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February 18, 2010

FINRA Proposal Riles OTC Market

By Peter Chapman

Pink OTC, which distributes NBBO data to third parties in competition with FINRA, is crying foul. It claims it will lose revenues if the FINRA proposal is approved. In the first half of last year, Pink OTC took in $3.7 million, or about one-third of its revenues from its licensing of market data. Coulson would not disclose the percentage of that figure that comes from sales of NBBO data, but says it is significant. "It's like losing an eye," Coulson said.

The deals Pink OTC has struck with parties such as Bloomberg, Thomson/Reuters and others for its data "would be repudiated," Coulson told the SEC in a letter. "The QCF proposal would amount to a 'taking' of Pink OTC's lawful property rights without compensation, which is a violation of the U.S. Constitution."

Although it is the dealers and the ECNs FINRA is requiring to provide it with the data, Coulson maintains that the data is the intellectual property of Pink OTC. "Dealers post on our system," he explained. "But the QCF proposal requires we provide all our Pink Quote data to FINRA. If we did not, FINRA would require the dealers and ECNs to immediately remove all quotes from our system."

For Pink OTC, the market data dissemination business has been a bright spot in a mostly dreary picture. In the first six months of 2009, market data licensing fee revenues grew by 15 percent. Revenues from Pink OTC's largest business, the provision of trading services, including Pink Quote and its Pink Link trading system, declined by 5 percent. That's mostly because dealers have exited the business while those firms that remain are employing fewer traders.

Coulson charges that FINRA wants to create the QCF solely for the revenues it will bring. "Rather than competing on the basis of product, service or price, FINRA now seeks through its QCF proposal to overturn the market's judgment by seizing market data for commercial use from a private competitor," Coulson told the SEC.

Indeed, FINRA's commercial division has seen a decline in revenues in recent years. It reported "transparency service fees" of $45 million in 2008, down from $56 million in 2007. It blamed the decline partly on a decrease in OTC market data revenues. According to a recently released SEC "concept release," FINRA received $20.7 million in revenue from the Nasdaq UTP plan (Network C) in 2008. Coulson estimates over $8 million of that is from OTC equity data.

Coulson and STANY both argue there is no need for the QCF. Pink OTC notes that brokers can get a feed from Pink OTC that consolidates quotes from Pink Quote and those securities dually-quoted on Pink Quote and OTCBB. That feed represents quotes on all OTC securities--approximately 9,300--except the 75 or so quoted exclusively on OTCBB. Pink also notes that brokers can purchase a feed from data vendors such as Bloomberg that consolidate all OTC quotes.

Pink OTC reports that it distributes about 800,000 top-of-book quotes per day, while FINRA distributes about 100,000. Still, Nasdaq's Level One feed is more widely distributed.

STANY told the SEC that the QCF was unnecessary because FINRA was abandoning OTCBB, leaving just one interdealer service run by Pink OTC. Therefore Pink OTC would be able to offer a consolidated NBBO feed.