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U.S. House of Representatives
Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 10:02 a.m., in room 2129, Rayburn House Office Building, Hon. Richard H. Baker, [chairman of the subcommittee], presiding.

    Present: Chairman Baker; Representatives Oxley (ex officio), Ney, Shays, Royce, Barr, Shadegg, Weldon, Fossella, Miller, Ose, Hart, Rogers, Kanjorski, Bentsen, Mascara, S. Jones of Ohio, Sherman, Meeks, Inslee, Moore, Ford, Lucas, Shows, Crowley, and Israel.

    Chairman BAKER. I would like to call this hearing of the Capital Markets Subcommittee to order, and welcome everyone here this morning. This hearing is the result of interest by many in the explosive growth of our markets and the concurrent growth in the supply of information to literally millions of investors across the country on a daily basis who are now, even despite the morning news about the activities in the market, are still investing heavily, with working families providing significant contributions to our economic growth.

    At the core of the hearing this morning is the discussion relating to the delivery of market data, that material on which every investor bases an investment decision and on the mechanisms by which that data is collected and delivered, and associated charges related to the delivery of that product for the educated investor.
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    I think it important to recognize the enormous growth in revenue that this product has provided to the exchanges, not that that in itself is any indicator of whether this is a good thing or a bad thing, just the significance of it to the performance of the markets. Anywhere from 20 percent to 40 percent of an individual exchange's net revenues now is generated by the sale of this information.

    Up rather dramatically, despite the fact that over the course of recent years, reductions in fees have been very significant.

    The subcommittee is here this morning to better understand the function of the markets, how market data is provided, the benefit to consumers it presents, and to ensure the 75 amendments to the Securities Act provided that the charges associated with the distribution of this information are fair, reasonable, and non-discriminatory.

    To that end, we will have a panel of witnesses this morning who can speak directly to how this system functions and better help the subcommittee move forward with a careful examination of this subject matter over the coming months.

    I am particularly appreciative that the Chairman has taken such an interest in this topic and has done good work in his former capacity in the committee on Commerce on this very subject.

    At this time, I would like to recognize the Ranking Member, Mr. Kanjorski, for any opening statement he would choose to make. Mr. Kanjorski, it would be my intent, with your agreement, to recognize you and then the Chairman for opening statements, and then move to our witnesses, if there's no objection.
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    Mr. KANJORSKI. No objection.

    Chairman BAKER. Thank you, Mr. Kanjorski.

    Mr. KANJORSKI. Mr. Chairman, thank you for the opportunity to comment on market information issues before we hear from our witnesses today. The securities industry presently faces few issues as important or as complex as those surrounding the ownership and distribution of market data.

    In short, the wide distribution of market information remains a fundamental component of our Nation's securities markets. A regulatory framework that promotes the transparency of market data—especially the real-time, public dissemination of trade and quote information—helps to make certain that all market participants have access to prices across our national market system. This access, in turn, helps to provide for efficient price discovery and the best execution of investors' orders.

    Congress first addressed the issue of market information when it enacted the Securities Acts Amendments of 1975. This statute, among other things, charged the Securities and Exchange Commission with establishing a consolidated, real-time stream of market information for securities in order to make transaction and quotation information widely available. As a result of this law, millions of investors worldwide now have easy access to market data.

    But the world has changed substantially since Congress enacted the legislation governing market information, and we may now need to refine our approach on such matters. For example, we passed the law and the Securities and Exchange Commission developed the regulations governing market data before the advent of technological and communication advances like the internet, electronic communications networks, and alternative trading systems. This new technology has greatly expanded the opportunities for retail investors and interested individuals to obtain access to real-time market information.
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    Additionally, critics of the current system for distributing consolidated market data have raised a number of questions about the present system in recent years. For example, some contend that although market data fees for retail investors have fallen by 50 to 80 percent since 1998, they remain unusually high because no competition exists in the field of market data collection and distribution. To address this problem, some argue that we should allow competing entities to provide consolidated information and/or permit the exchanges to provide their own data outside the consolidator. By providing investors with more complete market information, we would promote the goal of greater transparency and thereby improve competition.

    Although the Securities and Exchange Commission has recently begun to examine these difficult issues and other related and complicated questions through its concept release and advisory committee on market information, it is appropriate for us to begin to educate the Members of our subcommittee about these complex subjects. Accordingly, we will hear today from a variety of witnesses about their views on market data. I want each witness to know that I approach the issue of market information with an open mind.

    For me, one can distill the complex debates surrounding market data into three key questions: First, who owns market information?; Second, how much should we charge for market information?; and third, how should we distribute market information? The answers of our panelists to these questions will help me to discern how we can maintain the efficiency, effectiveness and competitiveness of our Nation's capital markets into the future, and what further legislative action, if any, we should take to address the issue of market data.

    In closing, Mr. Chairman, today's hearing is just the beginning of a discussion in the 107th Congress about market information. I anticipate that we will hold additional hearings on this issue in upcoming months, especially after the Securities and Exchange Commission's Advisory Committee on Market Data publishes its report in September. I therefore look forward to working closely with you and with others to address this multifaceted, complicated and important matter. Finally, I think we are indeed fortunate, on the Financial Services Committee, to have the new Chairman with his wealth of information that carries over from his former service on the Commerce and Energy Committee, so I look forward to his opening statement today also, Mr. Chairman.
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    Thank you.

    Chairmaan BAKER. Thank you, Mr. Kanjorski.

    Chairman Oxley.

    Mr. OXLEY. Thank you, Mr. Chairman.

    I want to commend you for holding this hearing on an issue that is fundamental to the health of our capital markets and, indeed, this issue is quite new to I suspect the vast majority of Members on the subcommittee.

    This morning, we will examine how stock market data is provided to the public, how it is paid for, what information is available to the public about market data fees, and how competition might improve the way investors get market data.

    While the regulatory structure we will examine is complicated, our goal is simple: to ensure that investors are getting the best possible information about stock prices in the most efficient way.

    As one observer put it last year, following a hearing I held on this subject, stock market data, that is the quotes at which people are willing to buy and sell stock, and the information showing the price of the last sale of a stock is oxygen to investors.

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    Indeed, the transparency of our marketplace is the backbone of its success. Unfortunately, the regulatory structure that exists today was put in place back in the 1970s when the only person using a cell phone was George Jetson, and Al Gore hadn't even thought about the internet yet.

    That outdated regulatory structure, which may have made sense before the advent of modern communications technology, put into place a system that prevents competition and the provision of consolidated market data, and impedes innovation in the way market data is presented to investors.

    The cost of market data is significant and those costs are passed on to investors, just like the transaction fees this subcommittee heard about last week.

    Competition is always a better way to set prices than regulation. With no competition in the provision of consolidated market data, the only check on the fees is regulation.

    One important question we will consider is whether market data fees are fair, reasonable, and not unreasonably discriminatory, which is the statutory requirement established by the Congress in the 1970s.

    Of course, the alternative is to actually introduce competition into the market for consolidated market data.

    We'll also hear from our witnesses today about what new competition in this field would mean for investors and the markets.
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    We'll also be seeking to learn how investors might benefit if more information about market data, costs and fees were made public.

    While the SROs publish a great deal of information about market data fees on their websites, some information, for example, certain information about pilot programs is not so readily available.

    Today, we will examine the implications of increasing the transparency of market data terms and conditions. No discussion of market data can ignore the fact that market data fees play an important role in funding the activities of stock exchanges in the NASDAQ market, but some critics of the current system question how market data revenue should be used.

    Should they subsidize the cost of regulation? Should they be limited to the costs of providing market data?

    If they are reduced by competitive forces or otherwise, will investors be subject to new fees to replace that lost revenue?

    Some suggest that the governance of market data plans, which set market data fees in the first place, should be expanded to include all market participants like ECNs and the public, as opposed to only the SROs that receive market data revenue.

    These are some of the issues we will examine today.

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    In addition to the cost of paying for market data, the current regulatory structure imposes administrative costs on the marketplace. Market participants who purchase consolidated market data face a maze of different types of fee structures and contract requirements.

    Reducing the administrative burdens associated with the purchase of market data would bring greater efficiency to the marketplace and ultimately save investors money.

    I thank each of our witnesses for coming today to inform the subcommittee on the very important issue that we have before us, and look forward to your testimony.

    I yield back the balance of my time.

    Chairman BAKER. Thank you, Mr. Chairman. I do very much appreciate your past work on this subject, your interest in participating in our hearing this morning, and understand clearly the interest that you have in this important issue.

    Today, there are literally millions of individuals investing today who were not even participants in the economic process a few years ago, primarily as a result of technology.

    And it is important that this subcommittee examine the delivery of this information to those individuals to ensure that whether a person is investing $200,000 or $200 million, that they get access to the same information in the same timeframe as all other participants.
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    This morning, we are fortunate to have with us a distinguished panel of witnesses representing the various interests from the markets, and I've been presented with the order for recognition this morning with Mr. Randy MacDonald, Vice President and Chief Financial Officer, Ameritrade Holding Corporation being our first witness this morning.

    Welcome, Mr. MacDonald.

    We, in all cases—I should give this brief explanation—we limit opening statements of the subcommittee because of the number of individuals on the subcommittee today, we strongly recommend that each witness present his or her thoughts within the 5-minute window.

    All witnesses' statements will be incorporated and made part of the official record in their entirety.

    And with that request, Mr. MacDonald, I will recognize you and welcome you to our subcommittee.


    Mr. MACDONALD. Thank you very much, Mr. Chairman Baker, and Chairman Oxley. I appreciate you inviting Ameritrade today.

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    Ameritrade has always represented the small investor, and I'd like to talk to you about our concerns. We have four concerns.

    Let me first start off by saying, with our pending acquisition of Tradecast, we're one of the largest brokers in the world, Charles Schwab, in our estimation, the largest.

    We are completely agnostic about our order flow. That is, we are not an ECN, we are not a marketmaker, we do not benefit from internalizing our order flow; we strictly act as an agent for the small investor.

    The first point I want to make is, the present practice of distributing quotes is discriminatory to the individual investor, and I'll elaborate.

    The second point is that the costs, the administrative costs to us, are spiraling out of control. We are at a competitive disadvantage because of the present monopoly.

    The third point I wanted to make is that the tape revenue in fact should belong to those people who actually contribute the orders, and that is the customers out there.

    And the fourth point I wanted to make is that the SROs have been unchecked. It's a case of the fox being in charge of the hen house. They are taking these excess profits and creating competitive systems, systems that will compete with other market participants.

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    The first question is what are the regulatory impediments? I would say that one thing that is going well, one of the benefits is that, in fact, people are getting information real-time.

    But let me start off with the discrimination. Today, I cannot deliver real-time quotes in a cost effective way to all 1.4 million customers of Ameritrade.

    There is an onerous subscription agreement. There is the cost of either per quote or a subscription fee. My average customer, about half of them trade less than once every two months. The fee that I have to pay to the four SORs are $1 a month, and if I have one customer who is paying me a commission of $8 every 2 months, I've done nothing but recover my cost for market data distribution.

    So 1.4 million customers are not getting real-time quotes. I think they're disadvantaged.

    The second point is on what I perceive to be the abuses by the SROs in distributing this information and causing administrative nightmares.

    In the past week, we've had three instances that kind of illustrate this point. One is we were trying to change our methodology for distributing real-time quotes, and we were obtaining subscription agreements from customers who were getting real-time quotes, and we were told by one of the SROs they would not approve that, because they didn't like the method of distributing the subscription agreement, so we have to go back to the planning board.

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    The second thing is they told us that the sign-on had to be because we do not allow for a single sign-on to the website that we could not obtain subscription agreements, that we would have to pay on a per-quote basis.

    So to the extent that someone is calling in to a broker, that quote would be free to that customer. But to the extent that they are using the web, they have to pay for that quote and that's the discrimination.

    The fact that there is dual sign-on, my wife and I can both sign on to my account, that is an impediment to allowing us to distribute real-time quotes, and I think that's arbitrary, I think that's capricious.

    And the third point I want to make is, in dealing with these entities, they reflect their monopolistic attitude, and we've had an incident where the chief technology officer, last week, was put on the speaker phone by one of these SROs and she said, ''I will be doing other work while you're speaking. If I like what you're saying, I'll listen; otherwise, I will just ignore you.''

    And so we're opening the window, we're shouting out, ''We've had it and we're not going take it anymore.''

    We paid a million dollars in market data fees last month. This is an enormous competitive disadvantage for us.

    Thank you very much.
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    Chairman BAKER. We will have significant questions from all the Members for you to have a further opportunity to comment on this. We do appreciate your direct testimony.

    Our next witness is Mr. Robert Britz, Group Executive Vice President representing today the New York Stock Exchange.

    Welcome, Mr. Britz.


    Mr. BRITZ. Thank you, Chairman Baker, Vice Chairman Ney, Ranking Member Kanjorski and certainly Chairman Oxley.

    I am Robert Britz. I am here representing the New York Stock Exchange and we appreciate the opportunity to be before you this morning.

    There is much to say on this subject and not a great deal of time, so I will get straight to it.

    Markets, such as the New York Stock Exchange, exist to manufacture securities prices, and basically only to manufacture securities prices. We tell the world what a fine slice of ownership—a single share of the global enterprise that is Exxon Mobil, for example—is worth on a moment-to-moment basis.
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    We take raw material, investors orders that they have entrusted to their brokers, and from that raw material, we create valuable market data without which markets could not operate.

    Markets like the NYSE create their value through a combination of this information on the one hand, and fast, secure, reliable delivery systems on the other.

    So think of the New York Stock Exchange as being in the business of producing market data, manufacturing securities prices. At the end of the day, the price is our only product.

    The CTA, the Consolidated Tape Association, on the other hand is an SEC-sponsored joint venture among national and regional stock exchanges. It doesn't produce data—the markets produce data—so much as it consolidates and collects and redistributes the data to the next level, the information vendors.

    So with that as broad background, admittedly there's been a fair amount of discussion about this subject over the past couple of years, and I must say much of it is a surprise to us.

    In truth, it's never been obvious to us what the noise has been about. It's clearly not about investors' access to the data. Individual investors and the general public, for that matter, have access to unlimited real-time data through a variety of delivery systems; telephones, television; PCs, personal digital assistants, pagers, automated teller machines, and so on.
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    Market data is available in the home and in many public places; schools, libraries, airports, even on the plane itself, restaurants, train stations, shopping malls, and literally on the street.

    In contrast to some commentators who have, in the past, suggested that investors are struggling for access to real-time market data, in fact they can barely avoid it.

    Simply stated, the data is pervasive and I believe the best is yet to come.

    So it is not about availability. It can't be about the cost of the access to the data for investors, because it's free from an endless number of sources.

    Indeed, the data is so inexpensive to information vendors that many purchase it, give it away, and still profit handsomely.

    It shouldn't be about brokers' cost of market data for a couple of reasons. Brokers themselves establish the prices they will pay for the market data.

    Given that fact, it's not at all surprising that the cost of market data has come down dramatically over the past 25 years to the point where U.S. market data, CTA, NYSE market data is among the least expensive of any market in the world.

    It's hard to see how this discussion can be about control or governance of market data since all the power rests in the customer-laden boards of the self-regulatory organizations. Simply put, those who establish market data fees are the ones who pay those fees. They can raise or lower any fee any time they care to.
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    Most recently, this discussion has morphed into being about transparency of market data processes. But even that's hard to follow.

    The SEC literally gave birth to the Consolidated Tape Association. It attends all meetings. It reviews, publishes and approves all significant initiatives. It has the power to override any action. It has the power to unilaterally amend the Consolidated Tape plan.

    So CTA hardly operates in a closet.

    Additionally, it's very important to realize CTA is a conduit. The discussions and the decisionmaking that end up at the Consolidated Tape Association begin and actually take place again at the constituent-laden boards of the self-regulatory organizations.

    CTA's initiatives begin at the grass roots level with customers. To the extent an idea gains some traction, it then moves through various industry organizations. If it continues to have some consensus, it goes to our board, it then goes, coming out of the board, to the Securities and Exchange Commission. The SEC publishes it for public comment, they review it, ultimately they approve or disapprove nonetheless a very rigorous and transparent process.

    All CTA fees contracts are both standard in terms of the terms and are publicly available on NYSE.com among various other distribution channels.

    The CTA annually publishes audited financial statements and issues those to the Securities and Exchange Commission for public review. The NYSE and the markets do likewise.
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    It's not clear what more we could do, viz a viz, transparency, but we are open to suggestions.

    Mr. Chairman, you asked a very important question in your letter, which is, how does market data recover its costs and subsidize other areas of the SROs.

    At the NYSE, market data does not recover its cost and it is therefore in no position to subsidize anything else. You should understand that the New York Stock Exchange gets a much smaller percentage of its revenues from market data than do other markets.

    I would never suggest it's not an important part of our funding, however, and in that regard there's a very important point to be made. We must be careful not to do anything that hinders markets' abilities to make technical infrastructure investments to maintain and enhance their operational stability.

    To the extent that markets like the NYSE don't make infrastructure or order processing network upgrades on the front end, which run to the hundreds of millions of dollars, there is no market data on the back end.

    One online discount firm recently was quoted as saying, it would be unprofitable and therefore unthinkable to invest for peak utilization.

    The NYSE not only invests for peak utilization, it invests for multiples of peak utilization. It's by no means a prescription for great profitability, it's simply the best way we know how to operate a market which has zero tolerance for down time, and whose operating performance is the standard around the world.
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    Because underinvesting and capacity reliability is simply not an option for the New York Stock Exchange.

    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Britz. I appreciate your appearance here this morning.

    Our next witness, representing Charles Schwab, is Executive Vice President, Ms. Carrie Dwyer.

    Welcome, Ms. Dwyer.


    Ms. DWYER. Thank you, Chairman Baker, Vice Chairman Ney, Congressman Kanjorski, and Chairman Oxley, distinguished Members of the subcommittee.

    I am Carrie Dwyer. I am General Counsel and Executive Vice President of Charles Schwab, one of the world's largest financial services firms. I'm pleased to be here today to present Schwab's views on market data.

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    As you may be aware, in many ways, the dialogue we are having today was launched in June of 1999 when my firm submitted a formal petition to the SEC to review and correct what we believed to be an unreasonable and discriminatory market data fee structure.

    The process since then, which has included an SEC concept release, and formation of the SEC Advisory Committee on Market Information, on which I sit, has seen an emerging consensus that the current system is flawed, but deep divisions over what the appropriate solution should be.

    For that reason, I am pleased that Congress, this subcommittee in particular, is taking an active interest in monitoring this issue. We believe that the need for reform of the market data system is driven by two things, and they've been referred to already in this hearing:

    The advent of technology that lets us give more information to more people in more ways, and the simple change in the end user of market data since the system was created 25 years ago.

    The exchanges do not manufacture data. The source of that news is not the stock markets, themselves, but the investment decisions of millions of people trading around the world in a diverse group of markets.

    Yet, despite the increased breadth of participation, all the information about prices is still funneled through the same small group of markets that were in place 25 years ago.
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    This group still controls the format, the speed, who can receive it and how much it costs. From them, investors must buy back their own information at a market not subject to competition.

    As more Americans have invested in the stock market, more people check their portfolios more often. The internet has facilitated this. No longer required to have a conversation with a broker, an individual can hit the ''refresh'' button on his computer 10, 20, 50 times a day to see the latest information.

    With automated access to brokerage firms by wireless internet, a customer can check her IRA while walking down the sidewalk, if she chooses.

    Our own internal research found that in the days when our customers relied primarily on telephone orders, they asked for and the firm bought about ten quotes for every trade.

    With online trading, Schwab buys in the range of 75 quotes per trade. While we encourage this trend, because it gives investors more knowledge, it also makes clear the dramatic impact online investing has had on market data revenue.

    Market data fees represent such a significant amount of revenue for the exchanges, that discussions about opening the system to competition become, understandably, very difficult.

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    Certainly cost is important, but there are other problems with the monopoly structure. The rules are made by exchanges alone; other participants don't really have a say. There is nowhere else to buy market data so market incentives don't apply.

    Under the current structure, market data is available in only a few limited formats. The creation of value-added data products has been slow and marked by competitive battles.

    In addition, the exchanges impose onerous administrative burdens on vendors and brokers. We must count every customer quote request and count for each type of end user to the exchanges.

    Every one of our millions of customers with web access must click through a different subscriber agreement for each exchange.

    We must seek and obtain prior approval of any new or innovative way to deliver market data.

    Pricing changes are often made through pilot programs that can circumvent SEC's and public scrutiny.

    I'm not here today to propose a specific remedy, either legislative or regulatory. I do believe, however, that a plan for market data reform must have at its core four guiding principles:

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    First, any reform must promote competition. Competition at all levels of the market data system will foster innovation leading to the creation of market data products that better serve the needs of today's investors. That competition should be fair. Anyone wishing to compete to provide market data should ensure that access is on fair, reasonable, and nondiscriminatory terms.

    Second, reform must ensure that no one has ownership over market data. The last several years, the exchanges have been advocating database protection legislation on Capitol Hill that would give them an historical property right over data. But market information is a set of facts, plain and simple: bids, offers, limit orders, last sale prices. No one can own these facts. Granting market data ownership or copyright protection to any one party would be antithetical to the very purposes of the National Market System.

    Third, the market data system must become more transparent. Market data fees should be set in the sunshine. Greater transparencies of the fees, costs, contracts, policies relative to the collection and dissemination of market data is essential to creating a fair and open system.

    Yes, the basic contracts of fee schedules are freely available on the websites, but each of us negotiates our own contracts with the exchange, one by one. We worry about side agreements, especially negotiated rates, offsets of other exchange fees, and pilot programs.

    We've been the beneficiary of some of these, but that doesn't make it fair. Transparency is the hallmark of our markets; so should it be the hallmark of our market information system.
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    Finally, reform must result in a level playing field, ensuring the broadest possible access to market data is essential to the protection of investors and the fairness of our markets.

    Individual investors must be able to access critical market information at the same time and on the same terms as large institutional investors and other market participants.

    One way to ensure fairness would be most-favored-nation pricing. If you sell it, everyone must get the best price.

    Mr. Chairman, the debate over market data is a complex one, but the reality is this; our markets have changed. It's time to reevaluate the entire framework by which market information is made available to investors, end the monopolies and create a new system based on fairness and competition.

    Thank you very much for the opportunity to testify, and I'd be happy to answer any questions later.

    Chairman BAKER. Thank you, Ms. Dwyer.

    Our next witness is the CEO of Archipelago Holdings, Mr. Gerald Putnam.

    Welcome, Mr. Putnam.
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    Mr. PUTNAM. Good morning, Chairman Baker, Chairman Oxley, Vice Chairman Ney, and Ranking Member Kanjorski.

    Chairman BAKER. And you'll need to pull that mike pretty close. They're not that sensitive.

    Mr. PUTNAM. OK.

    In late 1996, I founded Archipelago, along with software developers MarrGwen and Stuart Townsend.

    Today, it's a leading electronic communications network or ECN, whose owners include Goldman Sachs, E*Trade, J.P. Morgan-Chase, Instinet, Merrill Lynch, and CNBC.

    Archipelago serves a diverse client base and executes upward of 140 million shares per day or roughly 6 percent of NASDAQ's volume.

    Late last year, Archipelago entered into a business alliance with the Pacific Stock Exchange to create the Archipelago Exchange, the first fully open, electronic national securities exchange for both listed and over-the-counter securities.
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    The Archipelago Exchange will be fully integrated into the National Market System and will compete toe-to-toe with the New York Stock Exchange, the American Stock Exchange, and NASDAQ.

    Our trading rules, which reflect market structure of the exchange were published in the Federal Register by the Securities and Exchange Commission in December of 2000, and we recently submitted our responses to the SEC to comment letters on our rules.

    In the end, with plenty of elbow grease and some good fortune, we trust the Archipelago Exchange will be the first for-profit, technology-driven exchange that levels the playing field for all investors by combining greater transparency, faster speed, and lower cost.

    Former SEC Chairman Arthur Levitt has called market data the ''lifeblood of markets.'' Today, market data in our equity markets is governed and controlled by a Government-mandated, anachronistic, and static structure: the National Market System Plans. Although organized with good intentions and noble purpose, we respectfully submit that the NMS Plans, the CTA/CQ Plan for listed securities and the OTC/UTP Plan for NASDAQ securities, must be fundamentally improved.

    Why? Because the plans are exclusive providers. Any vendor or broker-dealer that supplies data to the investing public must contract with the plans. Further, the plans engage in ratemaking, albeit subject to SEC oversight. Surely, the words ''exclusive'' and ''ratemaking'' sound funny and out of place in a world that has so benefited from prudent deregulation.
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    Market forces neither impact the plans nor provide incentives to offer competitive rates. Instead, vendors and broker/dealers are presented with the classic Hobson's choice: doing business based on monopolistic terms or not doing business at all.

    In this sub-competitive environment, valuable market data is sold to vendors and broker/dealers and then distributed to millions of retail and institutional investors, forcing investors to pick up the tab for non-competitive pricing.

    Without competitive forces to discipline markets, economic distortions result. No one really knows if market data fees are too high or too low.

    What we do know is that they're not tied to value. More troubling is that innovation within the market for data provision is not rewarded. Exchanges have little incentive to bring innovative data products to the market, because data dissemination is regulated by the ''Vendor Display Rule,'' a one-size-fits-all mandate.

    The Archipelago Exchange is currently negotiating with the National Market System Plans, in essence, to join the fraternity. Absent initiation, Archipelago cannot do business as an exchange.

    Ironically, the most difficult task about creating a new exchange isn't the enormous time and expense of drafting 700 pages of rules, or responding to public comments or regulators and clients about your market structure.

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    No, the most difficult hurdle or barrier to entry is the hazing process that a new entrant must endure to join the NMS fraternity, which is composed exclusively of competitors.

    As with all frats, a single blackball veto right is part of the governing rules. And we have experienced dealing with the NMS recently.

    A recent example: our staff was recently told by the staff of the New York Stock Exchange that the exchange interprets the ITS Plan to severely limit the ability of participants to use computers to place its orders into ITS.

    The New York Stock Exchange strongly suggested we change our market structure to include a time probe, where the Archipelago Exchange would delay accessing other markets to hold that order up for a predetermined time, such as 15 or 30 seconds. The purpose of this holdup would be to allow the marketmaker to manually interact with the order.

    We believe that we do probe our market, but we do it electronically. Think of it in these terms. Suppose American Airlines, through the authority of the FAA, informed United Airlines that it would no longer be in regulatory compliance if United's pilots use computer autopilot, because American's pilots chose not to use it. ''You're out of business, United, unless you do it American's way.''

    Can anyone name another industry with this type of never ending hell week initiation is imposed as a precondition of joining?

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    We respectfully suggest an overhaul to the current system where sunshine is cast on ''ancient fraternal rights'' and competition is injected to allow market forces to play a central role in the collection and dissemination of market data.

    Some observations and suggestions:

    First, competition among marketplaces must replace ratemaking by a committee of competitors to provide value, and vendors must be allowed to pay for data based on value. Instead for forcing vendors to contract with NMS utilities, allow vendors to contract with any number marketplaces directly and let marketplaces sell data to vendors at prices that the market will bear.

    Second, the type of data that a marketplace can sell to a vendor should not be regulated. Rules that prevent or disincent a marketplace from providing additional value such as full depth of book, have no place in securities regulation.

    Third, while we are true believers of competition in the data market area, prudence suggests a transition period under which the NMS utilities would continue to function. These utilities can help ensure a soft landing as we move to a competitive model so that consolidated information is not lost before new competitors have had an opportunity to build their business.

    We expect the NMS utilities to wither on the vine as more in-depth competitors enter the marketplace.

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    Finally, NMS Plan participants should be barred from using fraternity rules as a license to affect the business model or value proposition of new entrants. Such participants must be continually mindful of their mandate in no way includes determining the market structure of new exchanges.

    If necessary, the plan should take action to change their governance to reduce the potential for conflicts of interest. The SEC must be vigilant in protecting against the misuse of NMS Plans to deny investors innovative marketplaces. Thank you.

    Chairman BAKER: Thank you, Mr. Putnam.

    Our next witness is the Executive Vice President and General Counsel of the NASDAQ Stock Market, Mr. Edward Knight.

    Welcome, Mr. Knight.


    Mr. KNIGHT. Thank you, Mr. Chairman. It is a pleasure to be here. And thank you Members of the subcommittee.

    Obviously, this is a very complex subject. We could spend hours describing the rules that apply here, how the market works.

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    What I'd like to do is just try to make a few basic points about how NASDAQ approaches this issue.

    In particular, I call your attention to a white paper that we attached to my testimony today which outlines, in some detail, the recommendations NASDAQ has made to the Seligman Committee, which is looking at this issue on behalf of the SEC. It's chaired by a distinguished professor of law who is considered one of the leading experts in securities law, and we and many on this panel have been working with that committee to try to come up with new solutions to this issue.

    In particular, though, the topic of this hearing today, Competition and Transparency, are two issues that we take very seriously at NASDAQ and which frankly we believe are at the heart of the success that we've had over the past few years.

    I would like to focus on what we consider seven key issues and facts, if you will, that frame our thinking in this area.

    First, in terms of the history of our market, the NASDAQ Stock Market is what it is today because of the very intense competition between various stock markets and, because of our focus at NASDAQ on transparency or the wide dissemination of information to the public as the best method for us to compete.

    Because of this single-minded emphasis on transparency, we believe that NASDAQ delivers the highest quality market to the investing public today.

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    Others at this table have other views.

    We're out there competing every day about our market. If we can continue to deliver such transparency and quality, the investor will return tomorrow. That's the test, quality every day, and we focus on it day in and day out.

    Second, I need not remind you that just 30 years ago, we were a tiny part of the U.S. economy, an insignificant part of the process of price discovery.

    Today, we are the largest electronic, screen-based market in the world, listing over five thousand companies. In the last 15 years, we have facilitated the raising of over $480 billion for companies with employees in each of your districts.

    This has not been an accident that we grew. More than anything else, our growth happened because we try to think first about the individual investor and their needs.

    That is why we get 40 million hits a day on NASDAQ.com, our website. That is why the individual investor pays only one dollar a month to get an unlimited number of real-time quotes and trade information.

    You only need to compare that with, for instance, your internet providers monthly bill of $21.95 to understand our commitment to getting information to the American investing public.

    Or compare our one dollar for an unlimited number of transactions to the $1.50 for a customer to get access to his or her money through an ATM machine.
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    In fact, an investor need only click on NASDAQ.com or any of hundreds of other websites and get 15-minute delayed information for free. That is one reason why most investors pay nothing for their market data.

    Our belief in transparency can also be found in how we sell our information products to the investing public. Just click on NASDAQ.com, which I did last night and printed out what is on that page.

    It lists all our data policies, our pricing policies on data, the market vendors, the agreements. It is all there on our website on trader.com, and the list of prices have undergone a rapid reduction over the last few years, a 50 to 80 percent reduction in our most critical fees.

    And, as I said, it's right there on our website.

    We understand that one of the critical reasons why so many individual investors have invested in NASDAQ stocks is the ease with which they can access information about our market.

    We're not standing still with this. We are looking for ways to improve our market and in January, with the support of many Members of Congress, the SEC unanimously approved SuperMontage, the next generation of the open access, fully transparent NASDAQ stock market.

    We're making substantial new investments in this technology. It won't be easy to build. It will cost hundreds of millions of dollars. But in the end, we believe the U.S. investor and the U.S. economy will benefit.
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    Fourth, you need to focus, I would respectfully suggest, on the fact that certain market participants have decided that to attract more customers, they need to offer information from our market for free. That is their choice, and they make up that cost in other services and fees.

    But a choice of a particular business model by one or a group of competitors should not drive important aspects of economic policy or market structure in one direction or another.

    Fifth, the value of our market data cannot be divorced from the quality of our market and what the market delivers. Market data value is inextricably tied to market structure, to our technological efficiency of our market platform, to the quality of our surveillance and regulation, the quality of the companies on our market.

    Attached to my testimony is an exhibit which describes in detail where we believe we add value to market data.

    The SEC put it this way in its Market Data Concept Release, and I quote:

    ''Information is worthless if it is cut off during a systems outage, tainted by fraud or manipulation, or simply fails to reflect accurately the buying and selling interests in a security. Consequently, there is a direct connection between the value of a market's information and the resources allowed to operating and regulating that market.''

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    Sixth, the process of establishing fees for market data is fair and it protects the public interest. Let me just briefly describe it. There is another chart which lays it out in detail in a graphic attached to my testimony.

    At a minimum, before we can charge a fee, we must submit our fee proposals to an outside advisory committee and then to our board, where I may point out that Schwab has an executive who sits on NASDAQ's board.

    We must have at least one-half of its members drawn from representatives of the public or non-industry groups as a matter of law. Once we have received these approvals, we then must submit that to the SEC for approval, and they notice the public fully about this, and the public has an opportunity to comment.

    This is a time-consuming and difficult process.

    Chairman BAKER. Can you begin your summation, sir?

    Mr. KNIGHT. Yes.

    Chairman BAKER. Thank you.

    Mr. KNIGHT. Finally, I would point out what I started with, which is that we are proposing significant changes in the current system. We have described those in the Seligman Committee white paper. We believe they will bring more competition to this process, but we ask the subcommittee, look at what these markets have delivered to the American economy and the American public in terms of growth over the last few decades.
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    Thank you very much.

    Chairman BAKER. Thank you very much, Mr. Knight.

    Our final witness, representing Bloomberg Financial Markets, is Mr. Stuart Bell.

    Welcome, Mr. Bell.


    Mr. BELL. Thank you, Mr. Chairman.

    Mr. Chairman and Members of the subcommittee, my name is Stuart Bell and I'm pleased to have the opportunity to testify on behalf of Bloomberg Financial Markets regarding the critical issue of access to market data.

    Bloomberg Financial Markets provides multimedia, analytical and news services to more than 150,000 terminals used by 350,000 financial professionals in 100 countries worldwide.

    Bloomberg tracks more than 135,000 equity securities in 85 countries, more than 50,000 companies trading on 82 exchanges, and more than three million corporate and municipal bonds.
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    Our clients include most of the world's central banks, as well as institutional investors and broker/dealers, commercial banks, and U.S. Government agencies.

    Bloomberg Financial Markets also provides the services of Bloomberg Tradebook, an electronic agency broker serving institutional investor and other broker/dealers. Bloomberg Tradebook is one of the largest electronic communications networks, regularly matching orders in excess of 100 million shares daily.

    In short, as both a vendor and an ECN, Bloomberg is acutely aware of the critical importance to investors and the markets of access to market data.

    And as Chairman Oxley reinforced today, this data is the oxygen of the market. Like oxygen, it is essential; unlike oxygen, it is not free.

    It defies basic economics to argue in any business context that in excess of $400 million in fees annually can be levied without the lion's share of those costs ultimately being passed on to the consumers and investors.

    As you know, before the 1970s, no statute or SEC rule required self-regulatory organizations, SROs, to disseminate market information to the public. Indeed, the New York Stock Exchange, which operated the largest stock market, severely restricted public access to market information, particularly its' quotations.

    Markets and investors suffered from this lack of transparency.
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    The Congress responded by enacting the Securities Acts Amendments of 1975, facilitating the creation of a national market system for securities with market participants required to provide for each security which in turn was to be consolidated into a single stream of information disseminated to the public.

    The Congress clearly recognized the dangers of data processing monopolies. To protect the public, the Congress envisioned that securities information processors would be regulated in the same strict way as public utilities are regulated, so as to avoid abuse and undue expense, and to increase price transparency.

    The potential for abuse of that monopoly status looms larger today than it did in 1975. At present, most SROs are non-profit organizations. The NASDAQ, however, has largely completed its privatization of NASDAQ and it may well be that other privatizations will follow.

    Non-profit SROs have exploited the opportunity to subsidize their other costs through market information fees. As for-profit entities, the incentive will be even stronger to exploit this Government sponsored monopoly over market data by charging excessive rates and using those monopoly rents to subsidize their competitive businesses.

    This threatens to hurt investors and compromise the efficiency of the markets in many ways. Investors will be forced to pay excessive monopoly rents for market data. Investors will be denied a level playing field that would otherwise exist in the absence of those monopoly subsidies.

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    Investors will also lose as major market players, comfortable as Government sponsored monopolies fail to innovate, leaving American markets vulnerable to future off-shore competition.

    Recent regulatory developments in the corporate and municipal bond markets underscore the absence of an economically efficient policy on market data that would benefit markets and investors and raise concerns regarding the possible resolution of these issues in the equities market.

    A little over a year ago, the NASD, operating through its' wholly-owned subsidiary, NASDAQ, filed a proposed rule change with the SEC to create a corporate bond trading, reporting and comparison entry service, the TRACE proposal.

    As approved a few weeks ago, the proposal creates a Government sponsored monopoly in bond data, just when NASDAQ has been transformed into a privately owned, for-profit entity.

    Under the TRACE proposal, the SEC has granted the NASD an exclusive franchise by mandating, with only limited exceptions, that all NASD members report their corporate bond transactions to the NASD.

    Is a de facto monopoly in this field necessary? The answer is a resounding NO. Credible, highly capitalized market participants are ready to consolidate bond market data if competition is permitted to replace a Government sponsored monopoly in this area.

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    Numerous market participants filed comment letters asserting that open network technology has made it possible to collect and disseminate price information without a central monopoly provider.

    Indeed, Bloomberg and the Philadelphia Stock Exchange have actually made such a proposal.

    The current debate over the nationally recognized municipal securities information repository, or NRMSIR, raises similar troubling issues.

    The Municipal Securities Rulemaking Board, the MSRB, recently proposed, for example, that all the NRMSIRs give to the MSRB all the data they had independently gathered, sorted, and analyzed.

    While billed as a voluntary initiative, it is disconcerting that the MSRB would argue that compilations of data gathered after enormous expenditures of private time and money should be considered free for the taking.

    In conclusion, the current market data policy in the United States, on both the equity and bond sides, does not promote competitive market forces which would benefit investors and markets. Bedrock changes in our markets over the past quarter century demand a thorough congressional re-examination of the 1975 amendments, including the provisions on market data.

    We believe the competitive provision of market data should be encouraged to the maximum extent possible. The greater the transparency, the greater the opportunity to unleash market forces for the benefit of investors.
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    Thank you.

    Chairman BAKER. Thank you, Mr. Bell. We appreciate your participation.

    Mr. Britz, I will start my questions with you with a couple of statements, one with regard to the reading of the 1975 Amendments and the requirement to provide information on a fair, reasonable, and non-discriminatory basis.

    I understand there is considerable discussion as to whether the intent of Congress at that time was to ensure that the information was provided on a cost reimbursement basis to the providers or whether, in fact, it was intended to be the significant revenue stream which, in fact, it has become today to the various exchanges.

    I tend to lean toward the side, given the importance of this technology, that it is something that should be provided at the lowest possible cost without net loss to the exchange.

    Second, in discussion with Chairman Greenspan a few days ago in another committee hearing, I asked the question of the Chairman relative to the transparency of markets and disclosure of information. How should we view this commodity in the current construct of the market?

    To which he responded, ''I think with technology accelerating as it has over the past 5 to 7 years, we've seen a more rapid response.''
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    Indeed, that's the issue which I was speaking to earlier, meaning transparency.

    The issue of disclosure gets down to the conflict between the obvious necessity of transparency, as you have put it, and the question of property rights.

    Because one of the reasons why you get a lot of disinclination on the part of various players not to want to disclose is they presume that what they have is a vested property right, skipping over.

    And I think it necessary to make the judgment, do they have the right to that float, as he calls it, whether it's information market data, or otherwise.

    And in most instances, I think you're going to find that the answer is no.

    In the course of your description of your activity, you indicated that today it is your belief, I think—and I'm asking for clarification—that the net cost to the exchange in providing market data today is a very expensive proposition.

    Can you tell me that you have identified a cost allocation to your operation for the provision of market data to customers, and if so, what relationship does that cost basis have to the fee currently assessed?

    Mr. BRITZ. Mr. Chairman, it's very difficult to make some of these arcane allocations and decisions when you have joint products.
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    Economists would describe the production of market data, on the one hand, and the execution of two or more investors' transactions, as joint products.

    What are we really doing? Are we executing investors orders and the price is a byproduct?

    Or is, in fact, the execution the byproduct and the price is the real product?

    What I can tell you, even being rusty viz a viz my old cost accounting days, is that when you look at the cost that the stock exchange has in terms of both executing that transaction and the production of market data, which are very difficult to separate, the cost of that activity exceed the revenues to the stock exchange of both market data revenues and transaction charges.

    So, as rusty as I am on cost accounting, even I can very quickly come to the conclusion that market data at the New York Stock Exchange—and I'm emphasizing NYSE—operates at a significant loss.

    In your comment, you talked about not operating at a net loss to marketplaces. Today, we already operate at a net loss.

    We actually have somewhat mixed feelings.

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    Chairman BAKER. Let me jump to that point. If we can't allocate a specific cost to the activity because it's inherent with the transactional side, how can we state that we know we're operating at a loss if we haven't got a cost center identified?

    Mr. BRITZ. Because, first of all, you can make those allocations, Mr. Chairman, but I would suggest to you that they would make the current debate and discussion of market data pale in comparison.

    Chairman BAKER. Let me do this, and I don't want to cut you off, but I have to, because I'm going to hold a 5-minute rule here and I'm just about out of breath.

    My point is, is you can't specifically allocate the cost, what relevance is there then to the board's consideration of fee reduction. It would have to be to your overall revenue stream and not to the fixed-base cost of the activity which creates this problem for me.

    This subcommittee's very intent on seeing a fee reduction on the Section 31 side, because we've identified on the SEC side that the charges related to service are far outstripped by the fees being generated.

    So we're going to take, I think, action on this subcommittee to reduce fees, because it's inappropriate to the level of charge, Section 6, 14, 15, 31, whatever we do, based on that presumption, which I assume that New York and NASDAQ exchanges would strongly support.

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    But at the same time, we're looking at this issue and saying that there's no relevance between the fee being charged and the actual cost of the operation, and therein is my difficulty with the subject.

    Mr. BRITZ. What I meant to say, Mr. Chairman, is that if you are to separate the joint products, order execution and production of market data, it inevitably involves somewhat arbitrary allocations.

    But there's no question that putting the two together, the cost of producing the execution and producing the market data in total exceeds the cost recovery, so there's no question but that each of them independently operates at a loss and combined. The only difficulty is getting into making some of those arcane allocations.

    Chairman BAKER. Well, I understand that there is arbitrariness in the decision process. There may be information that could be made available to us to help better understand, but at the moment, it's a difficult matter to sort out and I think I'll have more to say at a later time.

    I recognize Mr. Kanjorski.

    Mr. KANJORSKI. Thank you, Mr. Chairman.

    Let me first understand this question of transparency. I guess it is a 4-to-2 difference here as to those four witnesses that want to be in a competitive situation of providing this information and the two representatives from the exchanges.
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    The four of you, do you think you get all the transparency you need? Is that what you are worried about? Or is it the contract costs for acquiring it from the exchanges?

    Ms. Dwyer, maybe you should take the first shot.

    Ms. DWYER. OK. Let me just ask you to restate your question so I make sure I understand it.

    Mr. KANJORSKI. Is it a question of not getting adequate information in time, or is it a question of having to pay for the information you are getting from the exchanges?

    In other words, if we find another way to pay for it, are you satisfied that you will not want any other changes?

    Ms. DWYER. I think that pricing is going to be a function of how prices are set.

    And our major concern over the past several years, due to a variety of experiences we, as a firm, have had with the cost of market data, have led us to the belief that the setting of the prices, transparency of that process, the cost inherent in that process, is more important to fix than the actual level of price of the data itself.

    Mr. KANJORSKI. So, you basically want the data so that you can analyze whether it is an adequate reflection of real price?
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    Ms. DWYER. We think sunshine, we think the whole industry needs to see what each is paying for market data and why.

    Mr. KANJORSKI. Make the assumption that none of you had to pay for the data and that it was absolutely free. Would this be acceptable to you? Or is there a lack of transparency in the system that now inhibits your activities individually?

    Ms. DWYER. Well, if the data could be free, and I don't believe there is a free lunch anywhere, then I don't suppose it would be very relevant how the CTA collected and consolidated, as long as they were doing a good job in ensuring accurate data.

    Mr. KANJORSKI. In other words, with the standard out there by the exchanges, you are getting adequate information. Your complaint is that you have to pay for it, and you have to pay by some arbitrary contract that may not be equal to what your competitor has to pay. Is that correct?

    Ms. DWYER. I think we are not concerned that we have to pay for it. We think there's a cost to gathering the data and collecting it. That's never really been the issue.

    The question is, what is the cost and how is the system administered.

    Mr. KANJORSKI. Right. But you would not care about what those costs would be if it were free to you?
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    Ms. DWYER. Free, there wouldn't be a cost, so yes.

    Mr. KANJORSKI. Well, it would still cost the exchanges.

    Ms. DWYER. Well, we recognize that, or to anyone who consolidates data.

    Mr. KANJORSKI. So you are really worried about getting this information free. Would that solve everybody's problem, Mr. Bell? Would that solve Bloomberg's problem if we gave it to you free?

    Mr. MACDONALD. I'd like to address that, if I could.

    Mr. KANJORSKI. Go ahead.

    Mr. MACDONALD. Let me give you an example. We do not have transparency today and we need it. The individual investor is discriminated against.

    Mr. KANJORSKI. So, getting the information for free would not satisfy you?

    Mr. MACDONALD. No.

    Mr. KANJORSKI. What do you want?
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    Mr. MACDONALD. I would like to be able to give real-time streaming quotes to my customers, but there are administrative burdens to that. I mentioned in my testimony that the subscription agreement——

    Mr. KANJORSKI. Do you want to tap into the exchange's computers to see exactly what transaction is being processed in real-time as they are apprising you of the information?

    Mr. MACDONALD. Yes, I would like my customers to——

    Ms. DWYER. We already do that.

    Voice. We do that today, Congressman.

    Mr. KANJORSKI. OK, then what I am trying to ask is what more can they give you?

    Mr. MACDONALD. I actually disagree with that, both on a delayed quote basis. The New York does not, on a delayed basis, give us quote, the bid and the asked. They will only give us the last sale, so I respectfully disagree with that.

    Mr. KANJORSKI. So, if you got the bid and the ask price, would you be happy?

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    Mr. MACDONALD. That would be one thing that would make the playing field level.


    Mr. MACDONALD. The second thing would be, with the innovation with the internet, there are clearly rules that are impeding the innovation, and I have a big problem with that.

    Mr. KANJORSKI. So, if we were to lay down some system that says it is free to anybody that wants it, and there are no contracts that you have to enter into, because it is absolutely free and there is no reason to have a contract, are you satisfied?

    Mr. MACDONALD. No. There are other rules. I mentioned the way that we have to then obtain subscriptions from customers because there are still some rules in place.

    Assuming they went away, all these rules.

    Mr. KANJORSKI. Those rules would go away if you did not have individual contracts.

    Mr. MACDONALD. My goal is to get the best information to my customers in the best way.

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    Mr. KANJORSKI. Now to the two exchanges: I know you cannot give us an absolute cost estimate, but it does seem to me that the end product here is a result of the business you are doing. If you did not have the sale, you would not have the information, so there is a way to recapture most of the cost here, and this is sort of an add-on information that you are selling.

    But assume that there is—and there is—some cost for it. Can you provide me a ballpark figure on the real cost for the two exchanges on distributing this data information? One-hundred-million dollars? Two-hundred-million dollars?

    Mr. BRITZ. No. The cost of production and transaction processing at the New York Stock Exchange is in excess of $400 million.

    Mr. KANJORSKI. Four-hundred-million dollars.

    So if you had $400 million, you would be happy to give these other four people everything they wanted?

    Chairman BAKER. And if I can jump in here, Paul, to help on that point, if it's $400 million, I would hope you would ask him to give us something that says how they allocate those expenditures, and I'll give you a couple more minutes.

    Mr. BRITZ. Mr. Chairman, that's in our annual report in the income statement that we produce every year.

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    Chairman BAKER. So Members of Congress could understand it.

    Mr. KANJORSKI. OK. If we could get some sort of cost analysis breakdown, that would be helpful.

    Now, let us go to NASDAQ. Do you have an estimate of what it is going to cost?

    Mr. KNIGHT. I would answer the question this way, Congressman. We really believe the total operation of the market is, and its integrity is tied directly to the value of the information.

    We would allocate all of our costs. It is our market and the fact that the people have interest in that market, that that information has value. We drive orders together. We allow the execution—we create liquidity. That is why the information is valuable.

    And Congress requires us and the SEC to meet certain regulatory standards that bring integrity to that information.

    Mr. KANJORSKI. But make the assumption that we have the power or could find some way to say this is not your intellectual property—that it is public information and that we can force you to put it out.

    What does it cost to distribute that information? What is the loss to the NASDAQ if we do that?
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    Chairman BAKER. And that has to be his last question and sum up, please.

    Mr. KNIGHT. I really don't know, Congressman. I would be guessing and speculating. I would say that all of our costs are focused on delivering a quality market. A quality market is what creates that information.

    Chairman BAKER. And let me add on to Mr. Kanjorski's point with my question.

    The subcommittee really wants to understand what the costs are that are identifiable associated with this activity if we're to be making an informed judgment.

    Mr. Chairman.

    Mr. OXLEY. Thank you, Mr. Chairman.

    Let me commend the panel for what I think is an excellent presentation and some very good give-and-take, both in their statements, as well as their response to questions.

    Let me refer to Mr. MacDonald's testimony, which I think makes an interesting point, and one that I believe really gets at the heart of the matter.

    He stated—and I invite all of our witnesses to comment on this—that, ''SROs exercise governmental rights to collect market data fees from market participants, and then fund for-profit operations which compete directly with the market participants from whom they have authority to collect the fees.''
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    Very provocative, very interesting. I suspect that, Mr. Britz, you may have a different cut on that.

    But why don't we go down the panel? I'm assuming that Mr. MacDonald still believes what he said a few minutes ago, so we'll skip him and go right down the panel.

    Mr. MACDONALD. Even more fervently. I would like to add one other point to that, and there may be another revenue that we have not considered that the exchange is getting when issuers list with the exchange, one of their expectations is that the prices will be shared. So, in fact, that is another contractual issue we should look at and another revenue source.

    Mr. OXLEY. Mr. Britz.

    Mr. BRITZ. Mr. Chairman, I would go back to what I said earlier. Market data at the New York Stock Exchange operates at a loss and therefore it's in no position to subsidize anything, much less anything that might be competitive with our member firms.

    I would add one other point, and I think it's a large point that perhaps is being missed. Market data fees are where they are because it is a consensus of the broker/dealer industry that they be where they are.

    We don't see on this panel, Merrill Lynch, Smith Barney, Paine Webber, Prudential Securities, and many, many other firms. I can tell you that by definition, because those fees are where they are, it is the consensus of the brokerage industry, through their representatives on the various SRO boards, that they are about right and that this is an appropriate way to fund the operations of the NYSE, in my particular case.
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    And they are free, back to the question that was asked earlier, to change or indeed eliminate market data fees any time they care to.

    But the effect of eliminating market data fees, which at the New York are at about the $130 million level, gives you $130 million toothache that you then have to find a substitute for. So then the consensus is about, ''OK, how do we tax to recover that $130 million? Who are the winners and who are the losers?'' And that's a consensus process.

    Mr. OXLEY. Ms. Dwyer.

    Ms. DWYER. Well, it's absolutely correct that we are required by statute and SEC rules to send all of our customers quote information to the exchanges, even quotes and trades that we do away from the exchange go to the exchange.

    Funding the exchange I don't believe was one of the objectives of the 1975 Act amendments. The discussion, as I recall from reading the legislative history around those Acts, were about breaking open the exchanges' single-source monopoly and providing consolidated data. Combining the data streams from all the exchanges, which had been excluded from the kind of public view the New York Stock Exchange had.

    So there is language. The statute is ambiguous. There is language about whether the exchange needs to use a cost-based analysis to recover its fees.

    But I do not believe you will find anything that indicates it was intended to be a profit center, or that funding the exchange itself was one of the objectives. It has always been a pretty robustly solid financial institution on its own.
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    I think the point about requiring us to send the data, then marking it back up to us to display it to our customers, one point that has puzzled us is that the exchange and the NASD have announced that they are going to provide market data for free on their websites, which is puzzling in that we need to pay for it. We compete with them on many fronts.

    And, you know, we don't understand under the SEC rules or the statute, the ability to provide that data outside the confines of the plan, which the SEC approves, and to give it away for free while, you know, in order for us to provide it for our customers, we have quite a high cost.

    Mr. OXLEY. Thank you.

    Mr. Putnam. Let's try to make this brief, because we're running out of time.

    Mr. PUTNAM. OK. You know, it's funny. We think a big part of the problem is the plans themselves, the plans that were designed to protect investors.

    And we strongly support the New York Stock Exchange's effort to break away from the plans and to get into a competitive environment where you can start to get the expenses and revenues in line like a business would, and to allow some other competitors into the marketplace.

    What I mean by a problem with the plans, the ECNs, which are very much like exchanges, are providing data for free to Yahoo and Three-D Stock Charts, for example, on the internet, and those bids and offers are made again available for free.
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    But the plans prevent us, or prohibit us, from actually providing additional information, like last sale information for free. So we think that we need to, as Carrie said, shed some sunlight on the plans, not just in how the pricing is determined, but how the plans operate. Inject some competition into the process and start running these things more like businesses.

    Mr. OXLEY. Mr. Knight.

    Mr. KNIGHT. Mr. Chairman, we proposed that the plans be changed. We have proposed an alternative we call the Market Choice Alternative which would create alternative mechanisms to create this information and inject more competition into this marketplace.

    We're perfectly comfortable with that. We think that's the direction to go. Less regulation is what's needed here; more competition. And we think there is a way to do that using the existing statutes, and that is an idea that we think will also create the possibility for lower cost to the investor, and more innovation in the types of information that are available to the individual investor.

    Mr. OXLEY. Mr. Bell.

    Mr. BELL. I guess I would just follow up with what Ms. Dwyer was saying. I think that it is a concern of ours that in this environment where SROs are becoming for-profit organizations, and you have situations like free real-time data on websites that is different from what we could provide, because we'd have to pay for it, or what I mentioned, the trace situation with corporate bonds.
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    Again, the NASD and NASDAQ now have a monopoly where there isn't one presently, so I think that's of great concern.

    Mr. OXLEY. Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Chairman, for your participation.

    As is the custom, we will recognize Members by seniority on time of arrival on the Democrat side, just so people have a heads up here, the next four folks are Bentsen, Mascara, Sherman, Shows.

    On our side, it is Ney, Shays, Royce and Weldon.

    Mr. Bentsen.

    [No response.]

    Chairman BAKER. Mr. Bentsen has gone.

    Mr. Mascara.

    Mr. MASCARA. Yes. Thank you, Mr. Chairman.

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    Just a couple of observations. One, it's good to see that the monopolies are alive and well. During the past 6 years with the mega-mergers, I was going to ask Webster to remove the word ''monopoly'' from the dictionary, so I'm glad to see that everybody's referring to the New York Stock Exchange as a monopoly.

    I'm curious as, in my former life, I did accounting. And I noted, Mr. Britz, you said that it was impossible to ascertain what the costs were.

    I mean, having done a little bit of cost accounting at cost centers, somehow you should be able to break down the execution costs and costs of providing the market data.

    Are you saying that the New York Stock Exchange does not have the ability of ascertaining that information?

    And if so, I suggest you change accounting firms.

    But go ahead.

    Mr. BRITZ. Congressman, I didn't mean to say impossible. I meant inevitably—cost accounting, as you undoubtedly know, is an art, not a science—it inevitably involves making determinations as to what categories of cost ought to be included and what allocation of those costs you ascribe to market data on the one hand to the execution of the transaction on the other hand, and possible other functions.

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    You can clearly do it, but it's going to be assumption-driven, and my comment was I think it would raise the decibel level of this debate, the debate over those allocations and those categories of costs. Not at all impossible.

    Mr. MASCARA. OK. Because I was going to say, if I'm on the other side, and I see that you have many more people there that oppose those fees, if they're going to be charged a fee, they like to know that it's a fair fee and it is representative of the cost the New York Stock Exchange is absorbing.

    So I think they would take more comfort if your answer had been, yes, we can ascertain that and determine it, and these charges are based upon that information.

    Mr. BRITZ. I would imagine that's true, Congressman, but I wonder if it's not naive to think there would ever be consensus surrounding those assumptions and those allocation determinations that have to inevitably be made to produce a profit and loss statement to everyone's satisfaction.

    So I'm skeptical that it can happen. It's clearly not impossible to produce a P&L statement.

    Mr. MASCARA. The other observation was I would like to have seen someone from the SEC that we could have asked questions of.

    And that leads me to the next question, Mr. Britz. I understand that the SEC Advisory Committee on Market Information is currently examining many of the issues that we are discussing here today.
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    It seems to me that our subcommittee should wait for the recommendations of the experts, whatever that means, on the SEC's Advisory Committee, before considering any legislation on market data.

    After all, we are not experts. I'm here exploring new ground for me. But don't you agree that we should review the Advisory Committee's recommendations before determining whether to legislate in this area?

    Mr. BRITZ. Well, I would never be so presumptuous as to advise this subcommittee as to what it ought and ought not to do. I would say that the Seligman Committee is 25 professionals from around the securities industry, both the buy and the sell side, various types of broker/dealer firms, not simply one category around that table. The vendor community is around that table, and various academics representing the public are around that table as well, so there certainly is a wealth of expertise around that table.

    I don't have the clarity of vision to know what the end product of this committee will be. But I think it will be an interesting and a provocative and thought provoking one.

    Mr. MASCARA. Well, thank you, Mr. Britz.

    And thank you, Mr. Chairman.

    Mr. BAKER. Thank you, Mr. Mascara.
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    Mr. Ney.

    Mr. NEY. Thank you, Mr. Chairman.

    The question I had of Mr. Knight.

    If we change the market distribution system into a competitive model, would any loss in the total revenues created by restructure of the market data system be passed on to the consumers?

    If so, what impact would that have on the investors who invest in the market?

    Mr. KNIGHT. If you're asking about our market choice alternative, it's our belief that competitive forces exist now that if the National Market System Plans stepped back and allowed those forces to play out, people would step forward to put together the national best bid and offer, and that other competitors would spring up and that that is the best mechanism to go.

    And that that will result in lower prices for the investor for this information, and better information because of innovation and competition. That's a system we're willing to work with.

    The existing one is the product of circumstances that may have passed in the 1970s, where this information wasn't coming together. But in the end, people need to recognize the reason the SROs were given the responsibility is because, and explicitly in the statute, Congress had a concern about the integrity of this information, and we live under regulatory requirements that broker/dealers and other vendors of information don't have to carry.
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    Mr. NEY. Well, the SROs could recoup, because they'll be selling the data because the SROs would have a recourse.

    I'm just saying though that the consumers and that cost passed down, does that increase costs and how does that affect——

    Mr. KNIGHT. I would think that with more competition, the costs would go down.

    Mr. NEY. OK.

    Mr. BRITZ. Congressman, if I may come at that in a different way. If your question is, in my shorthand, if you vaporize market data fees, will that have an impact on the operations of the exchange, or more importantly the ultimate end customer.

    And I don't know the categoric answer to that. But back to the $130 million toothache, water seeks its own level, and the most obvious thing that our board would do, without presuming what they would do, is that they would gravitate toward the transaction charge that both we and the over-the-counter market have.

    And that's clearly a charge in the form of brokerage commissions that would inevitably find its way very directly to the end customer.

    Mr. NEY. A question of Mr. Putnam.
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    We're not going to haze you on this question now. I found your testimony very interesting.

    The question I had, if we know, change from a monopolistic structure, and the consumer relies on reliability and trustworthiness of data, would there be anything lost due to competition, as far as reliability of data, trustworthiness of data?

    Mr. PUTNAM. Well, we've suggested that we take an incremental step initially to protect investors from just that. That we wold maintain the current plans to provide a baseline, a minimum baseline of information, introduce competition to the system, and then hope that the utility died.

    If it turned out that market data was a natural monopoly, then we'd have to rely on SEC oversight and antitrust regulation to help determine the outcome on market data pricing. We don't believe that. We believe we're seeing it now.

    The New York Stock Exchange is offering more and more, and they're getting ready to offer a lot more information, and I believe competitive forces have driven them there.

    The same thing on the ECN side of the marketplace. We're offering information for free to investors, as a way of competing with one another.

    So we really think that's the way to get there.

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    Mr. NEY. So you don't have any hesitations, if this was changed from the current structure, about reliability if it was changed?

    Mr. PUTNAM. I think there are other examples in our current market where the SEC mandates a minimum level. So if you have someone who chooses to be a market data consolidator, that they are held to a standard of performance, system reliability, those sort of things, or they wouldn't be able to be a consolidator of data.

    I think we can get to it that way.

    Mr. NEY. Thank you.

    Thank you, Mr. Chairman.

    Mr. BAKER. Thank you, Mr. Ney.

    Mr. Meeks.

    Mr. MEEKS. Thank you, Mr. Chairman.

    Let me just ask your indulgence for a second. This is new to me, sitting on this subcommittee, this particular issue.

    So let me just ask Mr. MacDonald, first. I just want to be sure that I completely understand and ask you, can you explain to me why transparency in the market information is important, first of all?
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    Mr. MACDONALD. Well clearly, you want the investor to be informed about the best bid offer. Mr. Meeks, if you called my broker and you got one of my brokers, one of my registered reps on the phone, and asked him for a quote on AOL, he would give that to you for free.

    If, Mr. Meeks, you dialed into my website, and attempted to get a quote on AOL, you would effectively pay, either directly or indirectly. Directly, because you've signed a subscription agreement to get unlimited quotes, real-time quotes, for $4 a month. Or because indirectly because I'm paying on a per-quote basis.

    So we have a situation that's patently unfair to the individual investors. The system was designed for larger institutions who that sort of cost to them is incidental. It is not incidental to the person who trades periodically once every couple of months.

    Mr. MEEKS. Let me next ask then, I briefly read or understand that the SIA Subcommittee had released a report on transparency and made a recommendation or several recommendations.

    Now I'm trying to figure out I should ask then Mr. Britz and/or the gentlemen from—Mr. Knight, whether or not, did you participate in that subcommittee's report or in the hearings or anything of that nature, or have any input whatsoever in that report?

    Mr. KNIGHT. I don't think we were excluded, but I think it's important to note that that report was not adopted by the SIA, Congressman, in any official way. So I think associating it too much with the position of the SIA would be incorrect.
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    Mr. BRITZ. Congressman, that report was largely a survey of broker/dealers, so I guess I'm not sure how to answer the question as to whether we participated.

    We were aware it was happening. And at the end, we were sent a draft for our comments. So to that extent, yes. But we were not the intended audience of that report.

    And I think what Mr. Knight said is absolutely true. That is a report of a subcommittee of the SIA. When that subcommittee asked the board of the SIA to approve that report, the board declined to do so, and effectively distanced itself from that report.

    Mr. MEEKS. Either Mr. Britz or Mr. Knight, let me then ask this question, and I think it was somewhat asked, but I'm not clear on the answer.

    If say, the current plan structure was completely eliminated, and you, as an individual SRO, were able to sell data individually, how, and could you provide consolidated data and how would you charge for supplying that data?

    Mr. KNIGHT. Well, under the plan we submitted to the settlement committee, we believe the competitive forces that exist now, particularly in the information technology area, because of the demand that the consumer has, that they would pull together, that vendors would spring up to pull together that information for the public because of that demand. And we would sell to those vendors.

    Those vendors would be subject to certain rules from the SEC. Currently, they are called the Vendor Display Rules, and other mechanisms. But what would happen is there would be competitors also spring up to supply the same information, and we believe that competition would set the price as opposed to the cost-based ratemaking or some other Government alternative to setting that price.
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    We believe that is the better way to go.

    Mr. MEEKS. And finally let me ask one of the others, I think I heard someone testify to the fact that one of the drawbacks in the inconsistency of distributing delayed quotes, and mentioned differences between NASDAQ and the New York Stock Exchange.

    My question is, if individual SROs could sell their data independently, would you be concerned about greater inconsistencies in the distribution of real-time or delayed quotes?

    Mr. BRITZ. Well, first of all, if I may correct something that was said earlier, the New York Stock Exchange does not produce delayed quotations. Nothing leaves the Stock Exchange's factory, as it were, that isn't real-time.

    Several intermediaries in the distribution chain, for whatever reason, may choose to delay it along the way, but we're not in the business of delayed quotations. We think that's an inferior product and that's why we've pushed so aggressively to make real-time data more pervasive.

    Viz a viz the quality, this is a tough one. I think that from a pure self-interest point of view, the New York Stock Exchange would like to be able to distribute an NYSE-only product.

    And indeed, based upon a number of discussions with buy and sell side brokers, there's a demand for that product. But I wonder whether—and the tension here is whether you uncouple New York from Philadelphia and Boston and so on, whether or not there is something that happens there that dilutes the integrity of the product.
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    And particularly, whether the end users, and I don't worry about the institutional end users, because they'll get the New York product, particularly whether the less sophisticated end user, who may get a secondary market's bid or offer discrete from another bid or offer in the New York, and whether or not the quality of that information product will be up to what the primary market is.

    So, Congressman, there is a tension there as between just full and complete competition, unbundling of product, and whether or not you somehow deteriorate the quality of the product to the unsophisticated end user.

    Chairman BAKER. Mr. Meeks, your time has expired. Thank you, sir.

    Mr. Weldon.

    Mr. WELDON. Thank you, Mr. Chairman.

    My colleague, Mr. Mascara, asked whether Congress should wait for the SEC's Seligman Committee to produce a report before we act on this issue.

    Ms. Dwyer and Mr. Putnam, you are both participants in that committee. Do you believe Congress should not seek to promote greater transparency in competition in market data dissemination absent the Seligman Committee's report?

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    Is that committee producing results that you believe will lead to necessary reform?

    Could you answer those questions for me?

    Ms. DWYER. Sure. We don't know what the committee will recommend at this point. It's still very much involved in a lengthy discussion of what is actually a very, very complex issue, and essentially is operating to pull the views of a group of 27 or so folks each time we meet.

    I know that Dean Seligman's committed to producing a report on September 15th, but it's a slow process. I don't see anything wrong. In fact, I wholeheartedly welcome this subcommittee's interest in educating itself about this issue.

    Because it is complex, it's not something that anyone would want to act on precipitously, but I don't necessarily—I think the Seligman Committee will probably produce some very interesting results.

    I don't know that anyone needs to wait in considering these issues for that to happen.

    Mr. PUTNAM. I agree with Carrie. It's difficult, at this point, to tell exactly what's going to come out of the committee and there is still considerable disagreement on what we ought to do.

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    And I think if we wait until December, to see what the committee produces, and then for this subcommittee to start to act or examine market data, we're just stalling a process that needs to be looked at now.

    Mr. WELDON. Thank you.

    I just have one other question. The exchanges point out that market data revenues have remained steady as a percentage of total revenues, so why is anybody complaining about excessive market data fees?

    And, Ms. Dwyer, maybe you can tackle that one first, and then I'd like to hear Mr. MacDonald's response to that.

    Ms. DWYER. Sure. Well, just as Bob has had some difficulty portioning out the costs of market data, I don't know much about the revenue situation at the New York Stock Exchange. But I will say that our market data fees three years ago, when the internet first took off, went from about $7 million a year to all the exchanges, within one year up to almost $20 million, that was due to this increased usage that I talked about before.

    Partly due to, I think Schwab can take some credit, also some other people at this table, and people who aren't here.

    Due to the consternation of the huge run up in revenues and costs to us, due to the internet usage of individual investors, the rates have come down. And we've had many negotiations with both the plan operators at the CTA Plan, NASDAQ Plan about that.
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    There has been some accommodation. But in terms of our costs, that has left us basically flat. Because as the costs have come down for individual investor usage, certain kinds of usage, their usage has simply escalated and gone up.

    And we are continuing to develop products such as, you know, real-time portfolio monitoring products, streaming quotes and so forth. As we introduce those, our costs are simply going to continue to escalate.

    And I may say that the costs of our brokers, ten thousand brokers at Schwab, who get market data delivered to them on a terminal, those costs have not decreased appreciably at all over the last several years.

    And somebody mentioned that as insignificant, but when you have ten thousand brokers, it's not an insignificant amount of money.

    Mr. WELDON. Mr. MacDonald, would you like to respond to that?

    Mr. MACDONALD. I would. The innovation of the internet has changed the playing field pretty dramatically in the last year or two.

    So, the cost that we experience is not a fixed cost. It is a linear cost, and those costs are passed on to our customers.

    We, right now, represent one of the lowest price points for customers at eight bucks a trade.
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    I gave you the example where, in order for you to obtain real-time quotes on an unlimited basis, you have to subscribe at $4 a month.

    Half my customers do less than one trade every 2 months. Those customers are, therefore, very disadvantaged.

    I have to absorb those costs, and I already produce one of the lowest price points in the industry.

    So, these costs to me are linear. They are not fixed. They go up with volume usage.

    I think Carrie makes a very good point that the other innovation that is then stifled is, as we start to deliver those products and services that our customers want so they can make more informed decisions—things like real-time charting, real-time portfolio analysis—they are significantly disadvantaged against the institutional investor.

    Chairman BAKER. Mr. Weldon, I am sorry, your time has expired, sir.

    Mr. WELDON. Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Weldon.

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    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman. Mr. Chairman, I apologize for not being here. I had two committee meetings at the same time. Unfortunately, I missed this panel's testimony, and I apologize to you. I look forward to reading your testimony, and I don't have any questions at this time.

    Chairman BAKER. Well, thank you, Mr. Bentsen.

    Mr. Fossella.

    Mr. FOSSELLA. Thank you, Mr. Chairman, and good morning, everyone.

    Mr. Britz, you have testified that the New York Stock Exchange wishes to withdraw from the CTA, and I am curious as to what's the motivation. You touched upon it in your testimony, but, if you can expand upon that a little bit, but also what the implications that you see down the road from that decision, how it would work, how it would be structured.

    Mr. BRITZ. Well, the overriding implication, I think—and this is perhaps something that the entirety of the panel agrees on—is a more competitive environment.

    Congressman, we didn't wake up one day and decide to do this.

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    The CTA, for whatever reason, has become a magnet for—noise, for lack of a better word.

    When that noise comes from a particular broker, or even a couple of brokers, and it is obviously a competitive-positioning kind of noise, we are all big boys and we deal with that.

    On the other hand, when the SEC begins to take that so seriously that it issues a concept release on market data, then it raises questions as to whether or not there is a problem with market data, and goes so far as to suggest, if not propose, possible solutions to the problem.

    Those solutions look like bandaids rather than a straightforward approach to the real or perceived problem, which is the consortia. There are lots of other reasons, not the least of which is what the SEC and the Justice Department have done recently vis a vis another consortium, the OPRA—Price Reporting Authority.

    We became increasingly uncomfortable with our participation going forward in consortia like the CTA.

    Very clearly, if there ever was a reward for the New York Stock Exchange—and it is debatable as to whether there ever was—the risk/reward situation is way of out balance. That is what triggered our decision, and, when you understand that we can withdraw—and that is all we are suggesting, by the way. We are not so presumptuous as to suggest a market data landscape for the industry—we simply want to withdraw, and we know we can do that and continue to meet our statutory obligations exactly as written.
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    That is really what is behind our position.

    Mr. FOSSELLA. What do you envision—it seems like you have a problem with the construction. What are the implications as you see them?

    Mr. BRITZ. I think it might be as simple as the New York withdrawing and perhaps other markets continuing to band together in organizations like CT, in which case the world will hardly notice.

    Certainly, the end customer will never notice. The individual investor or the professional investor hitting the enter key and calling up a bid or an offer will have—will not——

    This will be completely invisible to them. I do think, as other commentators have suggested, you'll introduce competition.

    Someone raised the issue of value here.

    The New York will be able to contract for its own market data, which is a product we have great belief in.

    It can be decoupled or uncoupled from other markets. We can get directly and discreetly at the value of that data.

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    So, I think there are a number of positive benefits. At worst, it will be invisible to the end user. At best, it will have positive benefits.

    Mr. FOSSELLA. Two questions, because I know my time is limited, so I will throw one first at Mr. Putnam.

    In your testimony, you recommend a soft landing. I would like for you to expand a little bit as to where the airport is, for example, in your opinion, and how this soft landing would take place.

    Then, I am still a little confused, which is not abnormal, on this whole issue where one side says ''costs of market data have dropped dramatically and precipitously in decrease.'' The other side is saying ''we haven't seen the benefit of those lower costs and investors are still paying.''

    I am trying to figure out where the money is going, if I can do that.

    Mr. PUTNAM. We think the reason to take an incremental step is, in the interest of investor protection, you should——

    One, brokers need to know what the best bid and offer is across competing marketplaces in order to fulfill their best execution obligations.

    So, in order to guarantee or preserve that—I think I am agreeing certainly with what Bob is saying, is that keeping the exchanges staying on the current system is a way of guaranteeing that the best bid and offer is available.
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    Last-sale information is a good idea. We introduce, at the same time, competition so that New York, ourselves, NASDAQ is free to go and contract with other vendors or to provide the data directly themselves.

    That will introduce competition into the system, and then we no longer have to keep the utility that was created in the 1970s in place.

    Then, ultimately, that will get us to where we will start to competitive price market data.

    As far as commenting on the cost of the data and the cost to the end user, it is really not my area of the marketplace. We generate market data.

    Mr. FOSSELLA. That second question was to sort of anybody else who has heard somebody else comment on fees going down, but costs either remaining the same or——

    Chairman BAKER. If we can get a single panelist to respond to that.

    That wraps up your time, Mr. Fossella. Anybody choose to respond to this?

    Ms. DWYER. I'd be happy to respond to it in case I was unclear before.
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    Some of the fees have been reduced. There are—You know, you would have to see the fee schedule.

    They are very complicated schedules around this. An individual retail customer could choose to subscribe and pay a set fee, as was referred to by Randy.

    They can pay on a per-quote basis. There are a variety of ways of delivering data to customers.

    They are all priced differently. Some of those have, indeed, gone down quite dramatically over the last couple of years.

    But, at the same time, their quote consumption, has gone up geometrically and will continue to do so as people become more and more used to using real-time data.

    If they can have it, they want it. They don't want 20-minute delayed quotes.

    The New York Stock Exchange used to be in the business of selling those.

    They realized several years ago that there is no value in that, and more and more investors are wanting to not look at what their portfolio was like 20 minutes ago, but what it is like right now, especially on a day like today, you can imagine.

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    So, the cost of providing that even at a lower rate continues to escalate for a firm like ours.

    Mr. FOSSELLA. I think I am a little more clear. Thank you very much.

    Chairman BAKER. Thank you, Mr. Fossella.

    Ms. Jones.

    Ms. JONES. Like my colleagues, we—thank you, Mr. Chairman—we all have a number of other committee meetings, and we ran in and out.

    What I didn't hear—and I was trying to flip through your testimony—is what do they do in other parts of the world to deal with this subject matter?

    What kind of costs do they have? Is there anything going on somewhere else in the world that we ought to copy?

    Anyone can kind of respond to that. Did I miss that? We haven't talked about that? Good, OK.

    Mr. BRITZ. They actually do very similar things. I didn't bring it with me. I wish I had and would be happy to supply it to the subcommittee.

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    The Federation of International Stock Exchanges—FIBV—publishes a report on a great many subjects including market data, prices, and fees, and revenues and such.

    You have to look down that column of worldwide stock exchanges for quite a long time before you get to the CT/New York Stock Exchange level of price.

    It is in descending order by price. I should have said that straight away.

    The simple answer to your question is that they do very much like what we do here in the States.

    But, the data worldwide is dramatically more expensive than it is in the States.

    Ms. DWYER. May I also add I think that would be a very interesting set of issues for the committee to look at.

    I think there are some markets that are moving toward a free model.

    I would point out here in the United States the ECNs which are the newest kind of stock market that we have. The majority, if not all, including one that Schwab created a few years ago, give away market data for free.

    We see it as advertising, like, when you walk into WalMart, you are not charged to look at the prices on the cereal boxes.
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    We think it generates business to give it away for free, so we set it up that way, so that would also be something to factor in.

    Mr. MACDONALD. With regard to the costs, one of the recent impositions on the industry—and it was a fairly expensive one to put in place—was the OATS System, which is basically an auditing system so that you know, from cradle to heaven, what has happened to a transaction.

    So, I would ask New York and NASDAQ to speak, that when they talk about cost allocation, I would suggest that we have a very robust, very expensive system to keep track of those things.

    Ms. JONES. What would you propose as an alternative to that system from cradle to—whatever the other word you used?

    Mr. MACDONALD. I think the systems in place, I think, it is extremely robust.

    The point is simply there is a great auditing system for getting at the real cost of this.

    I think that the technology that we have arrived at here in the United States—we are very technologically proficient in these markets—one would argue that those costs should plummet as we become that technologically proficient.
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    Mr. KNIGHT. I would just confirm that our data also shows that the cost overseas, a place like London, for instance, is much higher than here in the United States for similar information.

    Ms. JONES. I yield back my time.

    Chairman BAKER. Thank you, Ms. Jones.

    Mr. Shays.

    Mr. SHAYS. Thank you, Mr. Chairman.

    Mr. Chairman, as a new Member, I want to thank you for holding this hearing and also thank all our witnesses. It is very enlightening to me, and I would say just up front I will probably expose my ignorance, but, hopefully, by the time I have to make decisions I won't be.

    I am struck by the fact—I bring to the table a general view that, if you don't have competition, you have regulation.

    But, the last thing I like seeing is regulation, and I think there is a general consensus that change has to take place.

    My question to the panel is, basically, is this change going to have to take place through legislation, through some decisions by the SEC, or will you all be able to work it out among yourselves?
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    Mr. MACDONALD. I'll tackle that one. The SEC has authority in this case.

    We are supporting that there be a piece of legislation that Congress do mandate that there should be blue sky, that we understand better what the costs and the revenues are.

    If there are excess revenues, then what has happened to those excess revenues?

    Are they going to build in competitive systems that will compete with market participants?

    Mr. SHAYS. Mr. Britz, will you——

    Mr. BRITZ. Congressman, I am perhaps one of the few non-lawyers in the room, so I won't comment on what has to happen from a legal——

    Mr. SHAYS. That makes you first among equals.

    Mr. BRITZ. I won't comment what needs to happen from a legal-process point of view. But, I would tell you that——

    Mr. SHAYS. I didn't ask what needs to happen. I need to know what the mechanism is. Is it going to be worked out amongst you?
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    Mr. BRITZ. We will have shortly before the Securities and Exchange Commission a petition for the New York Stock Exchange to withdraw from the Consolidated Tape Association.

    I have no idea what they will do with that petition. They, in fact, may hold it pending the deliberations of the Seligman Committee, and so on.

    But, if they were to acknowledge that we have provided them or will have provided them with a plan that comports with all of our requirements vis a vis consolidation and disclosure, and certainly the existing CT/CQ plans allow participants to withdraw.

    Mr. SHAYS. This sounds like a more confusing answer than most lawyers would give me with regard to this.

    Mr. BRITZ. OK, sorry. If we withdraw from the CTA, it may be the spark that gets you to a more competitive environment.

    Mr. SHAYS. Thank you.

    Ms. Dwyer. Anybody else care to answer?

    Ms. DWYER. Yes, I would just say I think even the Seligman Committee is the——

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    Some of the things we are talking about would require legislation. Unfortunately, 25 years ago, when Congress looked at this issue, it crafted a statute that described the world as it was. So, when you go to undo something like that, quite often you are going to have to go in and look at the statute. I don't believe the parties are going to work it out among themselves.

    Mr. SHAYS. You say you don't?

    Ms. DWYER. I don't believe so, no.

    Mr. SHAYS. Fair enough.

    Ms. DWYER. It has been a long couple of years. The SEC didn't act on my petition in 1999, so I don't know what they are going to do with Bob's.

    There is a simple solution, and that is to continue a level of regulated disclosure of the NBBO and then have a free market and any other data above and beyond that depth of other kinds of prices.

    Mr. SHAYS. In fairness to disclosure, I happen to represent the 4th District. I am very proud that NASDAQ is there, so I don't want you guys to do anything to hurt NASDAQ, so we will have to——

    Ms. DWYER. We are one of NASDAQ's best customers and one of the New York Stock Exchange's as well.
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    Mr. SHAYS. Mr. Knight, how do you think this is going to be worked out?

    Mr. KNIGHT. We believe that the Seligman Committee is very constructive in the approach it has taken. They are listening to all parties. We believe it is quite possible they will reach a solution here. I think, of course, as we all know, there has not been a chair named to the SEC at this point. I think that is part of the issue here, too, is the SEC's response to that.

    We would want to see what the new commission's views are in this area.

    The way the law is structured, in our view, is sufficiently flexible to deal with the situation, and we think, frankly, Congress should be very proud.

    If you look at Congressional history and the economic history of the United States, the securities laws have served us very well.

    Mr. SHAYS. Right, they have, but I do think—I will say, even with my preliminary look, I do believe that there will be some change, and the question is, what will that be?

    I would question, and let me give you the opportunity to answer it. Do you believe that there is discrimination in pricing? Do you think that takes place?

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    Mr. KNIGHT. No, in fact, we have a statutory obligation, which is policed by our board and by the SEC to avoid that.

    That is one of the reasons why our pricing is out on the website.

    That is one of the reasons we are heavily monitored in this area, so we don't believe we are——

    Mr. SHAYS. So, are you different than the New York Stock Exchange?

    Mr. KNIGHT. Both are subject to the same rules.

    Mr. SHAYS. Could you use your mike, please? Use your mike.

    Mr. BRITZ. We have the same view. We are subject to the same regulatory regime as the——

    Mr. SHAYS. So, in the ten seconds I have left, someone on the other side tell me how it is discriminatory.

    Mr. MACDONALD. Well, I would ask that both New York and NASDAQ, they have the power to do that—allow firms like online brokers—and I am including Merrill Lynch and all the others who are going online—to not have the discrimination of having a customer call a broker and the quote is free, but they go to the website, they get charged. That is discriminatory. That needs to change immediately. It is within their power. They should do it.
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    Mr. SHAYS. I'll follow up in the next round.

    Chairman BAKER. Thank you, Mr. Shays.

    Mr. Ford.

    Mr. FORD. Thank you, Mr. Chairman. I will be very brief. I want to just, sort of, one more time for the record: there are three—according to the notes we have been provided, there are three of the witnesses—and I was not here at the beginning of the testimony, so I do apologize. But, three of the witnesses serve on this advisory committee. Which three members?

    The three right there in the middle, so your advice to those of us on the committee, in a lot of ways, is to essentially ignore what that advisory committee would be doing, because it has reached the point where you—if I am mischaracterizing it—you have come today to suggest that we act in light of the fact—during the face of the fact that the advisory committee is meeting.

    I guess we have—those of us on the committee don't know a whole lot about the market.

    We read the Wall Street Journal, and we think we are really empowered and smart about what is going on.

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    We are led to believe that some progress is being made on this committee—with this advisory committee. If that is not the case, it would be helpful for those of us on the committee.

    Two, in light of your participation with this committee, you are advising us to act even though the committee is in the process of trying to figure this out.

    Is that a fair characterization?

    Mr. BRITZ. Certainly not on behalf of the New York Stock Exchange, with the proviso I mentioned earlier that we would never presume to suggest what Congress ought and ought not to do.

    There are about 25 people around that table at the Seligman Committee, a broad cross-section of customers, providers, users, vendors, representatives of the public, and so on, who have been discussing this since October of last year.

    As Carrie said, the end-product is due around the middle of September of this year.

    I would not presume to give you advice as to wait or not wait, but it is inaccurate to reflect the New York Stock Exchange position that we are asking you to act before that committee.

    Mr. KNIGHT. NASDAQ is a member of that——
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    Ms. DWYER. NASDAQ as well, yes. We were invited to come here today to help educate the subcommittee on the issues. So, at least, I did not come with any idea that we were recommending legislation.

    I think I am being realistic in answering the question that was posed to me by the other Member.

    Mr. FORD. Would you be opposed if we were to act prior to the advisory committee making a recommendation?

    Ms. DWYER. No, I wouldn't oppose that at all, but I think that this subcommittee and the large committee need to get into this issue, understand it, and understand where the Seligman Committee is coming from. You may know very soon what the ultimate recommendations will be. I don't know that you would need to wait for a final report.

    Mr. PUTNAM. And, as Carrie pointed out earlier, it may take legislative action at the end of—when the committee produces a report.

    Certainly, this subcommittee educating itself is going to be helpful if we are going to get something done quickly if that legislative action is required.

    Mr. FORD. Thank you. I know that this subcommittee, and certainly many on this subcommittee have—and I am new to the subcommittee, obviously a newly created one. I often believe that the marketplace can figure out a lot of these problems.
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    So, consistent with that, I hope that we don't pick and choose when we want the market to act and when we want to act.

    I guess my last question sort of deals with who actually—and we have all of these questions they provided us, and some are good, and some are not so good.

    One that sort of stands out is the sort of the ownership aspect of this data.

    As one who is trying to be educated here today, in the eyes of those on the committee—those who have testified—who actually owns this data?

    I mean, it reminds me a little bit of what a lot of the people in my district do with Napster.

    Obviously, there are some steps being taken now to correct—to remedy that and to ensure that everyone gets their fair share of the pie.

    In the eyes of those testifying today, who actually owns the data?

    Would you say those who compile it own it, those who access it own it, those who own it need it, or those who know more about it own it?

    I am just curious.
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    Mr. BRITZ. Congressman, again, as a non-lawyer, I am not qualified to answer that question. I would quote Professor Seligman.

    Mr. FORD. I am a lawyer, and I know I am not qualified to answer the question.

    So, any light you could shed would be helpful.

    Mr. BRITZ. Professor Seligman thinks it is a great article for a law review and not much more than that. I don't know who owns it, to be perfectly honest with you.

    I know that the New York Stock Exchange and other markets invest great sums of money to produce it. I know that the New York Stock Exchange has been charging for market data for 130 years.

    I know that 34 Act as it exists today talks about terms that are fair and reasonable, and not unreasonable but discriminatory, and clearly, if not explicitly, implicitly refers to the cost as being part of those terms.

    So, there is a great deal of history. One of the committee members at our last meeting said it is an irrelevant question. It doesn't matter who owns it. It is important to produce it.

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    There is a cost associated with producing it, and you ought to be able to recoup that cost.

    Mr. BELL. Mr. Ford, if I could just speak up very quickly, basically our point of view is that these——

    Chairman BAKER. Pull the mike up just a little closer.

    Mr. BELL. All right. This market information, we believe, is really in the public's ownership.

    We believe these are facts. We think we are bringing together a buyer and a seller. The result of that information is market data, and it should be available to the public.

    Chairman BAKER. Mr. Ford, you've exceeded your time.

    Mr. FORD. Thank you for letting me go over a little bit, Mr. Chairman.

    Chairman BAKER. Yes, sir, Mr. Ford. To not inconvenience our panel unnecessarily, we have a vote with about—I understand two votes with about six minutes left on the first.

    It would be my intent to recess for approximately 15 minutes.

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    We have at least three, maybe four, Members who would like to ask another question. I would point out to those Members, when I return, we will convene.

    So, if you will timely return Mr. Crowley, Mr. Barr, Mr. Shays, I will recognize who is here first so we can move this meeting along a little better.

    We stand in recess for at least 15 minutes.


    Chairman BAKER. If I could ask the hearing to come to order and our witnesses to take their seats, please.

    We will have other Members returning momentarily. I would recognize Mr. Bentsen at this time.

    Mr. BENTSEN. Thank you, Mr. Chairman. I have a couple of questions.

    As I read through the testimony and try and grasp the issue, I want to pose a question to you, and tell me whether I am right or wrong.

    If I am right, then I assume I will get a variety of answers.

    But, it would appear that the issue here, at least in part, on the fee structure that Ameritrade and Schwab, and other primarily online or discount-brokerage firms, are concerned about is, as more of your clients are directly trading themselves, they are incurring this cost on a per-capita basis, as opposed to someone going through a traditional brokerage operation where they would call up Merrill Lynch or whoever.
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    That cost is maybe passed on or not, but, also, because Merrill is able to absorb that cost through the 2000 terminals they have hooked up around the country and disseminate that to their brokerage operations, they carry that cost.

    I guess my question is sort of two-part. I mean, one, doesn't a Merrill or a traditional brokerage operation—I mean, they incur that cost, and they are able to spread it out. But, they are also incurring a lot of overhead costs that the online brokerage is not incurring. So, doesn't it all come out in the wash in that respect?

    Second, isn't that just part of the disintermediation that is occurring where, I mean, there are some costs associated with it, that nobody is getting anything for free here. It is just a business plan between what the online brokerage has and what the traditional brokerage has. In fact, as we see more of the traditional brokerage houses go to an online subsidiary or component, they are sort of affected by both.

    So, is that a correct analysis of what is going on?

    If it is, I am not sure that I understand where the equity is in your argument.

    The second part, I think I do have a different feeling, and that is that, with the disintermediation that is going on, the question that these changes do have certain exemptions under the law based on the 75 amendments to the Act then does raise some questions and how they raise their fees, and how they allocate.
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    So, I understand that equity argument, but the first part I am not sure I see where your equity is.

    Ms. DWYER. Well—so, let me say first of all that a statement was made earlier that it is primarily the online firms that are carrying this issue.

    We have been the noisiest for sure, because the effect has been so immediate and sharp for us.

    But, Merrill Lynch, Morgan Stanley, Smith Barney are all represented on the Seligman Committee.

    There has been consensus with those firms as well that a real hard look needs to take place at the governance and at the level of costs that they absorb, too.

    So, it is not simply an online issue. It will be more of an issue for them as they transfer more of their business to online.

    I don't think—you know, if you understood Schwab's business, we have 350 branches. We have the same kind of overhead that a firm like Merrill Lynch would have.

    We have, to support our internet business, a tremendous investment in infrastructure.

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    I think we have the largest mainframe computer system in the world, possibly, certainly the largest transactional one.

    So, there is a tremendous—I don't think there is a huge difference in the cost of doing the brokerage business even though our customers may choose to access us sometimes over the internet.

    The issue about the cost of quotation information, the market data, is that it is differentially priced depending on how the customer chooses to access the data.

    If a customer chooses to call his broker at Merrill——

    Mr. BENTSEN. Let me interrupt you for a second. I understand that.

    But, the point is that, through a discount brokerage operation where you offer a much more discounted price than the traditional brokerage operation, there are some underlying costs that have to be assumed somewhere.

    Doesn't the client ultimately have to assume those costs if they are going to go directly as opposed to going through——

    Ms. DWYER. The difference is that the costs are being set by the exchange. The exchange has no incremental costs or even interest in how the quote is supplied. It doesn't affect the exchange in any way, shape, or form. There is no reason why a customer who calls Merrill to get a quote is charged nothing.
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    The firm absorbs a per-terminal cost. Our firm absorbs 10,000 terminal costs.

    If a customer chooses to access us over the internet, he or she pays on a usage basis.

    There is no reason why the exchange, as the setter of those costs and the entity that gets the revenues—why there should be any difference there.

    That is the issue. It's not the firm's business model so much as the fact that the exchange has no incremental cost once it provides the quote.

    The quote is distributed over our network or over Merrill's.

    We have the cost of creating that network and supplying it to the customer, but the pricing of the data itself is different.

    Does that answer your question?

    Mr. BENTSEN. I guess I still don't—I would like to hear from the exchanges, but I still don't understand.

    Is the price for access to the data different between you as an individual and—when you get it off of your home computer terminal and the price that Schwab pays when it gets it off its terminal in Schwab San Francisco, or wherever?
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    Ms. DWYER. Well, we may not charge the customer at all.

    Mr. BENTSEN. But I mean the price between the computer that——

    Ms. DWYER. Yes. Yes, it is a different.

    Mr. BENTSEN. There is a different price?

    Ms. DWYER. It is a different fee schedule based on the usage.

    One of the issues that many of us have had is there are different usage models and different fees associated with how you use the data.

    We think that should be blind to the exchange, because it doesn't raise the exchange's cost to provide us with a data port or a per quote, or whether we provide per-quote stream to our customers or to provide to a broker's terminal.

    There should be no difference in that pricing, and yet the exchanges have over the years developed pricing models depending on our usage.

    So, that is really the issue rather than what the customer pays or doesn't pay, is that clear?

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    Mr. BENTSEN. Sort of.

    Mr. BAKER. Yes, Mr. Britz, could you respond?

    Mr. BRITZ. I think your analysis is incredibly perceptive. You synthesized the discussion better than I could have myself.

    The notion that there is discrimination as between online and so-called full-line traditional broker-dealer is actually quite silly.

    For example, Merrill Lynch, when I call them up and ask them for a quotation, is paying for the display device that enables them to give me that quotation in the first place.

    Just to put this in some context, that display device revenue is the overwhelming portion of the New York Stock Exchange's revenue and market data north of 85 percent.

    Merrill Lynch non-online firm, in general, is the single largest payer for market data.

    So, I think you need to understand that context and the notion that prices are escalating in a linear way belies the fact that there is an enterprise industry-wide cap, at least within the CTA organization, of one-half-a-million dollars a month.

    Mr. BELL. Mr. Congressman, if I could just give you my perspective as a vendor.
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    One of the things we brought up earlier was the fact that the individual investor can go to a website that is being offered by——

    Mr. SHAYS. Excuse me, sir. I have a real hard time hearing, and I know you have something important to say. You talk away from the mike. I need you to talk into it.

    Mr. BELL. I'm sorry. I was just trying to give you my perspective as far as a vendor's concern.

    We are trying to innovate in this market by providing all kinds of monitor screens and real-time information to our users.

    What concerns us is that we now have competition from the exchanges who are also putting this real-time information on their websites.

    The difference is that we have to choose as a vendor to either absorb the cost of us putting those real-time prices up on those—our analytics or passing them on to our clients, which eventually then gets passed on, we believe, to the individual investors.

    So, now, we are in a competition situation where the exchanges are displaying the same information that they get for free essentially versus what we are paying for.

    Mr. BENTSEN. I would just say, Mr. Chairman, you all are an intermediary of information.
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    I am familiar with—or used to be familiar with your product. It has probably changed a thousand times since then.

    But, that seems to me a somewhat different issue, but a real issue, and it is something that the subcommittee ought to take a look at.

    Thank you, Mr. Chairman.

    Mr. MACDONALD. Mr. Bentsen, this is Randy MacDonald. In my mind, it is very simple.

    Merrill Lynch has 14,000 salesmen out there, and they are moving to online. They are going to have the same exact problem that we have, but let me demonstrate my point by extreme.

    Ninety-eight percent of all of our trades happen in an automated fashion.

    That is not the case for Merrill Lynch. We both have overhead, so the issue for me is we are impeding progress here. Innovation is being impeded to the disadvantage of the individual investor.

    The fact that I can call Merrill Lynch rep and get the quote for free, whereas if I go onto an Ameritrade website I have to pay, is discriminatory.

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    It is arbitrary and capricious on the part of the SROs, and it needs to change.

    They have the power to change it right now, and they refuse.

    Chairman BAKER. Thank you, Mr. MacDonald.

    Mr. Shays.

    Mr. SHAYS. I really appreciate my colleague from Texas asking the question he did, because that is where I ended up with the discriminatory.

    The only example I heard was the issue of calling up a broker and not having to pay a fee.

    I did think it is slightly different, because my sense is that, when I deal with a broker, I am paying for other costs.

    I would say to you, Mr. MacDonald, that I don't watch TV, because I don't like advertisements. But, if I knew when your advertisements were on, I would watch TV just for the advertisements. I love them.

    Mr. MACDONALD. Thank you.

    Mr. SHAYS. And I would think—but, what I get a sense of is that, if I deal through you, my costs are less; if I deal through a broker, my costs are higher.
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    So, I don't want to call, and my sense is that I will get the information the way I want when I want instead of having to go through someone who tells me something.

    So, I guess—tell me another discriminatory pricing.

    Mr. MACDONALD. Well, the other one I mentioned was the actual subscription agreement.

    If you and Mr. Shays want to get unlimited real-time quotes, I have to have you sign a subscription agreement. We have attempted to do that through the web through a click-through method that has been—the process of which is now being rejected again.

    We also are being rejected, because we have the ability for people in multiple locations to sign on to their account, so that my wife can be on our account looking up news, weather, sports, her net worth, account, and so forth.

    I can be on the account at the same time trading, and the exchange has told us that that cannot happen.

    I say, well, the telephone is the exact same thing. If my wife calls up a broker at Merrill Lynch and I am also on the phone from Merrill Lynch, it is free, and you're telling me that—again, it is discriminatory in my mind. Just because the device is the internet versus the telephone, there are different rules.

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    I am not getting it. Now, on the issue of unbundled execution, I think you are 100-percent correct.

    The cost structure is very different, because we represent an unbundled execution.

    We have given our customers the choice of just an execution.

    You don't have to pay for research. We are not in the advice game, so that is the big difference in pricing.

    That is what we have always represented is choice for the consumer.

    We are having a very difficult time right now dealing with these SROs.

    Mr. SHAYS. What I am trying to wrestle with is my general concept of a monopoly somehow is regulated.

    What is the protection to the public that the fees that you charge will be fair, reasonable, and nondiscriminatory and consistent with your obligations under the exchange?

    What protects me as a——

    Mr. MACDONALD. Well, one thing I have to do——

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    Mr. SHAYS. I'm not asking you. I'm sorry, I meant the exchanges.

    Mr. MACDONALD. I'm sorry.

    Mr. BRITZ. Congressman, the process that I described before is one that begins with either an idea at the SRO level or the customer bringing an idea to us.

    It is then vetted with a wide variety of customers, either individually or through trade associations, again, up to our board to the extent it continues to have some traction, finally to the SEC for public comment, and the ultimate disposition one way or the other with the SEC.

    Keep in mind, even at our board level, it is 50 percent chief executive officers of member firms—the payers.

    Mr. SHAYS. Does the public get to see all your data on costs?

    Mr. BRITZ. Sure they do. That data is filed with the Securities and Exchange Commission and available for public viewing.

    Mr. KNIGHT. We have the same process, and we are subject to the same discovery, if you will, by the SEC.

    The process is a public process where public comment can be involved and where the board structure——
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    It is important to understand that these entities—exchanges—have a board structure unlike any other in the American corporate world.

    We are required by statute to have a certain composition that reflects a non-industry interest in our market that reflects the public interest.

    Those boards must approve this knowing very well their legal obligations here to the public to protect them. Then, and only then, will it go to the SEC, where they go through a similar process of asking these questions and allowing the public to comment again.

    Ms. DWYER. I always hate to be in a position of contradicting my regulators.

    But, let me just give you an example of how this process doesn't always work.

    Mr. SHAYS. And who are you referring to as your regulators?

    Ms. DWYER. My primary regulators are the NASDAQ and the New York Stock Exchange.

    A couple of years ago, our customer usage fee was doubled in a filing that was effective on filing, perfectly legal, but does not provide any opportunity for notice of public comment.
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    Mr. SHAYS. The notice of filing takes effect——

    Ms. DWYER. The filing takes effect on filing, and your only right is to get the SEC to abrogate it if you feel that it wasn't properly effected.

    Mr. SHAYS. And does it go back to the fees that were already paid, or does it just start?

    Ms. DWYER. Well, if it is abrogated. So, I will finish the example.

    The fees were doubled, no notice. In fact, we were very surprised. We were in the middle of a negotiation with the exchange at the time, and we saw it in the Federal Register after it had been filed.

    We asked the SEC to abrogate it, because we felt that the multiple was huge—the effect on us was huge, there should be public comment.

    The exchange withdrew it and instituted the fee for awhile as a pilot program.

    SEC did not abrogate it. There was no public notice and comment, and the fee stayed.

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    Now, subsequent negotiations got those fees down, and they were properly filed.

    We have gone on with a lower rate structure, but there are other pilots out there that don't go through the process——

    Mr. SHAYS. Mr. Chairman, could I just have someone explain to me why it is—do you mind if I——

    Chairman BAKER. No, please.

    Mr. SHAYS. Explain to a new Member here, when you say a pilot project, I don't understand why it is a pilot project. You said it ultimately became a pilot project.

    Ms. DWYER. Pilots—this is something we touched on in our testimony.

    Under the CTA plan, the exchanges are allowed to conduct pilot programs to test pricing models. They do not go through the rule—they are not considered rules or changes to the plans.

    Mr. SHAYS. No, I understand. What I don't understand is, if it is a pilot project, it only affects certain of its customers or anyone?

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    Ms. DWYER. Well, yes. For instance, Schwab had a pilot program for 7 years with a pricing structure with one of the markets. Schwab was, to my knowledge, the only participant in that program

    Mr. SHAYS. Maybe in the next round. I would just like to understand what protects each of the so-called—I call you a customer—each of the customers from knowing that they have the best price that their competition has and that there are not special arrangements for particular groups.

    Chairman BAKER. Thank you, Mr. Shays. I'll follow up on that, too, to some extent.

    Ms. Dwyer, would it be your opinion that the result of the pilots is to artificially distort the pricing mechanisms at least momentarily or for some duration while the pilot is operative?

    Ms. DWYER. Well, I think that is so. If the pilot cannot be taken advantage of by all, if it is not well-known, absolutely. Then, as I said in my testimony, we were beneficiaries of one. We enjoyed it very much.

    But, you know, it leads you to wonder what else is out there and leads you to think there should be more transparency in the system.

    Chairman BAKER. Let me take a slightly different tack from my earlier line of questioning, particularly for Ms. Dwyer and Mr. Putnam.
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    The exchanges have developed extensive infrastructure and spent a lot of money to facilitate transactional activity. The benefit or sideline of that is the data which comes from those transactions, which obviously has some value.

    But, without the data, there wouldn't be transactions for anybody, because I am not going to go out and buy X shares of whatever depending on what the price is.

    On the one hand, we have an unusual problem the SEC has created, and the Congress by law, a requirement to have a consolidated source for information to facilitate economic transactions which should be neutral and blind to all participants operated at a fair market cost to incentivize these transactions.

    It would appear, coming at this issue from a different direction, that it is much like having a public utility who is told you have to deliver the electrical service, do it in non-profitable areas as well as profitable areas, to make sure all people have access, do it in a fair, reasonable, and nondiscriminatory standard. And now somebody wants to come in and take certain parts of that utility's operation that are profitable and share in the revenue stream.

    Am I missing it, or what is the distinction there between what you are asking for and what the exchanges have historically done and provided?

    Mr. PUTNAM. I think that your example of public utilities is exactly the problem.

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    The way the system works there isn't competition among market centers and providers of data, so that we can get at a fair price——

    Chairman BAKER. But, when you deregulate public utilities, all too often in some States I have heard about, the consequences may not be necessarily beneficial, because you don't have an infrastructure that is properly funded that can provide market integrity with the delivery of the product.

    I have wrestled with this privately before our hearing. How do we fix this?

    You can't blow up the public utility. We need them. Whether you like them or not, you've got to have them if you want to have a market.

    I have heard you say—I heard Ms. Dwyer say a specific recommendation for action.

    I have heard you say it ought to be incremental, but give me an increment or two.

    Mr. PUTNAM. Well, it gets back to our view, which is different than the over-the-counter marketplace or the New York Stock Exchange's view, at least my perception of what their view is.

    We believe that the market data belongs to the customer, actually, the one who started by placing an order in the system.
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    Therefore, we don't charge for that data. What we do charge for is the facility that we operate where we execute orders when customers want to interact with those bids and offers.

    So, we charge execution fees. There is, obviously, a cost for us to produce that market data.

    We just absorb it through transaction fees when customers come to buy and sell.

    Chairman BAKER. I can understand that. Instead of saying here is your charge for market data, here is your charge for transaction fees, you take market data off the shelf and say here is your enhanced charge for transaction fees which covers the cost of the market data.

    Everybody does that. You've got to make money in the business, or else you are not going to do it.

    I don't have a problem with profit. That is not what is bothering me.

    The only thing that is a problem for me is if there is, in your view, a monopoly which now governs the issuance of this market data, which then leads to transactions off which everyone prospers.

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    Is there a mechanism you can suggest to provide alternate competition that is not disruptive to the current system, thereby putting it all in jeopardy?

    In other words, we don't want to shoot the guys. We want to provide another racehorse in the race to see if they can do it better or more efficiently, and thereby reduce cost as a result of competition.

    I think that is what I have heard you say.

    Mr. PUTNAM. We've suggested that we maintain the Government utility consolidator, at the same time allowing for competitors to come in the system.

    The reason for maintaining the current utility is just to guarantee that the baseline of information, a bid and offer, and a last-sale is available.

    Chairman BAKER. I agree with you on that. We're there. Next step? How do we get to that competition you are talking about?

    Mr. PUTNAM. The next step is—one suggestion has been to create a category of consolidators. So, you go to the SEC and you say, ''I want to be a consolidator of information. Here is the system that I am going to operate. I have adequate capacity and reliability, and I am signing up as a consolidator,'' just like we do as an ECN today.

    We sign up as an alternative marketplace, and we have to meet certain standards.
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    Then, we go in the business of providing that data. I think New York would like to be one of those.

    We think that they should have the right to be one of those.

    At that point, market forces will start to decide on what price the data is.

    Chairman BAKER. May I ask Mr. Britz on that point? Does he want to be one?

    Mr. BRITZ. No, Congressman. I think we are unlikely to be a consolidator.

    But, we are not against the notion of competing consolidators at all.

    Mr. PUTNAM. And I guess they would like to provide their own information at that point.

    We also think that there is some value—not some value—a big value in allowing market-data providers who want to be non-consolidators.

    That example would be Yahoo, where they are giving away certain data for free, but they don't have to provide consolidated data.
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    With adequate disclosure, maybe the customer that Randy was talking about that trades once every 1 1/2 months decides that that is good enough for them, and they don't want to go the extra cost of getting the superior data and that that is adequate for them to look at.

    We think that having the second category is another way of introducing some competition in the process.

    Chairman BAKER. Not to go on at length, let me just request from any participant if there is a suggestion for specific statutory modifications that you think facilitate additional transparency, or the consolidator approach which Mr. Britz has said there to which there is little objection if properly done.

    Let's explore that avenue. It would appear to me that what every member is about is making sure any participant in the marketplace has access to real-time information at the lowest cost possible. That benefits everybody, because that means you are more likely to have transactions that occur, and everybody goes away happy.

    At the moment, it appears there may be some inhibitions to all parties having access to real-time information at what they perceive to be an unfair cost basis.

    Now, I don't know that is the case, because I don't know what the cost is, which gets me back to my eventual starting point.

    Mr. Bentsen, did you want another round?
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    Mr. BENTSEN. Well, Mr. Chairman, if I could just for a second.

    Yes, I want to echo what you said, because, Mr. MacDonald, you made the comment that your clients are paying for it and other clients aren't paying for it.

    Ms. Dwyer has said there is a different fee structure, and I guess, you know, that is something we are going to have to learn—I'm going to have to look into, because I don't know all the details.

    But, somebody is paying for it. Whether it is being passed on directly to online purchasers versus full-line purchasers, somebody is paying for it somewhere, because the information is not free.

    I do agree that we are sort of entering this new world of technological innovation we've got.

    We have this tremendous market disintermediation in all sectors of the economy just about, not just here in the power sector and elsewhere.

    But, I am not yet convinced, and maybe I will be, that there is still a service that exchanges that provide, to the extent that Mr. Putnam and his colleagues are creating sort of sub-exchanges, I guess, if I understand your business.

    There still is a question, or a desire, I think, for market integrity that does, at least in theory, and I think generally comes along with exchanges, and also the liquidity that is provided in market-makers, and all of that.
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    There is a price associated with that, so I guess what we have to get to is exactly how that floats out at the end of the day.

    I mean, again, you all are able to offer trades at $8 a bundle versus $80 a bundle, or whatever the going rate is, and so the other costs have to be made up.

    But, I think actually this is a pretty fascinating issue, I have to tell you, the more I listen to it.

    Let me ask, Mr. Bell, you talked about in your testimony the MSRB's proposal for the muni bond repository of information and the fact that this is a regulatory imposition upon the market to provide this. Wasn't that as a result of concerns—as we know, municipal bonds are not under the Securities and Exchange Act—are not subject to SEC registration, nor should they be, in my opinion.

    But, there was a concern that, even with the broad institutional and retail market—secondary market for municipal securities, that there wasn't sufficient price transparency.

    So, as sort of a compromise, this idea of putting together this information repository would provide greater price transparency.

    Is that a fair tradeoff, or, in your testimony, you're saying that is a concern that now the Government is imposing it here and saying provide this information free of charge to everybody?
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    Mr. BELL. Well, I think it is a good question. I think that the municipal markets are a very different market from, let's say, the equity markets in the sense that——

    For example, for one municipal bond, Bloomberg, collects 40 different pieces of data. You need all those 40 pieces of data, we believe, in order to accurately determine whether the price is right or not—whether it is a fair price.

    As a NRM-Serv—and I think there's five different NRM-Servs—we take a proactive approach toward getting all this information.

    Other NRM-Servs seem to take a more reactive approach. As a NRM-Serv, all the issuers in the banks are required to provide documentation to the NRM-Servs at some reasonable timeframe.

    So, you can sit back and get that piece of paper that says three weeks ago there was a refunding on this bond. As a result of this funding, it has now gone from, let's say, Double A to Triple A in its rating. Obviously, if the rating changes, goes up, it usually becomes more valuable.

    So, what we tend to do is we say, ''Look, we know that this is something that's happening. We're going to call up the issuer ourselves.''

    We bear the costs ourselves, and we bear the cost of the people. We have about 15, 16 people that do this on a daily basis.
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    We get that information before the piece of paper comes out, and we put that out on the system.

    So, even though eventually the data will all be the same and eventually you will be able to determine if that price is fair once that official notice comes out, if you take more of a proactive approach, you have added value to that information on that bond. As such, if you have that information, you can then determine quickly whether that price is fair or not.

    So, it tends to be, I think—you know, the approach the NRM-Servs take are different. As a result, if we were to have to pool all that information and make it available on a common basis, then the value-added would obviously—you know, we would be giving our value-added away.

    Mr. BENTSEN. So your concern as an information provider is that you would have to give away some of your property or some of your intellectual property that is associated with that, not the—I am not familiar with the acronym yet—but not the repository—the idea of the repository itself or the fact that the market-makers have to provide the information voluntarily.

    Your concern is that other providers of information such as Bloombergs or others might later have to provide that and that would undercut your own business?

    Mr. BELL. Well, I mean, in a simple example, if we are taking a proactive approach, then the person—the NRM-Serv who is taking a reactive approach could just sit back and wait for us to tell them, ''Hey, this is refunded.''
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    So, they don't have to spend the money of having those people call up and find out if it has happened three weeks before it actually becomes official by a piece of paper.

    So, we are actually then giving our value to our competitors, if you will.

    Chairman BAKER. Can I jump to Mr. Shays? Mr. Shays.

    Mr. SHAYS. I find this absolutely fascinating. You referred to, the SRO says, your competitors. But, they are also your service providers and, in some cases, they are your competitor. But, isn't it true, also, that some of you sit on their board?

    Ms. DWYER. Yes.

    Mr. SHAYS. I mean, it is really not all that kind of, you know, precise and clean.

    Ms. DWYER. Highly incestuous.

    Mr. SHAYS. It is. No, I think—I am saying that is the way it has to work. But, in a way—are you in a sense making an argument to us that you are like the post office, you have to provide universal service and that your potential people you provide services compete with you and will take—will cream—you know, go after what is most profitable?

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    Mr. BRITZ. No, Congressman, I was making no such argument.

    You are absolutely right. Our board room is an interesting place.

    Sitting around that board table are our owners, our customers, and our competitors.

    Mr. SHAYS. In that sense, it is like the post office, because FedEx and UPS are helping to make decisions on why the post office prices itself.

    Mr. BRITZ. But, because of the regime that we have today—and this I think is what Jerry was referring to—markets compete today—not only markets—markets compete with broker-dealers.

    We are a competitor of Schwab and others on a certain level.

    Markets compete in lots of arenas, certainly for execution, but because of the regulatory regime we have today vis a vis the Consolidated Tape Association, they don't compete in terms of distributing market information.

    Mr. SHAYS. But what I hear on the other side is they are basically fearing that you are using the fees to subsidize other parts of your business that compete with them.

    You know, that is a valid concern if it is true.
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    Mr. BRITZ. I think if you ask them they will not make that suggestion about the New York Stock Exchange.

    I think there may be examples of other markets that may be doing that. They can't make that suggestion vis a vis the New York Stock Exchange.

    Mr. SHAYS. Mr. Knight, so basically they are making it against you?

    Mr. KNIGHT. I can't imagine that they are complaining about a dollar a customer fee or the fact that we are providing information for free, although, when we applied to the SEC to provide information for free on our website.

    Mr. SHAYS. That's a dollar a month?

    Mr. KNIGHT. Right.

    Mr. SHAYS. That's not a dollar a transaction?

    Mr. KNIGHT. No, in fact it is an unlimited amount of transactions for an individual.

    And many of these were delivered by pilot programs, but I think the important point here is that we feel there could be more competition put into the system.
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    We and the New York Stock Exchange and Archipelago are all suggesting different ways to do that.

    But, they share the common characteristic of eliminating the current single processor and have multiple consolidators.

    We are willing to live with that system, and we think it would bring even more competition.

    But, right now, the oversight by the SEC, the oversight by our boards, and the nature of the current process does give the public a large measure of protection.

    Is it perfect? No. Can it be improved? Yes. Are we on a road to improvement? I believe we are. We will know more in a few months.

    Mr. BRITZ. Congressman, if I may, there are some regional stock exchanges who pay for order flow, make a payment to a broker-dealer.

    Some broker-dealers who are sitting at this table receive such payments, and they are on record as having said that they are using excess market-data fees to fund at least a portion of those payments.

    I would go back to a statement I made earlier, some markets—the percentage of market-data revenues to total revenues is enormous relative to the New York Stock Exchange.
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    So, perhaps that is the reference.

    Ms. DWYER. Can I just add a couple of things, or are we out of time?

    Chairman BAKER. Certainly.

    Ms. DWYER. I wanted to say that the NASDAQ fees, for example, there is a dollar a month rate that you can get if you want to subscribe, if you are going to use a lot of quotes.

    There is also per-quote fee of one-half a cent, but that is on pilot.

    It is going to revert back without change to a penny on May 31st.

    This additional——

    Mr. SHAYS. So then it will only be service?

    Ms. DWYER. Pardon?

    Mr. SHAYS. It will revert back to service?

    Ms. DWYER. Unless somebody extends the pilot, it will revert back to a higher rate. There's also, if you want——
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    Mr. SHAYS. I just need to understand, a higher per-transaction rate?

    Ms. DWYER. Per quote. Yes, per quote. There is also, if you want Level 2 data, which is the good data on the NASDAQ market—it gives you more depth of market—you need that in a decimalized world—that is $10 a month per customer. That is also on a pilot that is scheduled to revert back to $50 a month if it is not changed.

    So, yes, the fees have come down quite a lot, but, you know, this is why we concentrate on the structure of the setting of the fees, because it is an unstable situation.

    Mr. SHAYS. Well, you be nice to my NASDAQ.

    Chairman BAKER. If I may suggest, just as a summation for the subcommittee's purpose, we would very much appreciate specific recommendations with regard to statutory modifications anyone might think appropriate.

    There appears to be some agreement, surprisingly, on the multiple-consolidator approach. I am sure there are variations on how that is achieved. We would like to understand that more fully.

    I think you can tell from the number of Members who participated and the duration of this hearing, which many would not have expected to last quite this long, that there is considerable interest, because we believe that the markets are dynamic, they are growing, and that there are significant new numbers of investors who are now investing the $200 a month, perhaps, toward the first home, the college education, or that retirement one day.
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    They are people who are brand new to this market, and, since 1995, the boom in online investors is nothing short of staggering.

    There is great sensitivity, therefore, by the Members of Congress to ensure that the system works efficiently and fairly.

    We need to better understand how this process is working, because the basis on which these investment decisions are made is information.

    We recognize the value and timeliness of that information.

    We certainly want to recognize that the exchanges have done an extraordinary job with huge investment in providing this service.

    But, we are bumping up against a changed economy that does make relevant review of these proposals, I think, very timely.

    To that end, Members may have additional questions they may wish to submit for the record. We will leave the hearing record open for an additional 30 days. Certainly, we appreciate any additional comments you would like to make, as well, for the record.

    I appreciate your patience, your participation, and our hearing is adjourned. Thank you.

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    [Whereupon, at 12:56 p.m., the hearing was adjourned.]