken in by less than fully revealing and proper information, and they're not sitting at this table, and we're trying to protect them.
Mr. Seligman: Ed?
Mr. Joyce: I agree with that. That was my point earlier, about the quality of the data and it going out to the public customers.
I think it's difficult to say that you're against a free market, once you've fulfilled the obligation of the consolidation, that you're against a free market, and so I am torn on it, as Bob was, that I see the value in allowing this to occur, but we have to be mindful of the potential impact on the earlier decisions we made, and the '75 Act that requires the national market system and the consolidation of data.
This could undermine all of the other process if someone chose to compete, and it could be economic for someone to compete, depending on Carrie's and Joel's pricing issues. They clearly come right into this.
So I don't think we should be so quick to take the easy answer that, oh, yeah, obviously, you should allow this. It could undermine the entire process.
Mr. Seligman: Rick?
Mr. Ketchum: Given that we're not operating in a vacuum and that we actually know that the mandatory minimum information is vended out at a price that results in large numbers of brokers giving it away to large numbers of their customers, even somebody like me that trades once a year, then I think that those concerns aren't that great, and I would say yes.
Mr. Seligman: You would say basically you would favor the simultaneous – okay.
Don?
Mr. Langevoort: I'll give the simple yes.
Mr. Seligman: Bernie?
Mr. Madoff: Yes.
Mr. Seligman: Brian?
Mr. McNelis: Yes.
Mr. Seligman: Mark?
Mr. Minister: Yes.
Mr. Seligman: Ed?
Mr. Nicoll: Yes.
Mr. Seligman: Paul?
Mr. O'Kelly: I guess I would answer it this way, is that I think the question could be slightly modified, say allow people to sell the information over and above the mandatory minimum, but that mandatory minimum information ought to be sent, because of its importance, sent out in the single stream.
So I would answer the question, anything above the mandatory minimum, free to sell, mandatory minimum goes out through a fashioned controlled by the exchange, by the exchange consortium or whoever this regulator is going to be for the mandatory minimum information, and allow exchanges to sell anything over and above that amount.
Mr. Seligman: Okay. Ken?
Mr. Pasternak: Yes.
Mr. Seligman: Gerry?
Mr. Putnam: Yes.
Mr. Quick: No. I think for market integrity and for investor confidence, I'll be consistent on that.
Mr. Seligman: Eric?
Mr. Roiter: Yes. The SEC has other tools that it can use to ensure market – the integrity of market information. It doesn't have to use its powers over pricing.
Mr. Seligman: All right. Now, let me get to the second part of question 2E, the embedded question.
We've now talked about mandated information, whether or not it can simultaneously be sold to non-ESIPs or SIPs.
Now, I want to focus on non-mandated information. Can it be sold? And at the moment, we're assuming, by the same SROs that we seem to assume would be the sellers under 2D in a free market subject to the statutory requirements.
Is there any reason why that shouldn't be permitted?
Mr. Roiter: Yeah, it should be permitted, subject to the statutory standards.
Mr. Quick: Also yes.
Mr. Seligman: Okay.
Mr. Putnam: It should be permitted.
Mr. Seligman: Okay.
Mr. Pasternak: I'd say yes.
Mr. Seligman: Paul?
Mr. O'Kelly: It should be permitted, and everybody should be subject to the same rules about vending it.
Mr. Seligman: I'm sorry, say that again?
Mr. O'Kelly: It should be permitted, and everybody should be subject to the same rules for vending it, so if an SRO wants to sell the information over and above to a class of purchasers and ECN wants to sell it, the same requirements should be imposed upon both of them as to who and how they should be able to sell it.
Mr. Seligman: Okay. Ed?
Mr. Nicoll: Yes.
Mr. Seligman: Mark?
Mr. Minister: Yes.
Mr. Seligman: Brian?
Mr. McNelis: Yes.
Mr. Madoff: Yes.
Mr. Seligman: Rick?
Mr. Ketchum: Yes, with – I agree with the caveat that Paul placed on it.
Mr. Joyce: With the caveat.
Mr. Seligman: Okay. Simon?
Mr. Johnson: Yes, with the same caveat.
Mr. Seligman: George?
Mr. Jennison: Yes
Mr. Seligman: Joel?
Mr. Greenberg: Yes.
Mr. Seligman: Carrie?
Ms. Dwyer: Yes.
Mr. DeSalvo: Yes, with the caveat about revenue sharing.
Mr. Seligman: Bob?
Mr. Colby: Yes, I agree with Paul's comments.
Mr. Brooks: Yes.
Mr. Britz: Yes.
Mr. Bradley: Yes.
Mr. Atkin: Yes.
Mr. Seligman: We seem to have some consensus. We do have to flesh out what revenue sharing may mean, but nonetheless, it seems to be at least beyond – no, the first one was lunch.
(Laughter.)
Mr. Seligman: This may be the first one of substantive significance.
I want to now go to Number 3, which is governance. My instinct is, this will either be the last one we can get to today, or we'll get to this and begin fees. We will not complete these today. That will clearly be a topic we'll have to go through in some detail, and it will continue on April 12th.
This is, Joel, not to suggest that we don't take it seriously, but I want to be sure it has enough time to be fleshed out.
Let us focus in the governance area on Questions A and B, and let's start with the following question:
The current membership of the SROs – I'm sorry – of the operating committees is, in effect, limited to SRO participants. There have been, in effect, two alternatives proposed.
One is to broaden the voting membership of the operating committees to include such individuals as vendors, broker-dealers, public investors.
A second alternative, which was framed various ways in the correspondence, would be to create some alternative vehicle such as Rick Ketchum's advisory committee, under which non-SRO participants such as vendors, broker-dealers, public investors, would have a voice, the voice would be captured in filings with the SEC.
Rick suggested further that a representative of an advisory committee would be a non-voting member or a participant in some sense of the operating committee.
So really, the way I see the choice in terms of if you keep the operating committee model subject to a plan, you can either say, leave things exactly as they are, you can say no, you've got to broaden who votes in this, you want to have real votes for vendors, broker-dealers, public investors.
Or third, you can say, keep things exactly as they are, but create an advisory committee or other mechanism so there won't be vote, but there will be voice for individuals such as vendors, broker-dealers, and public investors, a voice which will have to be recognized in filings with the SEC, so it can't, in effect, be swept under the table.
A number of the correspondents pointed out that there are statutory limits under the current regime as to who can participate in the SRO plans, and if you wanted to change the voting membership – and correct me if I'm wrong on this, Bob – this would require statutory amendment?
Mr. Colby: I don't think that's at all clear. The one place I saw this referred to was the portion of the Act that said the Commission has the authority to order SROs to meet together to have joint – to have joint discussions, and I think the concern is that without that authority, then there might be anti-trust liability –
Mr. Seligman: I'm very sure that's the concern.
Mr. Colby: – as opposed to – but there's lots of areas in which we have – there are meetings of industry participants beyond SROs where broker-dealers are participating, where we have either – particularly recently – we've either ordered them or we have provided a letter that said that we thought it was valuable and tried to throw some sort of anti-trust protection over it.
Mr. Seligman: If the committee favors, or at least we feel we have to discuss the broadening to include representatives of other constituencies, I think we need to think through carefully what the statutory and anti-trust implications of that would be.
Mr. Quick: Can I interject, just that it's – I think it's difficult to discuss this for many members of the committee, without a better understanding of what the CTA and CQ plans actually encompassed in terms of the plans themselves, which we discussed previously, about circulating to the committee.
Mr. Seligman: In fairness, there are some pretty experienced members on this committee that, with some discussion, in the concept release, there was certainly some discussion in a number of memoranda from Bob Britz, among others.
If there is a specific point about the CTA/CQ plans you would like highlight for us at this point though, Peter, would you – we will get you a memorandum on that before April 12.
Now let me go around the table. We are focusing on governance. We are focusing on an SRO plan being in existence that is not an inevitable result of our recommendations or what the SEC chooses to do, but if an SRO plan is in existence should the voting membership, (a) remain as is; (b) be broadened to other constituencies; or alternatively (c) remain as is but an advisory committee or other new mechanism be created to offer greater voice to other constituencies. This time I am going to start with Michael.
Mr. Atkin: I'm sorry, Joel. We are not talking about the basis of those, right? – like the one seat, one vote versus some formula?
Mr. Seligman: No. We are just talking about who votes at all.
Mr. Atkin: Okay. I guess there's two things that I would say. One, I would be cautious about saddling CTA with more bureaucracy. I think that I would suggest caution on having direct participation by people outside the plans. I would like to see why people outside the plans think they should get a vote on CTA activities.
That being said, I would absolutely support broad exposure and participation on their advisory committee. I think that there is value in outside input, providing public exposure into the process and things get out in the open and it is harder to feel like it is being hidden from you.
Mr. Seligman: Okay, thank you. Harold?
Mr. Bradley: I am not sure that either (A) nor (B) would meet the dictates of some of the recent issues we have seen with the CTA plan. Whenever there is an innovation in the marketplace it seems that immediately it becomes a plan amendment and subject to the unanimous voting requirements –
Mr. Seligman: And we'll get to that in a second.
Mr. Bradley: – so that's why I would say neither (A) nor (B) and I'll wait for (C).
Mr. Seligman: Okay. No opinion. Bob.
Mr. Britz: I think we are really missing the point here. If I can quote from your agenda, Joel, it says of course "Each SRO is required by the Exchange Act to ensure fair representation of its members in the selection of its directors and the administration of its affairs, and to have one or more non-industry directives. Under the current model, therefore, these broader constituencies have some degree of indirect influence over the actions of the various SRO plans."
That is flat out wrong. They have the sole influence over the actions of this plan. The various SRO boards have not delegated to the Consolidated Tape Association the authority to make substantive decisions.
I have been to CTA meetings. Trust me. Nothing happens of any substance at CTA meetings – with all due respect to my colleagues around the table who have been at those meetings. We are messengers.
The process starts at the grass roots level, but I will spare you that story. It goes to, in my case, the NYSE Board of Directors, and then that board authorizes what it is we do or don't do at the CTA level, so for this committee to look at whether or not adding representatives to the CTA operating committee is somehow going to produce meaningful change, I really think you are looking in the wrong spot.
So what might you do? You might in order to do that replicate our own board of directors, which does have very broad industry and non-industry representation on our board, but you know, clearly, David Kamansky at Merrill Lynch and Dick Fueld of Lehman Brothers are not going to sit on the CTA operating committee, and even if they did, they would only be endorsing whatever it is they did at the NYSE board table.
So if that is not going to happen, what is going to happen? I will use TJ because he is not here. David Kamansky takes an action at the NYSE board table vis-a-vis some CTA issue as to how the NYSE ought to vote. TJ is now his designee – Tom Joyce, I'm sorry – is now his designee at the CTA operating committee. What is TJ now going to do?
Number one, again, New York has got its explicit instructions, as does Chicago, as does Boston and so on. The messengers are all there. What is TJ or anyone else going to do at that point?
So I think – I think you have got the light on the wrong vehicle at CTA because nothing happens at CTA –
Mr. Pasternak: I have a question –
Mr. Britz: – and I do think that if you then shine the light on the various SRO boards you get exactly what it is you are trying to replicate at the CTA level. I'm sorry?
Mr. Pasternak: If you change (C), would your comment about (B) change?
Mr. Britz: I'm sorry, say it again?
Mr. Pasternak: If (C) changed, if (C) became a reality, meaning voting requirements changed, would your characterization of what happens or doesn't happen at CTA – by the way, this is a dumb question –
Mr. Britz: No, you know, no, because they are not voting. They are not voting.
Mr. Pasternak: Doesn't (C) imply here that they would then be voting?
Mr. Britz: Well, then what you are talking about is the NYSE and other SRO markets actually delegating to the CTA operating committee the ability to vote on substantive issues.
Mr. Pasternak: Correct.
Mr. Britz: Another issue that hasn't happened. It certainly might change the category of individual who sits around the operating committee today. Today they are staff members of the various marketplaces and, you know, the notion of imbuing them with the ability to make decisions around the CTA table is just not going to happen.
Now again, if Dick Fueld and Dave Kamansky want to sit around the CTA operating committee, then I think there would be great confidence that you could give them the ability to make decisions, indeed, to make those decisions at the NYSE board table.
Mr. Seligman: So, Bob, if I can get to a kind of bottom line here – appreciate the analysis, but what you are really saying is we should leave things as they are now?
Mr. Britz: I guess I am saying that, Joel.
I mean subject to everything else, I have said, which is that the NYSE is not going to sit around this table under any circumstances going forward anyway – I don't mean to be delivering a punchline to the committee so much as I mean to be trying to educate. You folks have lots better things to do than sit around CTA tables, and I just am not sure that you understand when you say we need to broaden the representation at the CTA table – my guess is that if we did that tomorrow, you all would be very disappointed that that was somehow a silver bullet in terms of trying to get at the issues that I think are important.
Mr. Seligman: Appreciate that.
Mr. Putnam: Can I say something real quick? As far as the CTA, I haven't sat in on one of those, but, Bob, are you saying that there's never a single member of that committee has never used its veto power to override a majority's interest?
Mr. Britz: In 25 years, and my experience with CTA is only in the last several, but our, one of our colleagues has actually been the chairman of the CTA for 15 years, and to the best of his recollection for the prior 10 there has been one situation. It is actually a current situation, and I don't know whether it is appropriate to go into the details or not, but it was not a pricing issue.
It's not appropriate? Is that what you are telling me?
Mr. Seligman: I would prefer just to keep the train on the tracks here.
Mr. Britz: Well, but the answer is – I think it begs the question of what problem is it we are trying to solve here. In 25 years there has been one market use its veto. For the record, it wasn't New York – and that issue is currently trying to be resolved.
Mr. Seligman: Andy?
Mr. Brooks: My impression is, and I have never sat around the CTA table and I certainly don't want to, so thank you –
(Laughter.)
Mr. Brooks: My impression is the CTA is a lot like the Security Council in the United Nations, where not a lot happens and there's not a lot of independent thought because, frankly, it is a function of self-interest, and I think that Harold's point about (C), what we are talking about here is how do we put together a group that can operate without as much self-interest as appears to exist at CTA, and that would require outside influence and people who actually had been delegated the authority to think independently and, boy, that's a big issue and that is complicated.
Mr. Seligman: Carrie?
Ms. Dwyer: So, you know, we are on the record as thinking that the system shouldn't persist, so I'll caveat that. If you are going to have a central utility, then I think it should have as broad representation as possible and a vote is better than no vote, but all that said, I agree with Bob that shining a light – having had some experience with CTA – shining a light on the CTA operating committee is not where it should be shown.
There is a New York Stock Exchange, for example, for tape A is the plan administrator and that is where the decisions are made and they are ratified at the CTA board sometimes, but the daily operating level – who negotiates the contracts, Exhibit A, all the administration, the audits, everything is done by the exchange.
This is what I referred to earlier. I am not sure people really understand how the system works, so, you know, overall I think a different model is a better model here than a committee that governs a central utility, but if one were to go with this, then you need to look very deeply at the plan administrator and, you know, I think we are on record as saying that that function should be as separate from an SRO function as possible.
Mr. Seligman: Thank you. Joel?
Mr. Greenberg: To me, it seems that again until you decide under what provisions these plans are going to operate, whether it is going to be cost-plus or something else, I can't decide how much influence someone else should or should not have. I mean if this is going to be very strict SEC oversight as to the pricing, then I don't think it matters who sits on the committee, so again I don't think – I don't have an opinion at this point until I know what the procedure is going to be to decide the pricing.
Mr. Seligman: George?
Mr. Jennison: Certainly broader representation would be better, and certainly something other than a one veto, certainly something other than veto power would be better – a vote of some kind, two-thirds vote.
Mr. Seligman: Simon?
Mr. Johnson: I think the goal is to have much more disclosure and transparency about all the dimensions on how the plan operates, and I think what Carrie just said is extremely important. There can be a much more general set of tools that we may need here. However, focusing on this particular issue, I think, letting in informed outsiders and ideally letting them vote, could be an important part of the package through which we get much greater transparency along the lines for example of the SEC concept release in this very, very critical area.
Mr. Seligman: Ed?
Mr. Joyce: My direct experience is more with the OPRA side of the world. It's a similar structure and it does have quite a bit about side input without voting authority and having that kind of input through an advisory panel would be fine with me.
Mr. Seligman: Okay. Rick?
Mr. Ketchum: Well, we have basically stated our position. I think there's much to what Bob Britz says, although some might say participation in the CTA is the best revenge.
(Laughter.)
Mr. Ketchum: It certainly isn't the policy formation. However, all of us do try to provide and in the various different governance systems try to do this well – input for whether our members or with respect to key issues, with respect to market.
If indeed there is going to be a consolidated plan, there's probably not – there should be a better mechanism for people to understand what is going on, a better mechanism for people to understand when an issue is going forward than just simply depending on notice and comment, and that is why we suggested an advisory committee. It allows entities that have particular interests to have better notice and we think they ought to have a joint ability to express their opinion – although obviously they can do that through notice and comment anyway, and it strikes us that that gives a little bit more transparency and understanding and fairness to the process.
If we are going to have one plan, we might as well have one of those rather than eight of those, so we thought there might as well be an advisory committee to everyone, recognizing that all that is going to happen is that the various exchange members and Nasdaq will take back the thoughts of the advisory committee back to our senior officials and then our boards, or it is obviously not a one-step process, but it is a fairly efficient way to get input and a fairly efficient way to feed input into the SEC. That is why we suggested it.
Mr. Seligman: Thank you, Rick. Don?
Mr. Langevoort: I agree with that. I am not sure "advisory committee" is the right name to give this. It is really a public oversight board.
Mr. Seligman: Well, let me understand what that means. In some instances public oversight boards vote.
Mr. Langevoort: Oh, no. No, I was not suggesting anything more formal than what the name implies, which is "public" and "oversight."
Mr. Seligman: But oversight typically sounds like it has some governance –
Mr. Langevoort: No, I don't mean that.
Mr. Seligman: Do you mean public advisory board?
Mr. Langevoort: "Advisory board" – we are an advisory board set up by the SEC to advise it on particular matters. I see what Rick is saying as this board being really a public and other – otherwise unrepresented group voice that would speak to more than the plan. It would speak to the SEC and speak in a number of forums that would provide transparency to the process.
No, I did not mean to say I was going to add a layer of bureaucracy here.
Mr. Seligman: Thanks. Appreciate that. Bernie?
Mr. Madoff: Bob is correct as to how the system operates, and he is also correct then in where we are directing the spotlight.
The problem is, though, how do you make the board responsive to the membership? Now it is very easy to say that the board makes a decision and gives the CTA their direction, but from my own experience in dealing on these types of issues, when it gets to the board level most of the members' eyes glaze over very quickly when you start to talk about a lot of these issues, so they go to these CTA meetings with a board directive but very few people on the board, without discrediting anybody's board because I served on the NASD board so it is the same, whether it be the NASD board or the New York Stock Exchange board.
Most of these issues are not familiar to certainly the majority of the board members and I don't know that a great deal of thought process goes into the decisions that isn't really the staff – you know – decision that is being made. It is not necessarily the board members.
That being said, that is not the fault of CTA. I think that the advisory committee sounds like a sensible way to deal with this issue, and I am not that familiar with the governance as to the voting process of CTA.
You have a similar situation in ITS and there because you need a majority – you need, you know, veto doesn't do anything. I mean what it does, it breaks everything up. Nothing ever gets done. So I think it's something that – I don't think this is that difficult an issue, you know, but we have to explore it, but clearly I think it would be a mistake to say that the present governance, the way it exists today, is fine, because when we first started this series of meetings that seemed to be number one on everybody's agenda, that we had to change the governance.
If somebody came in now, it would seem as it's okay, it's business as usual, so I am a little bit troubled about that issue, and I think that we have to delve into it a little bit further.
Mr. Seligman: I think there is another governance issue we will get to in a few minutes, which is the votes, which may also be part of this. Brian?
Mr. McNelis: With the caveat that we take the position that the SRO or the joint plans should be eliminated altogether, you know – should they continue that we would prefer that there were light shed, as it were, by having other entities be able to participate and vote, because I don't think just giving advice would solve some of the problems that people are concerned about.
Mr. Seligman: Mark?
Mr. Minister: I guess I agree with Bob, but maybe even more so with Carrie.
I don't think changing the board of the operating committee will have a whole lot of effect. I think the true issues go into the administration of the plan, which isn't the same as how it is operated, and that is why I agree with Carrie.
I think that is where the governance issue needs to be addressed, so it sort of like the spotlight is on the wrong place here in terms of what we are looking at, and I think the administration of the plan is where we really – I think if we would fully understand it, that's where if we have problems that it comes in that area.
Mr. Seligman: And I think for the background memorandum, which I hope will both address CTA, CQ and also Nasdaq, it would be useful to flush out not just the votes but these administrative issues as well. That is an issue we will take up to some degree on April 12.
Now, Mark, if I can just pin you down a bit, to the extent one focused on (A) and (B), if we have an SRO, a joint SRO plan governed by an operating committee, would you favor in effect the current voting pattern? Would you favor opening up the votes? Would you favor an advisory committee? How do you come out on that?
Mr. Minister: Oh, I think having it you get some sunshine and some advisory committee, and I won't get into a discussion of its power, but I think having it have more visibility is fine. I don't know that it will change anything, but there's certainly no harm in it.
Mr. Seligman: Ed?
Mr. Nicoll: Given the premise that the plan exists, I think it would be a mistake to create a vote by non-participants, so I think the better alternative is the advisory committee alternative.
Mr. Seligman: Thanks. Paul.
Mr. O'Kelly: I agree with Bob. I think we are focusing on the wrong thing, but having said that, I also see that we have unhappy people and they are finding other forums to vent their unhappiness.
I think we would be better served if we set up some type of mechanism to work along with the CTA so that the views of unhappy people could be surfaced at the CTA for addressing rather than in SEC advisory committees or put them off –
Mr. Seligman: Well, again, there are two ways you can set up an alternative. You can set it up with a vote or just as an advisory committee. Do you have a sense of which you would prefer?
Mr. O'Kelly: I guess how much does it take to keep them from asking for advisory committees or trooping them off to the Hill and I am not sure where that is.
In the first instance, an advisory committee, because I see the kinds of things that CTA does and I don't see how a person with a vote will act within that context very well, so understanding people's issues and concerns and allowing the CTA to bring them back to their boards for discussion seems to make more sense to me, but if people were insistent that they wanted to be right there at the meetings and express their views at the meetings, I guess if I understood how many and what roles they would be playing, I wouldn't entirely rule it out.
Mr. Seligman: In characterizing the advisory committee, which may or may not be the ultimate name, I characterized it as having three parts – the committee, the ability to have voice to the Commission in one form or another when there are filings by the joint plan, and then a nonvoting participant at the operating committee meetings.
That is the way Rick laid it out and I thought it was useful for discussion purposes.
Bernie, let me just keep going down the table and turn to Ken.
Mr. Pasternak: Just to keep things going along, we would support, for lack of a better word, the advisory committee.
Mr. Seligman: Jerry?
Mr. Putnam: We would definitely not be in favor of keeping things as they are, and despite what Bob has said about the way things go on at those committees there is an awful lot of folklore that surrounds CTA committee meetings. You can't help but erase that image of the couple parked in their car with a bloody hook hanging from the handle, even if you know it's not true –
(Laughter.]
Mr. Putnam: There's a lot of talk about what's gone on in those meetings.
A Participant: It's true.
(Laughter.)
Mr. Putnam: But it was only on the direction of the board?
A Participant: The board made us do it.
Mr. Putnam: We certainly fall more in camp (C). (B) – broadening the committee to include other representatives we don't think is necessary. We do think, though, introducing a sponsorship model will get you where other points of view are considered because in our world where we're sponsored by Nasdaq as an ECN, Nasdaq provides good services to us, but it's intriguing – you have to stop and think about well, what if someone else competed for that. What if someone wanted to do it for cheaper and can do it better? Once that model – a model like that, if that were to be introduced, then I think the SROs sitting at that committee would start to worry about those that it's sponsoring and start to bring other points of view to the table so it could be taken care of that way.
So I guess I'll stop there, but I have one more for C.
Mr. Seligman: And we'll get to C, but for the moment, just to tease this out a bit, narrowing your focus to A and B, would you favor additional voting representatives including those who are not SRO participants, or would you favor simply leaving things as they are, or would you favor some sort of advisory?
Mr. Putnam: We would – again, A is not for us leaving things alone, but I mean I guess we could be convinced that broadening the base is a good idea. I think that can be accomplished just by opening up SRO sponsorship to the ECIP as an alternative to market participants as a way of accomplishing getting others' viewpoints brought to the table.
Mr. Seligman: I appreciate that. Peter.
Mr. Quick: Certainly parts of A. We would recommend the existing composition, and we would make some changes as I submitted from the American Stock Exchange with regard to the voting requirements.
I'm a little perplexed in terms of the light of day of things. At the American Stock Exchange, things go before the board. Before they go before the board, they go before exchange officials which we probably have got about 40 different exchange officials that see these things and get to comment on before the board meetings. Then there's also the SEC publishing these things and the public comment period. So it's an area that I don't think a lot of people have paid a lot of attention to, but certainly there's an opportunity there to comment on these things, and there has been, but it just hasn't been utilized. So maybe the market centers need to do a better job at getting the word out on changes and soliciting more comment, but certainly the method is there right now for them to respond to it.
Mr. Seligman: And you wouldn't want to go through some sort of advisory committee function or anything along those lines?
Mr. Quick: Not with voting power, no.
Mr. Seligman: But I'm talking about it without voting power.
Mr. Quick: I would certainly consider that.
Mr. Seligman: Eric.
Mr. Roiter: I think perhaps having heard all of the comments on this issue that the most apt analogy for the CTA is not U.N. Security Council but maybe the Electoral College. And maybe that's not such a bad thing. I think it is – it's tempting to say well, if you're going to open up the CTA, maybe I'll be the representative of the public, therefore, you may be inclined to support broadening representation if you're the one. But at the end of the day, I don't think that's the model you want to go to, because what you start to do is approach the creation of, yet, another letter, another tier of self-regulation. I think if you feel impelled to go in that direction, you have to ask yourself the question, well, what's wrong with the structure of self-regulation that we now have, which focuses on the exchanges and the NASD?
So I think if there is a problem in the CTA not representing the public interest – I'm not suggesting that that's the case, I'm not really that privy to the inner workings of the CTA – you really have to look at the respective positions that are being taken by each of the SROs that have representatives on the CTA.
So I think at the end of the day you want to avoid pyramiding self-regulatory bodies one on top of the other and focus I think where primary responsibilities should be, and that is on the exchanges and on the NASD.
Mr. Seligman: And to the extent you look at the joint SRO plans, you would leave them as they are?
Mr. Roiter: In terms of the voting requirements?
Mr. Seligman: Mm-hmm.
Mr. Roiter: I think we could see some changes there in terms of eliminating the veto and – but I view that as fundamentally different from who sits on the committee.
Mr. Seligman: Okay. And with respect to an advisory committee of some sort, any opinion on that?
Mr. Roiter: It can't do any harm.
Mr. Seligman: Okay.
Mr. Roiter: I think.
Mr. Seligman: All right. So what I heard on this was I think I can literally characterize it as four different views. About half more or less wanted to leave votes as they are but add an advisory committee of some sort. No one seemed to quibble much with the notion that would be an advisory committee. It's views would be represented in filings with the SEC and would have a non-voting representative on the operating committee.
There were then three minority views. There were at least four individuals who indicated they would favor broadening votes on the operating committee for other constituencies, which hear include broker-dealers and so on.
There were a few representatives who basically said just leave everything as it is, don't add advisory committees, and then there were a few who basically said they needed time to think or didn't have an opinion at this point.
For our purposes, that's a useful start, and we'll circulate back on this issue trying to spell out how we might proceed, but clearly, they seem to be not an overwhelming favorite in one direction or another but some interest in the advisory committee, and we'll see how that plays out.
Let me turn to the other major governance issue, and that is the vote. And correct me if I get this wrong, but my understanding at the moment is each SRO gets one vote. There are three voting rules. To amend the plan or to take "a significant action" requires unanimity.
Second, for fee – and let me see if I got this right – for fee decreases – increases two-thirds, for decreases would be the unanimity. Bob?
Mr. Britz: I think that's right, but I think if there's a technical issue here, which is a fee increase requires a plan amendment in terms of the process, and a plan amendment requires unanimity. So for all intents and purposes –
Mr. Seligman: So let me just start this again, then. There's a unanimous requirement for a fee increase or a plan amendment or "other significant action." There is a two-thirds vote for a fee decrease, and in recent years, that's what we've basically been seeing. And then for other –
I'm sorry, the Chairman of the CTA, Tom Haley.
Mr. Haley: My recollection is that a fee increase is, as literally written in the plan, calls for two-thirds. But a fee increase also in order to be effective, requires a plan amendment. Plan amendments require unanimity.
Mr. Seligman: So an operation level, then, my statement wasn't inaccurate, that is, a fee increase as a practical matter may require unanimity.
Mr. Haley: A fee increase as a practical matter, and as along as I've been associated with CTA, has required unanimity. That is correct.
Mr. Seligman: A fee decrease, however –
Mr. Haley: Requires unanimity.
Mr. Seligman: A fee decrease requires unanimity?
Mr. Haley: I believe it does.
Mr. Seligman: Any change in the fee requires –
Mr. Haley: That is correct.
Mr. Seligman: So then what we're starting with as a practical matter is voting rules, each SRO one vote per SRO. For amendments of plans or changes in fees up or down, we're told it's unanimous. Other operational decisions are simple majority. Now, that's –
Does that include pilots?
Mr. Seligman: Mr. Haley, are pilots plan amendments or are pilots operational?
Mr. Haley: Pilots are the authority of the administrator subject to a review.
Mr. Seligman: So can a pilot be approved by less than unanimity, or does it require unanimity?
Mr. Haley: A pilot can be initiated by the plan administrator.
Mr. Seligman: Without a vote?
Mr. Haley: Without a vote, and that is the way the plan reads and was approved by the Commission. At each meeting subsequent to a pilot being initiated, it is reported to the – all of the voting representatives.
Mr. Seligman: I appreciate that. I'm going to suggest for our purposes we will separately address pilots, which will include discussion of voting requirements. For a moment, though, we are looking at on the CTA, and I presume also the CQ side, in effect each SRO gets one vote. Unanimity for plan amendments and fee changes, majority otherwise.
Mr. Bradley: So there's no super majority which was I thought discussed? There's no super majority?
Mr. Seligman: This is what's been asserted to us today because of the way the plans are drafted.
Rick Ketchum, with respect to the Nasdaq side of things, how do you vote?
Mr. Ketchum: I vote that Tom Gavin is going to explain it.
Mr. Gavin: I'm not as familiar with the UTP plan as Tom is with his plan, but I'm fairly certain that plan amendments do require unanimity.
I know that to date fee changes, however, have not typically been reflected in a formal plan change, although the most fee changes we've made have been in essence run by all the other participants and at least informally approved before we went to the SEC.
Mr. Seligman: Who votes?
Mr. Gavin: The representatives of the UTP plan participants, so basically the other exchanges in the UTP plan.
Mr. Seligman: So the vote, in other words, would be the Nasdaq stock market and the other exchanges?
Mr. Gavin: Correct.
Mr. Greenberg: I know we're going to talk about it later, but what is a pilot for those of us who don't –
Mr. Seligman: Joel, in a few minutes we'll take a break and I'll give you on the sidebar on this.
Let me – I'm going to hold off on OPRA, which has yet another pattern we can focus on. For the moment, we're focusing on CT, CQ, Nasdaq/UTP. Again, you know, our basic principles are one SRO participant, one vote, this unanimity for fee changes and for plan amendments, otherwise majority.
There have been concerns expressed about the voting rules. Let's start around the table. We'll start with Eric. You're really addressing a series of voting rules simultaneously. You can take Dr. Pengloss' position and tell us this is the best of all worlds, leave things as they are, or you can say I'd like to propose a change and here's what I propose.
Mr. Roiter: I feel like I'm in one of those chess matches where you have 30 seconds to make a move.
Mr. Seligman: Not even that much, Eric.
Mr. Roiter: I just used up 20 seconds. I'd have to say we'd have to think a little bit more about it. We don't have any specific recommendation to make. I think the only alternative to – I think we are in favor of one SRO, one vote, because when you consider the alternative, it would I think undermine the integrity of the self-regulatory structure to start favoring one SRO over another. So long as you're going to have a joint plan, each SRO should have one vote.
In terms of what should be subject to unanimity, what should be subject to super majority, I'd like to reserve a viewpoint on that. And I know you've separated the pilot question from the general voting requirements, but I think whatever is agreed upon as the requisite level of voting ought to apply to pilots as well because I think there's been a tendency to use that exception to do a lot of things that aren't temporary in nature.
Mr. Seligman: Thank you, Eric. Peter.
Mr. Quick: I think there are certain problems with one SRO, one vote, or one exchange, one vote. It has to do with the possibility theoretically of somebody coming in and registering as an exchange and like participating let's say in a type B revenue and not doing any kind of significant volume in it at all and, under the current rules, having the ability to block an increase or an amendment to the plan by virtue of their one vote. I don't believe I have an answer now to what the alternative to that would be, but that's a problem that we've discussed at the American Stock Exchange with regard to one vote per participant.
Mr. Seligman: Now in your correspondence you suggested that you might support some sort of weighted vote system.
Mr. Quick: Well, we certainly talked about in the user fee how to determine revenues allocated among the plan participants, something to do with market share. Right now it's basically done on a trade basis as opposed to a market quality volume and trade basis.
Mr. Seligman: Thank you, Peter. Gerry.
Mr. Putnam: We support C. And I think, you know, one SRO, one vote is fine, and the example give at two-thirds super majority to amend a plan change sounds like a good place to start.
Mr. Seligman: Thank you. Ken.
Mr. Pasternak: Well, we would support the one vote per SRO, but also with having to be coupled with the ability that one vote not being able to immobilize the whole entity, i.e. going to a super majority or a majority but not a requirement to have an absolute vote on every issue.
Mr. Seligman: And do you have any particular level of super majority you would favor?
Mr. Pasternak: Well, I could even live with a version of a pure majority with weighted voting that recognized the relative difference between the participants as – or a super majority of two-thirds depending on which one might seem more logical. My instincts are that weighted voting might make more sense.
Mr. Seligman: Okay. Paul.
Mr. O'Kelly: I would be in favor of one SRO, one vote, but I think we have to realize here that at least my experience with CTA and with the OTC UTP plan is that the exchanges that are not administrators are heavily reliant upon the administrators of the program, AMEX, New York and Nasdaq, to make considered business decisions about the things that probably mean the most to you people, the pricing and the packaging of the services.
So to say I want to preserve my right to vote, I say that with sincerity, but on the other hand, I have to rely upon those people, and I think they've done a good job despite what others may think – I think they've done a good job, but I have to rely primarily on their recommendations to us as to what makes good business sense for providing those services to people. So I've got to vote, but I don't have a lot of expertise or informed judgment other than a fair amount of reliance on them to do a good job. Again, to date I think they have, but I think that ought to be made clear to people here is that you're – not all voters are equal.
Mr. Seligman: All right. Now, you said you support one SRO, one vote. Would you change the actual voting rules?
Mr. O'Kelly: We've been happy with the way that the – it has worked. We don't see a problem. So no, I wouldn't change the voting rules.
Mr. Seligman: Okay. Ed.
Mr. Nicoll: I really feel – I wonder whether any of us are really qualified to opine about this. If we are – assuming arguendo that we are going to have this plan and we are really talking seriously about how to change the vote on the plan, I don't know that we really understand the consequences of that very well.
I mean, I have no idea whether we should go to proportional voting or one SRO-one vote. I don't – I don't have an opinion at this point.
Mr. Seligman: Okay, that's fair. And you will see, though, we'll spell things out in written text when we come back to this. We'll try to make it easier for everyone to feel they're participating in the full process.
Mr. Seligman: Mark?
Mr. Minister: Yeah, I would concur with Ed. I don't feel that I'm qualified to recommend a changing in the voting structure – be it weighted, be it super majority, majority. I don't think putting me on one side of the fence or the other would be valuable at this point.
Mr. Seligman: I appreciate that. Brian?
Mr. McNelis: I think I would share those sentiments. And rules by which they vote I think are probably not too – I don't have any wisdom to add to that with the possible exception that perhaps having a veto authority may not be a good thing. But that would be my only caveat there.
Mr. Seligman: Bernie?
Mr. Madoff: I would have to – I would have to defer at this time.
Mr. Seligman: Don?
Mr. Langevoort: I don't have much to add other than I'm skeptical that a veto is a good thing.
Mr. Seligman: Let's see, I've got Rick?
Mr. Ketchum: I think that it is worth spending time and certainly worth spending time for the plans to look at whether there are more instances in which a veto is unnecessary with respect to plan amendments than the present way they operate.
I think, though, it's not a simple issue. And we'll continue to try to think exactly where you cut that line. There are certainly a lot of potential scenarios. And Peter hit this in which you can have effectively a tyranny of minority vis-a-vis the amount of interest and yet have a majority or a super majority of the vote.
For example, you could have three members – and it's not an entirely hypothetical example – you could have three members of a reporting plan, two of which have a market share of under 10 percent, and yet could consistently outvote the entity that had a marketshare of 90 percent with regard to decisions, with respect to changes in the plan, changes in the manner in which the information would be sold, fees, et cetera. I'm not sure that's fair.
It probably has something to do with the fact that in at least one case we have a fairly large market share for the moment. So I do think it's a very difficult question. I think there should be an effort from each of the plans.
And I'm not sure this – this committee is uniquely suited to reach it, as opposed to encourage the plans and the SEC to go through this process of trying to cull down areas where a veto does not seem necessary to protect unfairness.
I would also note with Bob – and I think this has been, thought not totally theoretical, as we note in our comment, generally speaking the plans have operated by consensus – certainly the CTA and CQ plans have operated by consensus. And this is not a continual sore.
Mr. Seligman: Rick, let me just flesh this out a teeny bit. Even given your reservations about whether or unanimity or veto situation makes sense, would you favor a one SRO-one vote approach?
Mr. Ketchum: I don't think you can answer the question of one SRO-one vote approach until you answer the question of whether you're going to make changes on unanimity. If there's unanimity, I favor a one SRO-one vote approach. If there's not then I think you have to look at the overall fairness of SROs with different shares in the market, however one measures those shares.
And that's not to say that should be the case in all situations. In many situations each SRO can be – can be certainly proportionately hurt as much by a wrong decision. But there are some of them in which the SROs that really have a lesser stake in the how the information is used or how the relationships are maintained could veto what the SRO with the largest stake has.
So I don't know how to separate the two, Joel. I think one – in the present environment one SRO-one vote is just fine. If the environment changes, then I think one would have to look at the whole thing and look at whether there should be proportionate voting as opposed to one SRO-one vote.
Mr. Seligman: Ed?
Mr. Joyce: Yeah, the one exchange-one vote made sense. I don't have strong feelings on – whether it should be unanimous or not, but just as a point of information, the OPRA program, which is similar in terms of structure, the fee changes. It's a two-thirds vote. That would deal with Peter's concern that one person could sabotage a vote for the wrong reasons.
Mr. Seligman: Appreciate that. Simon?
Mr. Johnson: I think the presumption should be that the veto is removed so there's no unanimity requirement. And the simplest thing is to make the basic requirement one of a simple majority, one SRO-one vote.
If – there's a case to be made for an exception to that – and I think that's what Rick was pointing – then I think people can come to the SEC and explain that and you could have a reasonable discussion about that.
I should add given that I'm – I'm arguing in favor of non SRO participants also having a vote I think they should be roughly equal between the non SROs and the SROs. But SROs I would give them the tie-breaker, if that was ever an issue at this point.
Mr. Seligman: Good point. Joel?
Mr. Greenberg: Pass for now.
Mr. Seligman: Carrie?
Ms. Dwyer: I guess, I would echo Ed's comments that I actually don't think this committee has enough information to decide on how voting structure should work when we – actually, I think a lot of us don't understand what matters are voted on, what are the powers of the administrator, how pilots work. How the thing actually works – you know, it seems silly to me to try to figure out of there should be majority or super majority vote in the absence of actually understanding what we're talking about here.
And as I said earlier I think that the spotlight really should be more on plan administration and less on CTA. That's my opinion based on my knowledge. But I think the rest of the committee is deserving of maybe a clearer look at what it is CTA does before we decide on what its voting structure should be.
Mr. Seligman: Good point.
Mr. Quick: You know, Joel, if I could just interject. It's a good point – especially on the pilot programs because certainly the Chicago Stock Exchange has had a pilot program going on to trade Nasdaq stocks for probably over 12 years now.
Mr. Seligman: Forgive me. I couldn't quite hear the middle part of that.
Mr. Quick: The Chicago Stock Exchange – a good point that Carrie made in regard to the pilots and understanding how they work, because certainly the Chicago Stock Exchange has had a pilot with UTP on Nasdaq stocks for well over 12 or 13 years now. And that seems a long time for pilot program.
Mr. Colby: Technically, I think Chicago's trading is not a pilot. What's pilot is the plan under which it's been operating and that's because it's a less than perfect plan, as we discussed in the SuperMontage.
Ms. Dwyer: I guess, my point about pilots, we know from personal experience about a couple of them. There are a lot of pilots or have been in the past. But my issue is not really with the pilots at this point, but understanding who can authorize them, whether anything we decide about CTA voting has anything to do with things that actually happen that affect all of us at CTA.
And that's why I'm saying it would – you know, I think you need to start with facts before you can adopt a recommendation for changing the voting structure.
Mr. Seligman: Appreciate your point. Andy?
Mr. Brooks: Two things. I also feel somewhat unqualified to talk about this voting process. But I would say it's interesting – I wonder if you could have proportionate voting because you seem to have proportionate revenue sharing. And that seems to jive with perhaps what people are trying to do.
The thing that concerns me, though, with unanimity or veto power is a sense of redress. Is there arbitration available? Or some of oversight? Or can someone exert undue influence either to squash a competitive influence or to do something that's untoward? And that's the part of CTA that I've never really fully understood?
Mr. Seligman: Bob?
Mr. Britz: I'll try and be consistent here. I think it's a moot point because I think that the decisions are made at the SRO board level and there is no requirement for unanimity. I repeat. Everyone who enters a CTA meeting enters with instructions.
So having said that I agree with, I think, everything that Rick Ketchum said. I do think it's impossible to answer the one vote-one market question unless you understand whether or not there's unanimity.
There are very asymmetrical economic interests in these organizations that don't get reflected in a one vote-one marketplace.
The other thing I would mention is that the times are changing. And as you look around the CTA table, for example, you see today both the Nasdaq market and the American Stock Exchange, which is it still fair to say they're affiliates? Certainly for the last two or three years?
Mr. Ketchum: I guess, from an SEC definitional standpoint we're still affiliates.
Mr. Britz: And –
Mr. Quick: It sure doesn't feel that way.
Mr. Britz: And if I believe what I read, the NASD, Nasdaq and the AMEX will be sitting around that table, so there's a – there's a block of three affiliates. The CBOT and Cincinnati, I think, are affiliates, as well, if that's a fair characterization.
So there are – at least potentially – many voting blocs that have distorted the one vote- one marketplace phenomenon, as well.
Mr. Seligman: Okay. Harold?
Mr. Bradley: So I guess, we have weighted voting over here. My feeling is having been exposed to a couple of the issues – some related to the ITS plan and some to the CQ plan in the last year or so where issues come up – I believe there's not usually a veto exercise because it's kind of like in Congress when they don't take a vote because they know how it's going to turn out.
And that the power to filibuster is what's guaranteed by a veto power. And that my view is that the SEC is often brought in at the ninth hour or after a year or two of mindless delays because of the directions from the board level. And I would argue that we ought to address at least a super majority in terms of amendments that affect how markets work.
Having people protected because of their size, as I understand the '75 legislation, the veto was set up to protect the little exchanges to go out of business. And it's now being used in reverse for much of the material I've read. That may be inaccurate. But that would be my concern.
Mr. Seligman: Thank you, Harold. Michael?
Mr. Atkin: Well, I mean, I'm not really qualified to tell CTA how to operate itself. But it would probably be useful to ask CTA if they're having any problems with their operations and if this conversation can help the SEC look at that and make some changes, that would be a good thing.
Mr. Seligman: Let me – at this point – really focus on the background memorandum that will be prepared. The meeting on April 12, I presume a good deal of it will address fees. But I also presume we'll get to what I've referred to as ancillary matters.
And I think we're fleshing these out as we go along. And among other things ancillary matters, in part, deals with such issues as the role of the administrator, the role of the pilot, some sense I think of the operational realities of how these plans operate.
And I think a detailed discussion – and it can obviously draw on earlier discussions that the SEC and others have made from the Division of Market Regulation to be circulated before the April 12th meeting will be quite useful. I want to defer till then the matter of taking up pilots. I think there is a fair amount of, you know, devil in the details here that really focuses on how these plans operate now that we need to put very clearly on the table. And a background – perhaps I'll use Rick's phrase – white paper on it would be quite helpful.
With respect to votes – you know, to the extent I can characterize it, there was an unusually large number of no opinions or it's contingent upon other things.
There were a few who speculated that under some circumstances we might want to make a change in one SRO-one vote. And again, it's contingent upon the context of how things are shifting overall. I think there were more than a few who focused on whether we should move beyond a unanimity requirement to some form or super majority. And that would apply to plan amendments, significant actions and fees. We heard various numbers. But it seems to me we may revisit these issues through the round robin circulation of documents. And we may revisit it a little bit, frankly, on April 12th when we go to the what I refer to as ancillary matters. But really it gets at operational matters.
Now, at this point it is 4:00. We've been going at it for two hours. Let us take a 10 minute break. I think we'll go at most one-hour as a committee before we get to public participation at about 5:10, 5:15 and then we'll break for today.
I am an optimistic, upbeat person. But I am not so optimistic or upbeat that I think we can reach the full discussion of fees. I would like to have one sweep around the table with respect to fees. And I'll pose one question. We'll have a good deal of amplification on that question when we come back on April 12th. And I think the posing of this question will perhaps inspire some to see if they want to make comments.
I will remind everyone that it will be very, very useful for comments to be received by March 15th so they can be effectively circulated and contemplated before our next meeting. Let's pick up again at 4:10.
(Recess.)
Mr. Seligman: We're back on the record. We have about – for the group before we open up to public comment, about one hour. There are at least two members of the group who have already left. There are two others who say they have to leave early.
I would like before this meeting is done to start the discussion on fees. And so what I'm going to suggest is we take 3D, which is opening up to new entrants and delay that till April 12th. Before we begin on fees I would also like a few more people in the room, but I'll take what I can get.
What I would like to do is to start a discussion – and appreciate we're not taking votes on anything today but it is useful to get a sense of initial views – I've given – as I know that many of you in this room have given a lot of thought as to alternatives we might come out with on fees if we retain – or rather in a variety of contexts.
And I would like to pose one initial question – there will be others we'll have to go through – but the one initial question I would like to pose – and we'll go around the room would be to focus on SEC oversight.
At the moment the SEC oversight is not articulated in great detail in the statute but it's framed in terms of two concepts – a fairness and reasonableness standard and a nondiscrimination standard.
The December 1999 SEC concept release suggested that we should put some flesh on the bones, if you will. We should have a much more precise, cost-based standard. And there was a very detailed effort to articulate what that would involve.
And I would like perhaps Bob Colby to take a few minutes speaking for the Commission and explain what the logic of a cost-based standard would be and how it would differ from what has been the belief as to what the prior standard is, and then I want to go around the room and focus on the question as to whether or not, in effect, we should retain a kind of SEC oversight based on statute at the kind of current levels that we have, or we should ratchet up to a cost-based or other alternative standard.
I think that's one of the key questions. It's not the only one. Clearly if we're going to go down the route of a cost-based standard we have some very serious considerations to analyze as to what exactly that means. And there are details that would have to be discussed. And I would like to be able to articulate more of those before the April 12th meeting.
But by way of setting up that conversation, let's start with Bob. And then I would like to get an initial sense of where the group is on that issue.
Mr. Colby: Well, the concept release talked about a more detailed cost-based analysis in which it would be a multi-part approach. The first would be to try to identify which costs that are engaged in, in order to create the consolidated tape, should be paid for. And the release asked – some costs are obvious – the $7 million plus of actually pulling the data together and disseminating it I think are obvious.
The release also asks the question about which parts of the SROs collection – market operation and surveillance should also be paid for, with the proposition that these are costs that are critical to producing valuable and reliable data, that producing the data doesn't begin at the SIAC stage, but it begins earlier on the floor or in the quotation system or the like. So the first phase is trying to identify the costs. Then the question is deciding what portion of the costs – once you've identified it – which portion of the costs should be paid for out of market data revenues because you might decide, yes, these are the appropriate costs that go into creating data, but we're not necessarily going to fund all those costs out of market data.
And then – if you do – if you go that way, then you can say that produces a figure, and then you establish your fees in order to capture that amount of data. Then there's a third-level question of what fee design do you use in order to capture that data because now the current fees involve fees that differ based on terminals, the number of users and a variety of different formats.
And then there was a fourth element which is not actually cost-based, it's a distributional element in the concept release.
Mr. Seligman: Bob, what's the argument for adopting in some form this more precise and more detailed standard, rather than to continue along the lines of SEC review that we currently have just derivative of the statute?
Mr. Colby: Well, I think the concern is that market data has tremendous value to all participants. And it's been viewed as fundamental to the growth and development of the markets.
And in trying to encourage the widest spread possible use, you want to have the fees as low as possible. And so then the question is how do you then establish fees that are fair and accurately reflect the costs and the responsibilities that go into creating the data in order to get the fees as low as possible while still covering the costs that are appropriately covered.
And so the idea is that, given that you have to look at these fees and you have to decide how much to be charged, what is the process – the current process has not been a rigorous cost-based process. If you had to do another process, what process can you use? And this was an attempt to just come up with one that is rooted in cost, but also is one that you can observe and monitor.
Mr. Seligman: Okay, appreciate that. Now, I know Bernie is going to have to leave at 4:30. So I said, we'll go out of alphabetical order. And unfortunately Joel Greenberg just left.
Bernie, the kind – first slice on the fee issue would be should we move beyond the current type of SEC review, which is based upon a statute, the fairness and reasonableness standard, the nondiscrimination standard to a cost-based standard, leaving to another day how one would articulate precisely the costs and precisely how the calculation would occur?
Mr. Madoff: Well, my guess would be I would rather come out in favor of a cost-based procedure. My concern with the oversight – and I think probably the concern of the commission with the oversight is it's a big job to do that. Can they realistically do that effectively?
I think that one of the problems we're all facing now – and I think certainly by some of us – is it's very hard to get an accounting of exactly what the fee structure is, where money is being spent and so on. I think the commission – and I think rightfully so – is uncomfortable with the responsibility of dealing with that. It's almost like they have better things to do with their time than to deal with this.
And this is really complicated stuff. And this is not to cast any dispersion on anybody, or to say that anything is being hailed incorrect. I don't think it is, quite frankly. I think that that being said, you know, it's been said here before, sunshine, daylight, is the best disinfectant. All this stuff makes everybody feel easier. And I think that by not having a cost-based fee structure you – and having people interpret what is fair and what isn't fair or what fees should be allocated to what areas and so on, that's a matter of interpretation. That makes it difficult. So I think we would – certainly I would feel comfortable having it as simple – the process as simple as possible. And I think cost-fee basis goes for that.
Now, that being said, I'm not sure that it's that easy. At least I would like to go in that direction first.
Mr. Seligman: Is there anyone other than Bernie who is going to have to leave before, say, 5:15? Okay, let me at this point recognize our chair, Laura Unger, who has joined us, and ask if Chair Unger would like to make any statement?
Acting Chairman Unger: The only thing I would like to say is, you're right. We're not at a loss for things to do. And in fact, that's why I was not here for most of the day. And don't let the lack of my presence here at the meeting belie the fact that I'm keenly interested in what you all are doing and talking about and the conclusions that you arrive at. It's an incredibly important issue.
And it's tied inextricably to a lot of other technology-related issues that we're looking at right now. And so it's one in a sort of mosaic of things that is very important to the Commission right now. So I appreciate your hard work and dedication.
And I guess, you're going to finish early tonight at 6:00 or 7:00 or something civilized – and certainly sitting here all day looking at each other and talking about this is, I hope, as rewarding for you as it is for us. So I appreciate your time and effort on this. And really it will be invaluable to the commission.
Mr. Seligman: Thank you, Laura, really appreciate that. Let me – we'll just explode the alphabet totally. I'm going to go around the table starting with Rick, counterclockwise. And, Brian, for once, you're going to get the last word.
Mr. Ketchum: The middle fights back. Well, I think the SEC took a great deal of care in their release. And if one was to look at a cost-based standard, certainly a number of the things they identify in there are appreciation of the fact that taped information – or market information fees does support a wide range of critical SRO functions at the present time.
I think the existing statutory standards that allows the SEC to look at the fairness and reasonableness of the fees within the context of a statute that also has a clear goal the wide dissemination of market information is sufficient.
And it's sufficient to ensure that the price of that information has continually gone down and dissemination has continued to become more broad. So I think given that, I want you to think at least twice before pushing the SEC into pure utility rate making.
Mr. Seligman: Okay. Ed?
Mr. Joyce: Yes, I would, I think, currently having the authority, the oversight, the SEC can utilize that authority. I believe that there are many costs that are included in the collection of the data. And I would be very concerned that a pure cost-based system – first, I think it would be very difficult to come to.
And I think the legislation contemplated reasonable fees beyond just the collection and dissemination of the data. Indirect costs associated with it that go into the area of market regulation and identifying them in a purely objective formula, I think would be difficult.
I would welcome a more aggressive review if that's what it took if people thought the costs were too high. I don't think going to a purely objective cost basis is that doable.
Mr. Seligman: Okay. Simon?
Mr. Johnson: I think moving as far as possible towards a cost-based system is attractive. I think that including funding for the SROs' market operation surveillance makes a lot of sense. The whole presence obviously needs a lot more transparency. And we're all concerned about the SEC getting bogged down in this.
It seems to me that if you couple this with the changes in government that we've been talking about – and particularly – if you have the kinds of people that are represented in this room sitting on the committee – or sitting in the relevant pieces of the information gathering process – maybe that's the plan, maybe it's not – their interest is very much along the lines of trying to keep the costs down.
And I think that they would work together with the SROs and that would hopefully keep the SEC just in a backstop function, as much as possible. If that didn't work, then I think you would have to try the utility rate making approach which has a lot of drawbacks. And if that doesn't work, then we have to think about something more radical.
Mr. Seligman: Simon, let me just tease this out a little bit further. What you're saying if I understand is at the current time you would rather not move to a more aggressive cost-based approach, but rely on governance measures?
Mr. Johnson: Sorry. I was actually trying to have my cake and eat it, too. I thought that you should – the SEC should stipulate that their expectation is the cost-based – that the committees themselves will come up with pricing on a cost-based – using a cost-based approach. And that's the expectation. And again, you can come to the SEC and you can explain why there are exceptions and you can justify the various kinds of costs. I think this gives everyone the incentive to open up the process, make it much more clear exactly what's going on. So I'm trying to be aggressive but all the way aggressive. The SEC is not setting the rates.
Mr. Seligman: Carrie?
Ms. Dwyer: Well, I think this is the issue that has brought us all to this table. If we didn't think there was a problem with market data pricing, then all these other issues would not be being discussed. So we're coming to it at the end.
Ms. Dwyer: I agree with Bernie that devising a cost-based structure, which Schwab has advocated in its petition for rule making of two years ago I guess, is so difficult that I think the Commission concluded after getting comments back on its comment release that it needed the further input of this committee. There are very hard decisions imbedded in this.
That said, I think – again, I'll raise the same point I've been making most of the day, is that I think we're theorizing ahead of our data a bit, and this is one area not to make a pun where there's very little data. This is one of the most non-transparent parts of our business.
I just made a list of questions that I think if the Commission could assemble some data on this, it would help us a lot. It certainly would bring some sunshine to this area, and maybe we can make a rational decision at the end of the day.
It all revolves around who pays what and why and is it fair. How is data priced? How are pricing decisions made? How are fees allocated among different participants? How are similarly situated participants assessed? Do they pay the same? We actually don't know that as a firm.
How are the arrangements negotiated? We have our own experience, but there's no transparent way to understand all the variations of the arrangements that can be negotiated. Our negotiations have been very much individualized. We don't know what anybody else's experience has been.
What about pricing pilots? What about what pilots are out there? A couple of years ago I believe the Division or Market Regulation asked the exchanges to respond with information about all the pilots that were out there. Subsequently, folks tried to FOIA the answers and were denied. It's just an area of complete obscurity to us. It leads to a feeling that there is unfairness, and that may be wrong, but that feeling has generated much of this. And so I think without that kind of data, you know, we can come to some decisions we may be completely incorrect at the end of the day.
So rather than get into the merits of how do you do a cost-based structure or how do you set up a completely competitive environment where competition will set prices, I think before we make that recommendation, it would be great to have some more data around here, and possibly the SROs could help us out with that.
Mr. Seligman: I will, after this meeting, be meeting with representatives of the Division of Market Reg and will explore the extent to which we can provide at least some of that data in a timely manner before our next meeting.
You may want to consider whether or not you want to amplify your statement here with anymore other particular –
Ms. Dwyer: I'm happy to do it, and I'll copy you on our petition and every comment letter we've sent over the last two years.
Mr. Seligman: Believe me, I have your petition and your comment letters. I'm talking about if you want to say anything further
Ms. Dwyer: No. Thanks.
Mr. Seligman: We appreciate your comments. Andy.
Mr. Brooks: I think it would be very interesting to try and work on a cost-based standard because it would require us to understand what costs are being paid and assigned and allocated, and that's an area where we really don't know as much as we need to.
I always wonder in that context are we implying that the SROs should be able to generate a profit off of this. And if it's a profit, is it a good thing? And so I think we have to look at sort of the raison d'etre (phonetic) so to speak of this whole market data subject.
I also – it makes me ask the question, whose data is it? And I've asked that before, but I think it's important when you try and assign costs. And I agree 100 percent with Carrie's insights about the transparencies of the costs, the sunshine effect and the most favored nation pricing, because what negotiate might be totally different from somebody else, and it really would be nice to know where you stand and if there is some regulation or some oversight to that.
I certainly don't want to put the Commission in the business of setting costs. I don't think that is your role, and I'm sure you don't welcome that role, but we sure do need to understand a little bit more about how these costs are being assembled and passed on.
Mr. Seligman: Thank you Andy. Bob.
Mr. Britz: I actually have mixed feelings on this issue. I have for some years now looked forward to the fee increases that a cost-based approach implies. Having said that, we have written at length that we think it's not such a great idea for a lot of reasons, which I won't bore you with but which include being burdensome to the SEC, being burdensome to the SROs.
The whole cost – the infrastructure to get to a cost-based has a cost in and of itself which would be very, very significant. The whole notion of rate-making, I thought, on the part of the government has been a discredited notion.
We have a system today where the payers actually dictate what the fees are. I circulated a memo, I think it was entitled "Market Power" but it was market power and governance, and it was only a two or three pager. If you haven't seen it and you have a chance, you might take a look at it. But at the end of the day, the board at the NYSE, and I assume other boards, don't so much set market data fees per se. What they do is try and determine the funding of the stock exchange. And they understand that the funding of the stock exchange is in their mutual interest, or the day may come when they decide it isn't in their mutual interest, and that's fair enough. They do that through a number of buckets, one of which is market data fees, but no different than they do that for transaction fees, for listing fees or any other fee for that matter.
So this is less an issue of setting the fee than it is the very payers deciding what is it that we will charge for, how will we tax ourselves. And when you couple that with the broad constituent board that we have that literally dictates that you must have so many members from regional firms and so many people from the floor and so many members from full line firms and so on, you get a kind of tension that leavens this process.
Without belaboring this, at the end of the day, the people who pay the fees get to vote on what the fees are, and it seems to have worked over a 25 year period.
That's what's at work here in terms of leavening these fees to begin with. The SEC – the first time the SEC has stepped in has been the current situation in 25 years. Otherwise, the SEC had endorsed exactly what the boards – the constituent boards of the SROs have done, and that speaks to the fact that they have obviously done a reasonably good job through this give-and-take kind of process at the board level.
Mr. Seligman: I appreciate your comment, Bob. Harold.
Mr. Bradley: I think that as I was preparing for the meeting, Carries four page kind of summary of some of these issues I found to be really enlightening for me given some recent experiences. As Ken did earlier today, I'd like to just be anecdotal for a minute.
We put a product together at our institution that I've been involved in trying to bake, and we got news last week that our data fees had gone up significantly over what was planned because both our vendor and the New York Stock Exchange had decided that we're a different class of user than what we had been carried on the books. Same institution.
What we're using is a computer to do analysis rather than human eyes – not a different function, just a different process – and our data fees changed, and it started to beg the question with me, I don't know how we're being billed.
I went to our people and asked. They don't really understand the differences. And I asked Carrie offline, you know, does this make sense? And her explanation to me was there doesn't seem to be a real good transparency here, and that would really help me understand. Again, sunshine, we can get to the favored nation status kind of idea, but all the pricing discussion I think needs to be predicated first on how are things done, and where are the cross-subsidies, because I'm paying some things that I'm not sure I should be paying, but I don't know what I should be paying.
Mr. Seligman: Thank you. Michael.
Mr. Britz: For the record, Joel. Every CTA fee is on the NYSE website and probably lots of other places.
Mr. Seligman: I appreciate that.
Mr. Atkin: A couple of things. First, the concept of cost-based is certainly appealing, but I think everybody's very concerned about the practical implementation and how you measure it. I remember when the concept release first came out and we had all the flurry of discussion about cost setting. I ran four to five big meetings about that subject, and there was absolutely no agreement in the room on how you measure it, how it's allocated, how you audit it, what incentives you have for exchange to innovate. And all three sides of the industry basically concluded to reject cost-based even though conceptually they liked it.
Second, I'm not sure if there's anything wrong with either the fee setting process – there's a lot of checks and balances from the exchange of SROs on how the fees are set – or on SEC oversight. It works. I mean look at the price per quote decreases that came out of the New York Stock Exchange and Nasdaq after there was some exposures and there was some experience in the marketplace. The price right-sided itself.
There are problems, however, and I think the problems seem to be about fee models; they're about the basis and the units of count; they're about the various approaches to administration; they're about the contractual terms and conditions, particularly as it relates to redistribution; they are about user classifications as Harold just mentioned; they're about how do you change a fee basis that was built in a model fundamentally different from the one we're currently operating in.
This is a different technological environment. There is a blurring of the lines between distributor and consumer, and the fee basis has not been able to be measured against those changes. So I think that it would be very useful for us to make sure that we are looking at the right issue as we're looking at the fee problem in terms of our recommendations to the Commission.
And just to pick up on Carrie's point about transparency, we are a trade association of everybody here, users, vendors and exchanges.
We have built a very complicated database of every exchange's market data policies and every exchange's fees. We have normalized all of the user classifications. That database is live. We are now in beta testing of it. We intend to make that database available free of charge to the entire industry, because the matter is Harold's right. No one understands it. It's complicated. Not that it's wrong, it's just complicated. It might be wrong, but it's complicated. And before you figure out whether it's wrong or not, you've got to understand it. You've got to look at what the rules are. You've got to comply with the rules. And if you want to change the rules, then you look at what you want to change and why.
We are absolutely willing and interested to make that database available to everybody here. We'll give you a password and you can look at it and have your people look at it and run scenarios and do whatever you like. We'll be more than happy to report back to the Commission.
We are doing beta tests with user firms who are re-distributors, broker-dealers who are re-distributors, professional vendors who are re-distributors, saying let's run a thing through its paces and make sure you can get answers to questions like what's this going to cost me, and what kind of reporting do I have to do and – so just for your own information, it's available now. It's got 40 exchanges globally in it right now, over 75 fee schedules. You can run any kind of comparison you like, and I'd be more than happy to make that available to you.
Mr. Seligman: Michael, I would be very, very grateful if before March 15th you could write me a letter or send me a memo outlining precisely what the information that you captured in your database is, what's online now, what's scheduled to go online. I think this would be very useful to share with the Committee.
Annette wisely adds, I think there will also be interest at the table in how to get a password.
Mr. Atkin: We won't assign everybody a password, you can share within your organization. We'd be more than happy, Annette, if you'd like, to come over and give the Commission a demonstration of how it works so you can understand it as well.
Mr. Seligman: I would very much appreciate that. But I think it's useful to – you know, we always want to start off with what's our database now before we focus on the changing rules.
Mr. Atkin: Certainly.
Mr. Seligman: Appreciate that. Let's go back to Eric.
Mr. Roiter: We start with the strong presumption against creating a cost-based rate setting review function for the SEC.
Historically, the SEC has not performed that role. When other agencies of government have tried to do it, the results have been very imperfect. And so we're in favor of anything that would avoid injecting the SEC into a cost-based rate review function. And that may leave a number of alternatives. I think that that is the path we ought to go down is to identify the alternatives that keep the SEC out of cost-based rate-making review.
The Commission, it seems to me, can do one of two things. I can find that currently there is effective competition for market information, or that there are ways to inject effective competition into the markets. And if that's the case, then we can talk about alternatives. I think we've alluded to some today.
There's competitive bidding. I know we talked about one kind of competitive bidding today, but I think there are other types of competitive bidding that can be done.
There are the parallel systems that were discussed where brokers and other market centers other than SROs could on top of or apart from giving up their minimal data to a single consolidator would be free to make other arrangements to provide that and additional data to competitors. Then there's also the approach of multiple consolidators.
Any of these approaches I think would be far preferable to a result that would force the SEC to become a substantive rate setter or reviewer of cost-based rates.
The other alternative would be to say well, we're not sure that we can really inject effective competition into the markets, but we'll simply take away the qualified immunity from anti-trust laws and let the market centers cope with being monopolists or being subject to anti-trust laws if their not monopolists. That would bring a different discipline to the system. It would avoid the heavy hand of substantive rate setting by the SEC. It would, I think, require amendment to the statute.
I think right now the SEC is caught in a dilemma. It doesn't want to, and I don't think should be, in the business of setting cost-based rates. But on the other hand, the SEC doesn't want to be a mere rubber stamp either.
And forgive me for suggesting this, but I think perhaps the SEC itself has some concerns about having been a rubber stamp with regard to the setting of market data fees because it is extremely difficult to do anything in between.
I know we've spoken about fair and reasonable rates and non-discriminatory rates. When you get away from cost-based rate setting, it becomes really difficult to be that precise about what is reasonable and non-discriminatory.
So the alternative would be to simply say this is an area where the qualified immunity from anti-trust laws will be lifted. The SEC could still have responsibility and authority to adopt rules to govern the integrity of market data and the reliability of market data, but leave the pricing to the markets or to the anti-trust enforcers.
Mr. Seligman: Eric, I may be way out on a limb here, but I am skeptical that there will be great enthusiasm among the participants in this process, such as the exchanges or the Nasdaq or at the Commission level for withdrawing the immunity from anti-trust enforcement.
I'm also skeptical on a separate point as to whether or not that would really be within the scope of what we could recommend. Although, I suppose if the committee consensus was in that direction, we could certainly discuss it. But while it's a novel idea, and certainly an alternative approach, I'm not sure that one is going to get us very far. I think your other points are extremely well taken however.
Mr. Roiter: Could I just have a 15 second rejoinder?
Mr. Seligman: I think you deserve it.
Mr. Roiter: I think if you look at the history of the very difficult vexatious issues the SEC has faced over the years, at the time they were being rustled with, whether they were Commission rates, other ways of opening the markets, elimination of Rule 390, I was at the SEC for some of these issues, and at the time, it seemed that the markets could not survive the withdrawal of the SEC's oversight role with regard to those I'd say impediments to competition.
It was a long and painful process that eventually led to the deregulation of Commission rates and an extremely long and painful process that led to the elimination of off-board trading restrictions. But now in those two areas, the markets and market participants are subject to the anti-trust laws. There's no implied or limited immunity from the anti-trust laws with regard to market behavior in those two regards. And guess what? The markets have not collapsed because the anti-trust laws have proven effective over our history, and there's no reason to suggest, I think that they wouldn't work here as well.
Mr. Seligman: Okay, your point is well taken. Peter.
Mr. Quick: We certainly have one of the most admired security industries or markets in the world with regard to how well and how smoothly it operates and how well the information is disseminated. Unfortunately, being a primary listing exchange like the New York and the AMEX, there are certain other regulatory responsibilities that we take on, and some of the fees from the – this revenue certainly goes to underwrite them as Chairman Levitt, or Former Chairman Levitt recognized in his opening statement when he was with us on the first meeting.
Absent the funding mechanism like the SEC, and the SEC I'm sure has its own desires in terms of more funding, it's extremely important for the safety and soundness of the markets that we are properly funded so we do have the lawyers, we do have the surveillance and the investigative staff to make sure that our markets remain unquestionably as pure and with as much integrity as they are.
I think certainly that the SEC has done an admirable job in the past in terms of reviewing the fee proposals that we've sent up and would hope that they would continue to do that. I don't think going to a cost-based system absent some other revenue to make up for the cost of being an SRO would be feasible.
Mr. Seligman: Thank you Peter. Gerry.
Mr. Putnam: A lot of what we've debated has been said here. I'll echo Carrie's comments, and it would be great to have a clear view of the way the system works today to understand it better. Maybe we can come up with some better solutions. I'll also – I agree with Bob's comment that it is a really terrible idea to put the government, the SEC, in the middle of rate-making process.
I think that, and my experience in business, is that if you introduce competition, if we really work diligently to figure out a way where we can build a competitive environment for the pricing of market data, ultimately that's the best way to get at the correct price.
And finally, Eric's point, if that fails, the only thing I think is left is just to open it up to – if these are monopolies, to open it up to anti-trust scrutiny.
Mr. Seligman: Thank you, Gerry. Ken.
Mr. Pasternak: Well, just a few comments, and then we'll just – one is that while we think cost-based – on the surface a cost-based type of fee structure might be attractive intellectually and from a pragmatic point of view, and I think you used the word, and I actually heard Bob kind of – they both made a comment – Gerry's comment was the business I think of exchanges. And I think that when you run a business, there's a lot of benefits that are very, very interrelated, not just pragmatically impossible to carve out, but from a practical point of view impossible to carve out.
An example is there's a transaction that occurred, and monitoring that transaction had a whole different element – many elements of both revenues and oversight. Carving out the part of the transaction that the fee – the transaction fee and the costs associated with producing the transaction would be imbedded in that cost, and how much would be in the market? I couldn't even begin to give any insights at all how to how one would separate that.
The second comment I may make about a business is Bob made a comment that if we went to cost-based I think you insinuated or you explicitly said that you thought the costs would go up I believe.
Mr. Britz: I did.
Mr. Pasternak: In your assessment of costs – even thought if I was to attribute costs, they might go down, or Carrie or somebody else. I'm not suggesting that I would know the right answer, by the way, I was just suggesting that getting down to the matrix of what cost would be, I believe in the – possibility.
The third statement I would make is that people have come to me with business plans, existing SROs, with profit incentive business plans to induce us to conduct our activities that are almost solely predicated on revenue sources of market data. So in their business model, whether it will work or not, again, I'm not eluding they think there's enough imbedded revenues and market data fees to build a revenue positive business model. Again, whether they're right or wrong is not relevant here to my final point.
So my final point isn't what I'm going to support is that we can't separate all the activities of SROs, market data, providing transactions, market reg and so on however alluring that might be. Therefore, we have to let the marketplace decide how to price those things.
I think you used the word the payers are really going decide, and I think that is – and the last point I might just put in here is that we believe that we should permit each entity that provides information, because we already conceded it's a business proposition to a SIP and an SRO to negotiate fees for its market information directly or separately subject to any back-up of SEC oversight. And I would even take it so far – I'm not trying to be coy here – but the copyright, and George immediately said he thought he owned the data. I may have some sense that I own some of that data value. In effect, any customer who wrote the check to buy the 500 shares of Microsoft may think he owns some of that market data. They get to work through that.
Clearly, there is a sense of ownership about who's providing that market data. And if we are all conceding that we do have business propositions, that we're not public service utilities – I mean most exchanges are either acknowledging that directly or moving directly toward that acknowledgment – then we have to look at this as a business. We have to deregulate that in the sense of allowing people to negotiate on the payer side and on the provider side or the production side.
And lastly, I would say that all these things have to be done with complete sunshine and favored nation pricing. That's very, very open to the public, and nobody can negotiate or – I don't even know if you could have oversight without having a lot of data about what's actually occurring. Thanks.
Mr. Seligman: Thank you, Ken. Paul.
Mr. O'Kelly: When I heard Bob explain the reason for the cost-based proposal and the concept at least, he said that it would be to – market data information more widely disseminated, although he didn't say, nor have I heard anyone here say that there is evidence today that that information isn't being widely disseminated.
What I have heard today is what little support there has been for cost-based pricing, and it sounds to me like there's been very little. It's been quickly followed up by I don't understand why I'm being charged what I'm being charged. And if it was a cross-based method of charging me, presumably I would know more about why I'm being charged what I'm being charged. I think in the first instance, if there is – it seems to me the problem here is that people need to be better educated either by the CTA, OTC/UTP plan or they need to better educate themselves by information that's already out there as to how they are being charged. It seems to me it's an educational issue, not a rate setting issue, because I haven't heard anybody here say my gosh, we've got lots of customers who would like to trade in the markets who are just unavailable to do so because they don't have available early inexpensive market data.
Mr. Seligman: Thank you, Paul. Ed.
Mr. Nicoll: I'm just going to be very brief and say we believe that a cost-based rate-making is a non-starter. And of the two, we'd prefer just the reasonableness standard to exist on its own.
Mr. Seligman: Thank you, Ed. It strikes me the way you lay that out reminds me of a story of a woman who arrived at Ellis Island some decades ago, and she was asked did she favor the overthrow of the United States by force or by deceit. And she thought about it for a long time and finally observed deceit if I have to choose. Mark.
Mr. Minister: Well, having been raised by a father who spent 43 years in the public utility industry, I was reared to believe that government rate-making was the worst thing that could ever happen to anyone. So certainly I think a cost-based or some mechanism like that, I agree with that as a nonstarter. And I also would agree with Paul, but I think there is evidently an educational gap in all of us in terms of how pricing is done and how it's distributed.
I think Harold's points are quite interesting. When you can be an organization as large as theirs and buy as much market data and have it not clear isn't good. There's something not working right in the system. And so I think pricing may be correct, but certainly we aren't – I don't think we're all in a position to even figure that out at this point. So I do think it needs some exposure and education.
I think Mike's offer – I think we all were excited to hear that we might be able to look at empirical data and try to go draw some conclusions.
Mr. Seligman: Promised Brian the last comment. We go to Don.
Mr. Langevoort: I'm certainly not in favor of the rate-making model. I don't know how you define cost in a way that doesn't include virtually everything an SRO does, which hopefully in some way or another contributes to the quality of its pricing.
What I hope we can do next time, because I think it's much more than we can do today, is focus a little bit more on the nondiscrimination principle. I think what a lot of people are complaining about is I'm being charged something I think is different, and I'm not sure it's justifiable. And if the Commission could say something or we can urge something that makes sense of what is appropriate differential pricing and what's inappropriate differential pricing, we'll have made a contribution.
Mr. Seligman: I appreciate that, Don. Brian, I promised you the last word, last but not least.
Mr. McNelis: Certainly not least. I think I'd like to pick up on some of the thoughts that Carrie and Harold brought out, and then – they are faced with a situation where they're having – they're trying to develop new products to be competitive in the marketplace. They are stymied by an administration of fees that is very restrictive in what they can do. And they are expressing great distress over the fact that they can't easily determine why they're being restricted in the way they're being restricted. And the fact that the FISD had to go to the extent of endless hours of labor with many dozens I believe of people involved to build this enormous database just so people can figure out how to pay fees I think speaks to the size of the problem.
There needs to be either more open competition or something that will allow the whole process to be simplified so that people can get on with business and not suffer the burdens of the great overheads that are associated with these complex fee structures.
Mr. Seligman: I appreciate that, Brian.
I'm going to have some concluding remarks, but before I do so, would anyone in the public like to offer comments or pose questions?
Can you identify yourself for the record and perhaps walk up to Michael Atkin's microphone.
A Participant: Jeff Gradler. I work for the Senate Banking Committee.
The question I have and just familiarizing myself with these issues, so pardon me if this is sort of big picture, but if I understand this, at least some of the positions folks have taken is that one threat potentially is that if we inject competition into this marketplace – more competition into this marketplace, that potentially the outcome could be that the price of market data were to go up. And to some degree maybe the most appropriate person that may want to respond to this is digging around back here, but I guess my question is sort of as follows.
If from an economist's point of view, if the prices were to actually go up, I think the response would be so be it. I don't know of any economic argument for keeping prices artificially low. As I understand it, the same source of efficiency problems that occur from keeping prices artificially high would occur also for keeping them artificially low. I grant you that there would be a political problem, obviously. But from an efficiency standpoint or public policy standpoint, putting politics aside, it seems to me if prices were to go up, that that probably would allocate resources more efficiently.
Mr. Seligman: Can I interject at this point? I think that's a very, very appropriate question and a fair question, but I'd like to proceed through the process we've started where we're going to have at least one, perhaps two subcommittee meetings and then a full meeting of this group to focus on a more free market or multiple competitors' world in which the kind of circumstances you described could occur. I'd like, if you will indulge us, to have until the meeting in May to respond. Whether you're present or not, we'll do it in the record. We can communicate the record, but we'll give you an informed answer at that point.
Mr. Britz: May I at least correct the misnomer?
Mr. Seligman: You certainly always can correct a misnomer.
Mr. Britz: What I said was that if we went to a cost-based government rate-making approach, I could envision costs of market data going up. I did not say that if we injected competition in the market data arena that I envisioned costs going up.
A Participant: For the record, I think what I said is that –
Mr. Britz: I'm making the distinction between competition and cost-based. My remark was just to cost-based.
Mr. Seligman: Simon.
Mr. Johnson: If prices go up because market power is being exercised, wasn't able to be exercised before and now greater competition allows people to have market power for whatever reason, then I think economics would not suggest this was definitely a good thing. Then it would be a much more complicated analysis.
Mr. Seligman: Are there other questions that anyone would like to pose? Comments?
Mr. Colby: Joel, could I make a comment just about the anti-trust point?
Mr. Seligman: Sure.
Mr. Colby: In trying to think that through, I think the first anti-trust responsibility applied, the first thing that would happen is there would be no joint plan because it would be impossible. So then it wouldn't necessarily take you to individual pricing and individual markets. It's not clear how it would apply if the prices were set on exchange level because what an exchange can do in setting the prices coming off its floor is it's not clear quite what the right form of joint action that would be affected by the anti-trust laws would be at that point.
I think there could still well be market power if – well, leaving aside New York's argument, if you believe that there are people that – whose quotes are important to have, there could well be market power exercised even if it weren't done on a joint basis. And so that gives rise to if there's joint power that rises to monopoly, the question of what to do about the fees still exists even outside of a joint plan or consolidated basis.
Mr. Seligman: Let me not so much sum up since we've covered a lot of territory but focus on where we're going with our next meeting and the questions I think which have been framed and really put on the table for us to focus on before then.
A number of individuals have focused on we need better information on certain things to be as informed a group. And certainly I have already suggested the SEC will prepare a or at least I will request that they prepare a background memorandum focusing on the administration of the CTA CQ plans, the Nasdaq/UTP plan and, if they think it's appropriate at this point, OPRA or we can get to OPRA later.
I think among other things, that discussion should focus in part on the role of the plan administrator, on pilot programs and how they are approved.
I think when we really get down to the nuts and bolts of what is going on, there is a very important part of that discussion which should focus on how the relationships between the plans and the various users of its data are negotiated, and I think that's worth addressing. And obviously, there will be other questions there as well.
The big issue that I think we got to at the end of the day was the question of fees, and it's well worth remembering that's what started this to some degree with a petition that was filed by one of our members. I did not hear overwhelming enthusiasm for a cost-based approach. Indeed, I think it's fair to say a significant majority opposes that, but I did hear a lot of other things. So what I'm going to suggest, I would like to continue under this general rubric of fees, but I'd like to parse it down much more precisely than this discussion, and I'd like to start with the following issues for next time.
We heard a lot about sunshine and transparency. There is a good deal with respect to the finances of the plans and the individual contracts which is not public. One question I would like the members of this committee to address is should there be more information required to be disclosed, whether it's to the Commission or through a database or through one's website, on a mandatory basis. And if so, what more information should be in the sunshine.
I think it's also worth remembering we exist at an agency whose greatest achievement is a full disclosure statute rather than rate-making, and the notion of using transparency or disclosure as a regulatory technique rather than rate-making has a long pedigree here.
Second, with respect particularly to contracts negotiated between the plans and particular users, I think there is concern over what's called nondiscrimination. And I think those that would argue that individual contracts should not have to be disclosed, I think they should carry the burden of explaining how they can reassure the marketplace that there is no nondiscrimination among categories of users of the data or why they shouldn't have to reassure that there is no nondiscrimination.
Third point that was touched upon at greater length in the SEC, concept release, and certainly in over 30 comment letters that I saw afterwards but has not received a great deal of attention in our first three meetings is the question of how particular data on the cost of running the systems, the kind of data that we would have to focus on for a cost-based system, if we went that way, is audited. I think this is an issue that may already be addressed. It may be one that the various plans want to assure is a non-issue, but I think it's nonetheless one given the approach the Commission has historically taken in other context to financial information worth putting on the table.
I would ask the plan administrators to the extent they are here, and we will correspond with them, to give us specific commentary on how fees are currently determined and to what extent they believe that Michael Atkin's new database – I should say your organization's new database adequately or does not adequately address the kind of sunshine concerns, if you will, that have been addressed today.
Now let me focus on a cost-based standard. While we heard little enthusiasm for it, we did hear some, and we heard or at least read a very serious SEC concept release before.
I'm going to ask the Division of Market Regulation and other members of the committee who favor a cost-based approach to take it upon themselves to articulate mechanically precisely how this would work. In the case of the SEC, they might just want to write a summary of what's already in the concept release. Again, though, let's circulate that by March 15th. Let's try to get these issues in as close to March 15th as possible.
I will, obviously, as with everything we've done through the committee request that all documents be circulated to all members simultaneously. I may or may not formally augment the current agenda before the April 12th meeting. I think it's probably useful to particularize for discussion purposes the remaining points I want to focus on.
We haven't talked a whole lot directly or indirectly about technological issues, and that may be the last on the agenda. You may want to comment to the extent to which you feel there is need to address that or to the extent to which you feel either if we go to a multiple consolidator system or a competitive bid situation that will take care of itself rather than require for the comment.
Let me thank all of you for what has been a long day. I'm afraid I'll have to promise you we will have one more full day on April 12th. We've got a good ways to go. I think we made enormous progress. I do not anticipate circulating a draft of positions on the first basically three issues that we went through before April 12th. I want to have everything on the table through the April 12th conversation before we start crafting a document to build further consensus. But I think today was an extraordinary educational day for all of us. A good deal was stated that will help build a stronger report. And I think, frankly, we flushed out some areas where there is less consensus. Both achievements are very, very useful.
Participant: Joel, real quick, is sunshine transparency, does that include administration, or is that a separate topic?
Mr. Seligman: No, I want you to focus on that. It's not just costs, but it's contracts, it's other aspects of administration. That may be a way that we want to really focus on in the final report.
(Whereupon, the meeting was adjourned at 5:18 p.m.)
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