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March 1, 2001

SEC Body Examines Price of Data

By William Hoffman

Alternative data dissemination proposals was the first agenda item at the March meeting of the Securities and Exchange Commission's Advisory Committee on Market Data.

That follows formation of a subcommittee to study replacing the current monolithic system of distributing and selling securities pricing information with a competitive system of data consolidators.

Georgetown University law professor Donald Langevoort was appointed chair of the subcommittee.

Joel Seligman, the committee chairman, received five proposals on alternative data dissemination structures after asking interested participants at last year's first committee meeting for their input. The submissions were "sufficiently well-developed that we had to take a look," Seligman said. "Clearly there are a lot of people in the industry who would like to customize data."

Market Structure

Seligman said changes in the way markets work have raised questions on whether the current monolithic approach is valid. When the national market system was created in the 1970s, only exchanges participated, he noted. Now electronic communications networks and other participants may need a new process to integrate them into the consolidated system - a new system that takes account of their views on data sharing, costs and efficiency. "It's just a much more complex world than it was 25 years ago," he said.

Nasdaq has been the default Securities Information Processor (SIP), a nexus of the current data structure, since the market's inception, noted Nasdaq senior vice president Dan Franks. Market data sales account for almost 25 percent of Nasdaq revenues (about 15 percent of NYSE revenues). Nasdaq has used no other method to process data so it is hard to speculate on the likely effects of reform, Franks said. "This stuff is like system's surgery. That said, we will do what is needed," he said.

Cameron Smith, general counsel at Island ECN in New York said, "I think this effort misses the entire point." Even multiple SIPs will be required to get their data from producers, such as exchanges, and perhaps broker dealers and ECNs. Currently, producers, including market makers, are required by the SEC to share that data without compensation for the cost of compiling it, he noted. "I would think it's worth reexamining the question of whether markets should be forced to give their data up," Smith said.

Gene Finn, former chief economist at the SEC, and the National Association of Securities Dealers, agreed: "The producers of market data should not have to give up proprietary rights to NASD or the NYSE or SEC just to fulfill the design of some system that somebody thinks is best." Finn submitted a concept document to the SEC in 1997, favoring a producer-controlled competitive market for data. "The one principle I think is really important to understand is that the information value in trade reports and quotations is part of the value of order flow," said Finn, who is also an outside director on the boards of Knight Trading Group and Ameritrade.

Seligman emphasized that his committee (which reports Sept. 15 to the incoming SEC Chairman) has not pledged to change the current single-consolidator model to a free market system: "All I can tell you is, we're going to seriously analyze both." Smith figures Congress would have to sign off on any reform: "They're the ones who created the national market system, and that's why we have a lot of the structures we deal with today."