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November 1, 2001

Campaign for Data Deregulation

By Gregory Bresiger

Wall Street Giants Take Aim at SEC Panel's Recommendation

Several big market players - Datek, Charles Schwab and Knight Securities among others - are condemning a Securities and Exchange Commission's Advisory panel recommendation for a system of competing consolidators. Instead, these protesting firms are calling for "a competitive, market-based solution that deregulates market data."

The firms made these comments in a protest letter that they were sending to the SEC as Traders Magazine went to press.

The Advisory committee, with some dissenters, argued that the SEC should permit a system of competing consolidators. [see Traders Magazine October, 2001.]

A majority of the committee expects that this system would evolve from the current unitary consolidator model. Under this, the Consolidated Tape Association receives and disseminates market information from all reporting market centers and distributes the information to vendors and subscribers.

Conceptual Nonsense

But the protesting firms, which also includes Reuters and others, are telling regulators that their proposed concept of competing consolidators doesn't make sense. That's because the report makes no recommendation to change an industry display rule.

That rule was adopted in 1980 as a way to promote transparency. Broker dealers and vendors are required to provide investors with a consolidated display of last sale transaction and quotations from all reporting stock market centers, according to the rule.

"The crux of the market data issue," according to the protest letter, "is that SEC rules first require market participants to give market data they generate to the exchanges (the "Quote Rule"), then require them to buy that information back from the exchanges in consolidated form if they distribute any quotation information to investors (the "Display Rule")."

"This government-established monopoly," the letter continued, "means there is no incentive for exchanges to innovate and offer competitive and efficient pricing, and no incentive for exchanges to streamline administration and otherwise provide good service."

"This system also prevents firms and vendors from offering competing products (such as depth of quote), because SEC rules prohibit vendors from distributing their own data products unless they also purchase and distribute the exchanges' monopoly data along with their own data," according to the letter.

Exclusive Right

The protesting firms argue that - without a repeal of the display rule - the exchanges would still retain the exclusive right to sell market data. And that, they add, would destroy potential competition.

"The exchanges would retain exclusive control over access to, and fees for market data, and would face no competitive pressure to provide data on a more efficient and useful basis at more affordable rates," according to the letter, which was made available to Traders Magazine.

"By analogy, no one would expect television news to be competitive if multiple competing television networks broadcasting the news were nevertheless required to obtain that news from a single, government authorized bureau," wrote Edward Nicoll, chairman and chief executive of Datek Online Holding Corp, and one of the four authors of the letter.

For the committee's recommendation to become effective, the SEC must be satisfied that a system of competing consolidators would meet its technological and economic standards.

A few dissenters on the advisory committee argued against the economic benefits of a new model. Still, the advisory committee agreed that, if the SEC vetoes the competing consolidator model, it should "adopt specific improvements to the exit model." Those would include selecting the information processor by competitive bidding and broadening governance through a non-voting advisory committee.

Among the other conclusions of the controversial report are recommendations for market centers to be permitted to distribute additional market information, which would include limit order books free from mandatory consolidation requirements. That would allow information to be customized.

Poor Timing

The protesting firms also privately were angry with the timing of the release of the report. It came just a few days after the disaster at the World Trade Center. Officials of the protesting firms said they had little time to analyze the report because of the difficult times their firms are having.

SEC officials, reached for comment on the letter, said at presstime that they had yet to see it and so would not comment until they had reviewed it.