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April 1, 2001

Pressure to Fix Market Data System

By Editorial Staff

May Deadline: SEC Group Huddles to Propose Alternatives

Wall Street's system for gathering and transmitting market data, under attack from online brokerages and other firms, may soon get an overhaul.

The outcome will be shaped by how an SEC subcommittee studying the system answers several questions on the current structure. Dominating the issue is the Consolidated Tape Association (CTA).

The CTA, created by Congress in 1975, consolidates and sells data from U.S. markets. Now it is at the butt of stinging criticism by some who argue it charges too much for its services.

In 1999 Charles Schwab Corp., in a related case, complained to the Securities and Exchange Commission that it was unfair that investors must pay to receive data online, while others could receive the same data from a broker at no charge.

Tight Deadline

Donald C. Langevoort, the chairman of the SEC's Market Information Advisory Subcommittee, said its members have until May 14 to report to the full committee with the answers to several crucial questions.

The full committee in turn has until Sept. 15 to present its report to the Securities and Exchange Commission, said Langevoort, a professor at Georgetown University Law Center.

"That's not a lot of time" to reconcile at least five competitive "consolidation models" proposed by the New York Stock Exchange, Reuters Group, PLC, Archipelago, LLC, and others, Langevoort acknowledged.

Representatives of the NYSE, which is threatening to withdraw from the CTA, and Reuters Group declined to be interviewed for this story.

Rep. Michael Oxley (R-Ohio), chairman of the House subcommittee on capital markets, insurance and government-sponsored enterprises, jumped into the fray at a March 14 hearing when he denounced the current system as "outdated."

A securities industry adviser said that, once lawmakers are involved in the debate, the issue becomes more difficult.

"It is always worrisome when a congressional body gets into it, because it's extremely complicated. It's not likely that they're going to understand the issue in enough depth to do it justice," said Leo McBlain, chairman of the Financial Information Forum, in New York City, which advises brokerages on information systems issues.

Langevoort said his subcommittee's participants must respond to five major issues to prepare the ground for a possible successor market data model.

* Must market data consolidators offer some minimum data beyond the national best bid and offer, or NBBO, and the last sale price? Should government decide what's displayed, or should consolidators? Langevoort said subcommittee participants so far favor some mandatory minimum provision.

* Should the government set price guidelines? Langevoort said market centers would exercise inordinate leverage over consolidators if the latter were required to buy the former's data. No consensus has emerged.

* Could consolidators buy data from sources other than market centers? If so, Langevoort asks, which ones? Broker dealers? Again, there are many questions.

* Who qualifies as a consolidator? Should a consolidator be licensed, tested, examined for experience, resources? And who determines the criteria?

* Would government or another entity be responsible for establishing data transmission and exchange protocols?

"When you can answer each of these questions you'll know what your design is going to be," Langevoort said. "Once you know the design, you're in a position to evaluate your benefits and risks."

McBlain suggested the subcommittee deliberations need to dig deeper. Competing consolidators would probably raise the cost of collecting and disseminating identical redundant market data, McBlain said. If the cost rises, will markets sacrifice part of the benefit of monopoly consolidation? he asked.

Will competing consolidators collecting and computing data in real-time stay synchronized? And if not, McBlain asked, how will markets and investors interpret the apparent discrepancies? "My concern is that [the subcommittee] has not thought this out in enough detail," McBlain said.