Federal Advisory Committee on Market
Information:
Reuters Group PLC
Recommendation for an
Alternative Model
December 4, 2000
Dean Joel Seligman
Washington University School of Law
1 Brookings
Drive
Campus Box 1120
St. Louis, MO 63130
Dear Dean Seligman:
In your correspondence of October 26, 2000 to members of the SEC Advisory
Committee on Market Information (the "Advisory Committee"), you requested
written submissions regarding solutions for developing an alternative model for
dissemination of market information.
In response to your request, Reuters Group PLC ("Reuters")1 has set out below a preliminary overview of reforms
that, in its view, merit consideration by the Advisory Committee in its efforts
to enhance effective dissemination of market data for U.S. equity securities.
Consistent with our understanding of your request, this submission does not
attempt to describe a comprehensive and detailed set of regulatory reforms, but
instead seeks to outline a framework to prompt further discussion by the
Advisory Committee in its assessment of which "alternative models" for
disseminating market information, if any, merit additional consideration.
Introduction
The Congressional mandate underlying creation of the National Market System
encompassed a broad range of important policy objectives, including efficient
execution of transactions, fair competition between market centers, enhanced
availability of market information, the linking of market centers and a number
of related goals.2 The ability to achieve these objectives, Congress
recognized, grew out of an essential and evolving factual predicate: "New
data processing and communications techniques create the opportunity for
more efficient and effective market operations."3
In the twenty-five years since adoption of the Securities Act Amendments of
1975 (the "1975 Amendments"), "new data processing and communications
techniques" have dramatically advanced and enhanced the ability of the
marketplace to achieve Congress' original mandate. These advances include: (i)
explosive growth in the availability of computer processing capability, (ii)
creation of more rapid and continuous methods of communications among a broad
range of market participants, and (iii) development of standard communications
protocols that allow the creation of network architectures on a scale nearly
inconceivable twenty-five years ago.
The effective use of new technology to achieve the goals articulated in the
1975 Amendments will, we believe, require significant changes in the current
regulatory structure - and in that sense may call for an "alternative model" for
dissemination of market information. Nevertheless, changes to the specific
regulatory mechanism for implementing the statute should not be confused with a
change to an "alternative" policy model. The 1975 Amendments did not
"lock in" one particular structure for dissemination of market data. Indeed, the
breadth and flexibility of the Congressional mandate to the Securities and
Exchange Commission (the "Commission") underscores the expectation that ongoing
regulatory change would play an important part in recognizing the potential for
new technologies to serve the markets and investors better.4
Central to achieving this objective, in our view, is recognition that
continuing adherence to the "mainframe" technology model - embedded in the
current system of "monopoly" data consolidators - will hinder, rather than
enhance, efforts to achieve the goals established by Congress in 1975. Network
technologies, now widely used in all markets, offer far superior opportunities
to collect and disseminate market data - opportunities that cannot readily be
realized under current regulations. Network technologies are already being used
to make separate streams of order flow information visible to the marketplace.
It is essential, we believe, that the existing regulatory framework be revised
to permit markets and investors to achieve more fully the benefits that these
new technologies can bring. The combination of technology and competition can
ensure that the greatest degree of information flow is made available to the
marketplace.
Central Elements of Regulatory Reform
At the core of any reform to existing regulatory structures, Reuters
considers it critical to establish a framework that permits competition
to flourish in the collection, consolidation and dissemination of market
data. Commission-sanctioned data monopolies play an important role in today's
markets, and may well have been necessary in the 1970s and 1980s to achieve the
goals of the 1975 Amendments. Nevertheless, the explosive growth of the Internet
and other communications networks in the 1990s confirms that technological
constraints no longer require the existence of such monopolies to permit
widespread and rapid information dissemination to occur. Moreover, many of the
concerns regarding the existing market data system - that it costs too much,
that it moves too slowly, and that it provides investors with data that they do
not need5 - reflect the rigidity inherent in monopolistic
regulatory approaches, approaches that in fact have been abandoned in one
industry after another since the 1970s.6
In Reuters' view, the Advisory Committee should consider whether the time has
arrived to adopt a wholly market-oriented approach to data dissemination. A
serious argument can be made that, at present, continued substantive regulation
of mechanisms for market data dissemination (apart from anti-fraud protections)
may do more harm than good.7 Technological change in recent years has substantially
increased the quantity of information available to investors and reduced its
cost. While the Commission and the Congress have played a significant role in
several important transparency and disclosure initiatives, to a significant
extent the growth in information available has occurred (both in the securities
markets and in other sectors) as a result of market rather than regulatory
pressures.
Nevertheless, in recognition of potential concerns that the Advisory
Committee and others may have with too-rapid deregulation of the market, we have
sought to identify approaches to reform that will preserve key features of the
existing system, while introducing elements of competition that can most
effectively achieve the objectives established by Congress in 1975. Crucial
elements of reform along these lines would, in our view, include: (i) mechanisms
to ensure consolidation of essential market data, (ii) standards
requiring non-discriminatory access to consolidated market data, and
(iii) elimination of barriers precluding effective competition among
multiple consolidators of market data or, at a minimum, creation of a truly
neutral exclusive data consolidator chosen on competitive terms that do not
favor "legacy" systems currently operated by SRO monopolies. Important
additional considerations would include assessment of the need for
Commission-mandated communications protocols, as well as minimum standards
governing the adequacy of the response times and other aspects of consolidators'
systems.8
No single approach necessarily will achieve an appropriate balance between
each of these features, as well as among the various other objectives of the
1975 Amendments. As discussed in greater detail below, however, adoption of an
approach based on Commission-led efforts to permit competition among
consolidators of market data appears both practicable and preferable to the
existing monopoly approach. Moreover, we consider it feasible to implement this
model without wholly uprooting existing market structures and through extension
of principles already embedded in Commission regulations.
A Framework for Competition among Market Data Consolidators
In our view, the Advisory Committee should develop and refine a set of
regulatory reforms that would enable competition to arise among multiple market
data consolidators, consistent with the key regulatory objectives identified
above. We consider adoption of reforms promoting competition to be the most
effective way of assuring that investors will gain the benefits of technological
and other innovations, both in terms of quality and cost. An additional major
benefit of these reforms would include, we believe, reduction or elimination of
the problematic policy choices and burdens on the Commission - and
inefficiencies inherent in any approach that relies on "quasi-rate making"
supervision of monopoly consolidators.9
How would a system based on competition work - especially if it is to achieve
the regulatory objectives identified above? While the full exposition of the
details of a system permitting competition among consolidators will undoubtedly
require additional careful consideration by the Advisory Committee, we suggest
that a useful "starting point" proposal would begin with the following elements:
1. Multiple Potential Consolidators. Commission regulations should
expressly recognize the possibility of competition among market data
consolidators, with eligibility open both to current consolidators and other
entities.
Consideration preferably would be given to reforms that would enable multiple
entities to act as consolidators (subject to non-discriminatory access
requirements as described below). A serious assessment also should be made,
however, of the implications of auctioning "exclusive" information processor
status to a single entity selected from multiple firms (e.g., based on
who would provide the lowest price to subscribers consistent with appropriate
quality and performance standards).10
2. Minimum Commission Standards to Qualify as a Consolidator. Any
entity seeking to qualify as a consolidator would be required to meet minimum
standards established by the Commission.11 These standards should include:
- Consolidated Data. To assure that the investing public will
continue to receive adequate consolidated data, consolidators would be
required to disseminate consolidated market data meeting minimum requirements
established by the Commission (e.g., as to last sale and quotation
reporting).12
- Non-Discriminatory Access. To ensure that every consolidator will
have access to market-wide data (and thus to meet its obligation to offer
"consolidated" market data), each consolidator would be required to make
market data available to the marketplace - including to competing
consolidators - on non-discriminatory terms.13
3. Obligation to Submit Transaction and Quote Data. All broker-dealers
would have an obligation, as is currently the case, to submit appropriate
transaction and quotation data to at least one consolidator recognized by the
Commission. In contrast to current regulations, however, broker-dealers would be
free to negotiate the most favorable terms available from a consolidator for
their data.
4. Subscriber Choice. Subscribers would be free to purchase market
data from any consolidator approved by the Commission - taking into account
quality, speed and other features of the consolidator's service, as well as its
cost. Consolidators would have the ability to offer a broad range of data and
services beyond the regulatorily-mandated minimum. By the same token, current
vendor display rules should be reviewed to determine whether they provide
investors with adequate flexibility to manage their systems and choose the
information they wish to receive.14
From a commercial and practical perspective, the proposed approach seeks to
build upon two principal features: first, the obligation of each consolidator to
provide competitors with non-discriminatory access to market data (thereby
assuring that each consolidator will in fact have market-wide data reflected in
its system) and second, the freedom of broker-dealers submitting data, as well
as subscribers, to select among multiple consolidators (thereby creating
potential incentives for new consolidators to create efficiencies by sharing
revenue streams with broker-dealers that currently must give their information
away for free).
Advantages potentially arising from the proposed approach would include: (i)
assurance of availability of consolidated data satisfying minimum standards
established by the Commission, (ii) a market for consolidated data that would
create incentives for innovation and efficiencies - including the provision of
additional data and services beyond the regulatory minimum - and potentially
significant reductions in costs, (iii) elimination of the need for continuing
"cost-based" or similar review of monopoly pricing by exclusive processors, (iv)
enhanced investor choice, and (v) increased participation by broker-dealers and
other market participants in building effective consolidation services.
Moreover, the model could be implemented based on existing Commission rulemaking
authority and the extension of existing regulatory principles (e.g., the
non-discriminatory access provisions of the Order Handling Rules and Regulation
ATS).
Issues Raised for Consideration by the Advisory Committee
In your correspondence to the Advisory Committee, you raised a number of
specific issues that any proposals for reform should take into account. The
remainder of this letter seeks to address each of those issues briefly in
connection with the proposal described above.
Who will act as consolidators?
Any SRO or other market participant or data vendor could act as a
consolidator if it satisfied the minimum conditions established by the
Commission. In our view, a number of existing SROs would be likely to continue
to seek "qualified consolidator" status.15 In addition, Reuters considers it likely that a
number of market participants and data vendors (including Reuters itself) would
seek to serve as consolidators.16
How would the consolidators obtain market information?
All broker-dealers would be obligated to submit market information to at
least one qualified consolidator. Unlike the current model that requires
broker-dealers to submit their data without charge to an exclusive consolidator,
the proposal would permit them to select the consolidator or consolidators that
offered the most favorable terms for their data. This ability to choose is
likely to create substantial incentives for increased innovation and efficiency
among consolidators. For example, a consolidator operating a system that is more
efficient or more attractive to subscribers presumably could, as an inducement
to using its facilities, offer a higher portion of its revenue stream to
broker-dealers than a less efficient or attractive system.
An important component of the proposed approach - arising out of the
regulatory objective of establishing minimum standards for consolidated data -
is the additional requirement that every qualifying data consolidator must
provide competitors with non-discriminatory access to its data. 17 This requirement, comparable in many respects to the
non-discrimination rules established by the Commission in other contexts
(e.g., Regulation ATS), would not entail regulatory entanglement in
price-setting. Instead, if a consolidator chooses to sell any of its data to
subscribers, it must provide that data on no less favorable terms to
competitors. Notably, it may be possible to structure the non-discriminatory
access requirement in a manner that will create incentives for consolidators to
offer the data on somewhat more favorable terms to competitors - since they will
have a reciprocal obligation to acquire data from each consolidator to whom they
are selling.18
The Advisory Committee may wish to consider whether the requirement of
non-discriminatory access should be reviewed on a continuing basis. As noted
above, market forces have greatly increased access to market information without
the need for regulatory intervention. Nevertheless, U.S. markets have long been
operated under an "exclusive" consolidator model and the potentially
anticompetitive impact of existing monopolies may take some time to dissipate.
How would consolidators make market information available to users and
under what terms?
Consolidators would make market information available to users in a form that
would be subject to minimum standards established by the Commission. For
example, to the extent the Commission requires that users receive timely
consolidated last sale data from the principal trading markets for the security,
each consolidator would be obligated to provide that data to its users on a
timely basis. At the same time, a consolidator would have the ability to
supplement its data and to provide additional services to users.
Each consolidator would be free to establish the terms on which it proposes
to make data available to users. This would promote beneficial price and service
competition currently absent from the marketplace. At the same time, the
non-discrimination requirement noted above would be designed to reduce the risk
of monopolistic practices and to ensure broad access to data among
investors.
In what standardized format, if any, would data be made available?
The Commission would, under the proposed approach, have the authority to
mandate (or reserve the right to mandate) use of standardized formats for
dissemination of data. In our view, however, it likely would prove unnecessary
for the Commission to implement such authority.
Standardized communications protocols, such as FIX, have become
well-established in the financial markets and are likely to improve over time.
Indeed, significant linkages based on these protocols already exist among many
market participants. While Commission intervention could play an important role
in some circumstances, the need for action may be limited. Moreover, Commission
regulations establishing consistent industry standards (i.e., setting the
width of the railroad tracks) are likely to be far simpler and less intrusive
than efforts to oversee the cost structure and responsiveness of the monopoly
SROs on which the markets currently rely.
How will investors be assured of receiving accurate, real-time
consolidated information?
As noted above, the Commission could supplement competition among
consolidators by establishing minimum response times and accuracy requirements
for meeting the needs of investors. Consolidators failing to meet minimum
response time standards should lose the ability to require that their data be
included in information disseminated by competitors (and, if persistently unable
to supply data in a timely fashion, should lose "consolidator" status). In our
view, competitive forces will tend in any event to push consolidators to provide
accurate and timely consolidated information.
Indeed, experience of recent years suggests that it is precisely the absence
of competitive pressure on SROs acting as exclusive processors that has most
significantly retarded improvements in dissemination of market data. Delays in
implementation of decimal trading and flaws in operation of the options markets
are among the recent examples of monopoly data providers lagging substantially
behind the competitive marketplace - notwithstanding the expansive authority and
vigorous oversight of SROs by the Commission.19
How will brokers satisfy their best execution responsibilities?
Brokers will satisfy their best execution responsibilities just as they do
today - by reviewing the full range of execution opportunities available to
their customers and reassessing their procedures on an ongoing basis. Because
the model contemplates, at least at the outset, a continuing stream of
consolidated data, brokers' ability to implement their best execution procedures
would not be impaired - and indeed are likely to be enhanced through increased
incentives for data consolidators to create and offer users software and other
tools to measure execution performance more effectively.
Why is the model preferable to the existing model?
Developments in communications technologies have made the existing monopoly
system unnecessary to achieving the objectives of the 1975 Amendments. Indeed,
those monopolies have arguably come to represent an impediment to flexibility,
innovation and efficiency in achieving the policy objectives of the
statute.20 As Congress recognized in 1975, moreover, the
Commission must aggressively guard against potential abuse of monopoly status,
including through the potentially intractable problem of guaranteeing the
"reasonableness" of the charges of "exclusive" securities information
processors.21
The introduction of competitive forces - widely recognized as more effective
than utility-style regulation throughout the economy - will significantly
increase the potential for innovation and efficiency improvements in the
dissemination of market data. Moreover, the 1975 Amendments themselves expressly
acknowledged the importance of protecting competition among Congress'
goals.22
The approach proposed for the Advisory Committee's consideration would, at
the same time, continue to assure the markets of a continuing stream of
consolidated data - and preserve minimum standards governing market data
consolidators, at least until confidence grows that the marketplace will achieve
these objectives without further regulatory intervention.
* * *
We appreciate the opportunity to offer our views to the Advisory Committee on
potential reforms to improve data dissemination in the U.S. equity markets. We
look forward to discussing the proposed reforms outlined above, as well as those
offered by other Advisory Committee members, at the December 14, 2000 Advisory
Committee meeting. If you should have any questions or would like to discuss any
aspect of this letter, please do not hesitate to contact me at (212) 593-5500 or
Mitchell Feuer, Reuters America Vice President for Government and Regulatory
Affairs, at (202) 898-8343.
Sincerely,
Thomas Glocer Chief Executive, Reuters Information Chief Executive Officer,
Reuters America Inc.
cc: Annette Nazareth, Esq.
Footnotes
1 Reuters supplies the global financial markets and the
news media with the widest range of information and news products, including
real-time financial data, historical and graphical databases, and news, news
video, news pictures and graphics. Reuters also provides global solutions and
technologies for the financial markets. Instinet Corporation, a global
electronic agency broker that is a member of 20 exchanges around the world, is a
wholly-owned subsidiary of Reuters and is vitally interested in these
issues.
2 See Securities Exchange Act of 1934, as amended
(the "Exchange Act"), §11(A)(a)(1)(C)-(D).
3 See Exchange Act, §11(A)(a)(1)(B) (emphasis
added).
4 See S. Rep. No. 94-75, at 12 (1975),
reprinted in U.S.C.C.A.N. 179, 190 (noting that under the 1975 Amendments
"the SEC's basic role would be to remove burdens on competition which would
unjustifiably hinder the markets natural economic evolution"); H.R. Conf. Rep.
No. 94-229, at 92 (1975), reprinted in 1975 U.S.C.C.A.N. 321, 323.
5 Reuters continues to support reforms to the current
system of data dissemination, as described in our comment on the Commission's
Concept Release on Regulation of Market Information Fees. See Letter
submitted on behalf of Reuters America Inc., by Devin Wenig to Jonathan G. Katz,
Secretary, SEC, dated April 5, 2000 (suggesting that the system be made easier
to administer and more flexible); letter submitted on behalf of Charles Schwab
& Co., by W. Hardy Callcott to Jonathan G. Katz, Secretary, SEC, dated July
10, 2000, at 2-3; letter submitted on behalf of Securities Industry Association,
by Marc E. Lackritz to Jonathan G. Katz, Secretary, SEC, dated April 11, 2000,
at 4.
6 See Sharon Brown-Hruska and Jerry Ellig,
Financial Markets as Information Monopolies, 23 REGULATION, at 29.
7 See id.; letter submitted on behalf of Fidelity
Investments, by Eric D. Roiter to Jonathan G. Katz, Secretary, SEC, dated April
12, 2000.
8 A related and critical additional point that must be
addressed is the relationship between market data consolidation and "securities
information processor" functions relating to order interaction (e.g.,
under the Commission's Order Handling Rules and Regulation ATS). In this
connection, we believe that, particularly in light of the "legacy" issues noted
above, it will be important in the first instance to establish a neutral and
open industry facility for order interaction among exchanges, ATSs, and market
makers, especially in the market for Nasdaq-listed securities.
9 See Letter on behalf of the Mercatus Center,
by Wendy L. Gramm and Susan E. Dudley, to Arthur Levitt, Chairman, SEC, dated
March 31, 2000, at 7.
10 See Request for Proposals, Canadian
Securities Administrators (July 25, 2000); Roiter, supra note 7, at 2.
Although SROs should be free to compete in such auctions, it is important to
guard against regulatory entrenchment of "legacy" systems operated by SRO
monopolies (especially insofar as they have an impact on related systems
providing for interaction and execution of orders).
11 Consideration also could be given to additional
standards supplementing those expressly noted above (e.g., relating to
response times and similar technical aspects of consolidators' systems).
12 Consolidators presumably would be permitted, if not
encouraged, to provide additional data and services beyond the regulatory
minimum. If incentives to innovate are to be preserved, care must be taken to
ensure that innovations by one consolidator are not "captured" by competitors as
part of the regulatory minimum.
13 In other words, if an exchange wished to qualify as
a consolidator, it would be required to sell its data to competing consolidators
on terms no less favorable than those on which it effectively provides that data
to subscribers, exchange members and data vendors. In exploring the precise
scope of this requirement, it may be useful to consider adoption of a "most
favored nation" requirement that obligates a consolidator to offer data to its
competitors on the most favorable terms offered to any subscriber or other
recipient of data.
14 Rapid increases in message traffic are straining the
capacity of systems of both information processors and end users. As the
Commission is aware, this problem is most acute for options message traffic. The
Commission recently amended the Options Price Reporting Authority Plan for
Reporting of Consolidated Options Last Sale Reports and Quotation Information
("OPRA Plan"), to allocate scarce OPRA Plan systems capacity during peak usage
periods. See Adoption of Amendments to National Market System Plan,
Exchange Act Release No. 34-43621 (Nov. 27, 2000). The increase in equities
message traffic is also of concern. Nasdaq has had to delay its implementation
of decimal pricing due to capacity constraints. The capacity problem could be
ameliorated by allowing investors greater freedom to manage their systems and
choose the information they need.
15 For the reasons noted above, it would be important
to ensure that SROs forgo any existing competitive advantages before being
permitted to enter into competition with other entities.
16 In the event multiple entities do not seek to
qualify as consolidators, the Commission could continue, as it does today, to
regulate "exclusive" securities information processors. As noted in prior
comment letters, there are a number of steps that Reuters suggests that the
Commission consider if it continues to regulate "exclusive" processors under the
current model. See Wenig, supra note 5.
17 As discussed below, the Commission potentially could
play a constructive role in establishing communications protocols and related
requirements to be met when providing data, either to subscribers or
competitors.
18 If the Advisory Committee determines to pursue the
proposed approach, it will be important to consider carefully the details of the
concept of "non-discriminatory access." In particular, a variety of methods
could be explored to preclude one competitor from "monopolizing" access to data
that is submitted to it. The antitrust laws, among other precedents, could
provide useful precedents for consideration. See, e.g., Entering the
21st Century: Competition Policy in the World of B2B Electronic
Marketplaces, Federal Trade Commission Staff (October 2000).
19 See Order Staying the Deadlines for Decimal
Implementation, Exchange Act Release No. 34-42685 (Apr. 13, 2000); Certain
Activities of Options Exchanges, Exchange Act Release No. 34-43268 (Sept. 11,
2000).
20 See Gramm and Dudley, supra note 9, at
7 (arguing that entrepreneurial incentives are stifled under a market monopoly
system).
21 See H.R. Conf. Rep. No. 94-229, at 87 (1975),
reprinted in 1975 U.S.C.C.A.N. 321.
22 See H.R. Conf. Rep. No. 94-229, at 92 (1975),
reprinted in 1975 U.S.C.C.A.N. 321, 323.
http://www.sec.gov/divisions/marketreg/marketinfo/reutersm.htm
