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May 31, 2004

Market Data Proposal: Brings Out the Critics Is it More Tricky Than The Trade-Through Plan?

By Nina Mehta

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  • Market Data Proposal: Brings Out the Critics Is it More Tricky Than The Trade-Through Plan?

One part of the SEC's Regulation NMS proposals often takes a back seat when the debate is about trade-through reform. But don't be fooled: The market data component is as far-reaching and controversial as the widely-reported trade-through recommendations.

"This SEC proposal is simply attacking the wrong side of the problem by trying to figure out how to divvy up the pie of market-data revenues," says Lawrence Leibowitz, co-head and executive vice president of Schwab Soundview Capital Markets, the institutional research and trading arm of the Charles Schwab Corp. "The problem is that the pie is too large."

Reg NMS, published by the Securities and Exchange Commission in late February, is an attempt to modernize the national market system. It is regarded as the commission's most sweeping overhaul of the equities market structure since the Securities Act Amendments of 1975. Reg NMS reportedly took many years of painstaking work before the final document was released earlier this year.

Reg NMS tackles four critical areas: the trade-through rule, market access fees, subpenny pricing and market data. The creation of a uniform trade-through rule has made headlines. That's largely because it potentially threatens the dominance of the New York Stock Exchange and other traditional markets.

Nevertheless, the market data proposal is also significant because hundreds of millions of dollars are at stake. In 2003, for instance, the government-sponsored networks that collect market-data fees brought in $424 million in revenues. Expenses for consolidating and disseminating trade and quotation data totaled $38 million.

The New York Stock Exchange got the biggest share of the market data pie: $148 million. NASD and Nasdaq captured $116 million. The rest was divvied up among the remaining self-regulatory organizations, based on their reported trade or share volumes.

Reg NMS makes a number of market data recommendations. It continues the SEC's commitment to providing consolidated information to market participants, but at a lower and more cost-related price. It reduces the scope of the consolidated data that would be provided to broker dealers and other recipients.

Market Center

Under the proposal, the data would include the price, size and market center of the national best bid and offer and last-sale information. The current required provision of a montage of quotes would be eliminated. The market data proposal would allow market centers to independently price and sell market data that falls outside the definition of "core information."

Finally, the proposal recommends a new formula for determining how market-data revenues are allocated to the SROs. This formula, much more complex than the current simpler one, would reward markets for providing more aggressive, better-quality quotes that create greater price transparency. The formula, which includes an infamous square root, was also devised with an eye toward eliminating the current monetary incentives for wash trades and other practices. These create what the SEC calls "serious economic and regulatory distortions" in the market.