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SEC Concept Release:
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Regulatory | Transaction | Listing | Market Info | Other | SRO Total | |
NYSE | 100.5 (14) | 165.7 (23) | 296.0 (41) | 111.5 (15) | 55.0 (7) | $728.7 |
NASD | 234.0 (33) | 126.9 (18) | 137.3 (20) | 152.3 (22) | 49.3 (7) | 699.8 |
Amex | 17.7 (8) | 91.9 (41) | 16.3 (7) | 82.9 (37) | 15.2 (7) | 224.0 |
CBOE | 19.7 (15) | 84.6 (67) | 0.0 (0) | 17.5 (14) | 4.7 (4) | 126.5 |
PCX | 3.0 (4) | 53.8 (71) | 2.0 (3) | 12.9 (17) | 5.3 (7) | 77.0 |
CHX | 0.0 (0) | 24.7 (54) | 0.0 (0) | 20.0 (44) | 1.1 (2) | 45.8 |
Phlx | 0.0 (0) | 30.2 (69) | 0.0 (0) | 7.1 (16) | 6.4 (15) | 43.7 |
BSE | 2.5 (13) | 10.4 (57) | 0.8 (4) | 3.8 (21) | 0.9 (5) | 18.4 |
CSE | 0.5 (8) | 2.6 (45) | 0.0 (0) | 2.6 (45) | 0.1 (2) | 5.8 |
$Total | 377.9 (19) | 590.8 (30) | 452.4 (23) | 410.6 (21) | 138.0 (8) | 1969.7 |
Individual SROs vary widely in the extent to which they perform each of the four SRO functions and rely on the four sources of funding. As a cumulative matter, however, they received 21% ($410.6 million) of their funding from market information fees in 1998. This percentage has remained remarkably consistent, despite the rapid growth in market data revenues in recent years. For example, market information revenues provided the SROs with 20% ($246.1 million) of their funding in 1994. In addition, the reliance on market information revenues by two of the major equity markets the NYSE and Amex has remained relatively consistent ever since the national market system was created in the 1970's. 111 The major exception is the NASD, which was a relatively small organization and had no market information revenues in the 1970's. With the expansion of the Nasdaq market, however, the NASD now is one of the two largest SROs and receives 22% of its funding from market information revenues.
The NYSE historically has operated and regulated one of the largest and most prestigious markets in the world and has, as well, taken a leading role in the regulation of its members, which include most of the largest broker-dealers. Consistent with its broad responsibilities, the NYSE receives substantial revenues from each of the four sources of funding. In particular, the NYSE's revenues from listing fees in 1998 ($296 million) represented 41% of its total revenues and were more than double the listing revenues of all the other SROs combined. The NYSE's substantial responsibilities for regulating its members are reflected by its more than $100.5 million in revenues from regulatory fees. It also received $165.7 million from transaction services fees (classified as "trading fees" and "facility and equipment fees" in Table 9 in the Appendix) and $111.5 million from market information fees.
The NASD started from a substantially different position than the NYSE, but has grown so rapidly in the last decade that its revenues now are comparable to the NYSE's. The NASD began as a membership organization for broker-dealers conducting business in the over-the-counter markets. With the dramatic expansion of the Nasdaq market, however, the NASD now performs all of the four SRO functions to a large extent and is funded accordingly. Nevertheless, its origins are demonstrated by the fact that it received by far the largest amount of funding in 1998 from regulatory fees ($234.0 million, classified as "member assessments," "registration and qualification fees," "regulatory fees and fines," and "corporate finance fees" in Table 10 in the Appendix). The prestige of the Nasdaq market is reflected by the NASD's $137.3 million in issuer listing fees. The NASD also received a larger amount of revenues from market information fees ($152.3 million) than any of the other SROs, which was bolstered by its $22.2 million in distributions from Network A and Network B for transactions in listed securities. Finally, the NASD received $126.9 million in revenues from transaction services fees.
The other SROs differ from the NYSE and NASD in three principal respects: (1) their markets generate much less trading volume, (2) they derive only a small portion of their revenues from listing fees, and (3) they are less involved in member regulation, which results in much lower revenues derived from regulatory fees. The result is that each of the SROs other than the NYSE and NASD derives a much higher percentage of its revenues from a combination of transaction service fees and market information fees.
The SROs' revenues are derived from discrete categories of fees that are disclosed separately on their financial statements. Their internal cost structures, in contrast, are much less transparent. Generally accepted accounting principles ordinarily do not require an entity to disclose an internal break-down of its costs according to business functions.112 Consequently, most of the SROs' financial statements do not disclose the amount of costs that are associated with their respective functions or that support the various services they provide.113 The SROs' financial statements do indicate, however, that a substantial majority of their costs relate to personnel and technology systems. For example, 74% ($405.6 million) of the NYSE's total operating expenses in 1998 were classified as "compensation" and "systems and related support." Similarly, 79% ($491 million) of the NASD's total operating expenses in 1998 related to "compensation," "professional and contract services," and "computer operation and data communications." The financial statements of the other SROs are similar in this respect.
In addition, while SRO total expenses have grown rapidly in recent years, from $1.05 billion in 1994 to $1.68 billion in 1998 for an increase of 60%, they have not kept pace with the growth in securities industry costs in general. For example, the total expenses of the U.S. securities industry, as represented by NYSE members doing a public business, grew from $70.2 billion in 1994 to $161.0 billion in 1998, for an increase of 129%.114 Similarly, the percentage growth in the SROs' market data revenues (67%) and total revenues (64%) since 1994 has not kept pace with the percentage growth in the securities industry's total revenues (139%).115 Finally, the SROs' market information revenues represent a very small portion of the securities industry's total expenses less than one-quarter of one percent in 1998.116
The principal exception to the general unavailability of information about internal SRO cost structures is the NASD. Thus far, the NASD is the only SRO that has divided its regulatory and operational functions into separate subsidiaries, NASD Regulation, Inc. and Nasdaq.117 The respective functions of NASD Regulation and Nasdaq are specified in the NASD's "Plan of Allocation and Delegation of Functions by NASD to Subsidiaries." For the most part, all of the regulatory functions of the NASD, including both market and member regulation, are delegated to NASD Regulation, while the market operation and listing functions are allocated to Nasdaq.118
There are four separate sources of NASD financial information for 1998. First, the NASD issued consolidated financial statements for itself and its subsidiaries, which include NASD Regulation, Nasdaq, and Amex. (November-December 1998 figures for Amex are included in the NASD's 1998 consolidated financial statements). Second, Table 10 in the Appendix sets forth the NASD's revenues and expenses with the Amex figures excluded. Third, note 11 to the NASD's 1998 consolidated financial statements provides segment information for NASD Regulation and Nasdaq-Amex. Finally, the Nasdaq subsidiary is separately registered as a SIP and has filed an annual amendment to its Form SIP for 1998 that includes financial statements for Nasdaq individually. Taken together, these four sources provide a picture of the respective costs associated with the regulatory and operational functions of an SRO.
The internal breakdown of the NASD's revenues and expenses in 1998 is as follows:
1998 NASD Segment Information
(excluding Amex)
($millions)
NASDR | Nasdaq | All Other | Consolidated | |
Revenues: |
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Regulatory | 234.0 | |||
Transaction | 126.9 | |||
Listing | 137.3 | |||
Market Info | 152.3 | |||
Other | 23.4 | 10.0 | 15.9 | |
Total Revenues |
257.4 | 426.5 | 15.9 | 699.8 |
Expenses: |
||||
Direct Expenses | 236.6 | 264.4 | 26.0 | |
NASDR Charge | 57.3 | |||
Transfer Pricing | 39.6 | |||
Total Expenses |
236.6 | 361.3 | 26.0 | 623.9 |
Operating Income before taxes |
20.8 | 65.2 | (10.1) | 75.9 |
Nasdaq's revenues are derived primarily from transaction services, corporate listings, and market information fees, and totaled $426.5 million in 1998. Nasdaq's direct expenses totaled $264.3 million. In addition to its direct expenses, Nasdaq's expenses included a "NASD Regulation Charge" of $57.3 million and a "Transfer Pricing" charge of $39.3 million. The NASD has represented that the NASD Regulation Charge is the amount charged to Nasdaq for market regulation and enforcement services performed by NASD Regulation. Nasdaq's total expenses in 1998 were $361.3 million, leaving it with $65.2 million in operating income before taxes.
NASD Regulation's revenues totaled $257.4 million and were derived primarily from regulatory fees. Its direct expenses totaled $236.6 million and primarily were attributable to the NASD's member regulation function. NASD Regulation's net operating income before taxes was $20.8 million.
Taken together, the financial statements of the NASD and its subsidiaries reveal the following information about the costs associated with the NASD's respective SRO functions in 1998. Member regulation costs were approximately $236.6 million and were more than covered by $257.4 million in revenues primarily from regulatory fees. Costs associated with the other three SRO functions market operation, market regulation, and listings were approximately $361.3 million, of which at least $57.3 was associated with the market regulation function. The combined cost of the three functions was more than covered by $426.5 million in revenues derived almost entirely from transaction services fees, listing fees, and market information fees. In percentage terms, the total costs associated with the market operation, market regulation, and listing functions of Nasdaq were funded 30% by transaction services revenues, 32% by listings revenues, 35% by market information revenues, and 3% by other revenues.
As noted in section III above, Congress did not include a strict, cost-of-service standard in Section 11A of the Exchange Act, opting instead to allow the Commission some flexibility in assessing the fairness and reasonableness of fees. Nevertheless, the fees charged by a monopolistic provider of a service (such as the exclusive processors of market information) need to be tied to some type of cost-based standard in order to preclude excessive profits if fees are too high or underfunding or subsidization if fees are too low. The Commission therefore believes that the total amount of market information revenues should remain reasonably related to the cost of market information. This section is intended to provide greater guidance to the SROs, the securities industry in general, and the public concerning the categories of costs that should be considered as part of the cost of market information. With this guidance as a background, the Commission believes that it will be possible to develop a flexible, cost-based approach to market information fees and revenues that both furthers the Exchange Act's national market system objectives and can be implemented in a reasonably efficient manner. Comment is requested on an outline of such an approach in section V.A below.
The first step in determining the cost of market information is to identify, in theory, the categories of costs that are incurred to generate and disseminate market information. The second step is to allocate appropriately the amount of the costs included in these categories, which requires a determination of whether the relevant categories are "direct costs" of market information or "common costs." Direct costs (also referred to as incremental, separable, or traceable costs) are incurred only to provide market information and therefore can be allocated entirely to the cost of market information. Common costs, in contrast, are incurred for the provision of services in addition to market information and therefore should be allocated among each of the various services they support.119 Failing to allocate common costs in this way would improperly inflate the cost of market information.
One category of costs directly associated with market information is Plan costs the expenses incurred by the various processors and administrators of the Networks, acting on behalf of the Networks' SRO participants, to disseminate consolidated information to the public. The Commission believes that Plan costs should be classified as a direct cost and that therefore the entire amount of Plan costs should be allocated to the cost of market information.
Plan costs do not, however, include any of the costs incurred by the individual SROs in generating market information and providing it to the Plan processors. The Commission is considering an approach that would include many of these SRO costs specifically, the costs of operating and regulating their markets in accordance with Exchange Act requirements as part of the cost of providing market information to the public. In other words, the information that the SROs provide to the Plan processors would not be considered as cost-free. Before quotations and transaction reports can be delivered to the Plan processors and made available to the public, a market must provide a mechanism for bringing buying and selling interests together in a fair and orderly manner. In addition, the SROs must establish, monitor, and enforce trading rules, as well as otherwise regulate their markets to prevent fraudulent and manipulative acts or practices. The SROs incur substantial costs in performing these functions, and they contribute substantially to the value of the information. Therefore, the Commission is contemplating including these SRO costs as part of the cost of market information for the purpose of determining fair and reasonable fees.
This determination is supported by the language of Section 11A of the Exchange Act, in which Congress recognized the direct connection between effective regulation of a market and the value of that market's information. Section 11A(c)(1)(A) grants the Commission rulemaking authority to prevent the use, distribution, or publication of fraudulent, deceptive, or manipulative market information. There is little value in market information that is tainted by fraud, deception, or manipulation.
Similarly, Section 11A(c)(1)(B) grants the Commission rulemaking authority to assure the prompt, accurate, reliable and fair collection, processing, distribution, and publication of information with respect to market information, as well as the fairness and usefulness of the form and content of market information. None of these goals will be achieved by a poorly operated market that is prone to systems outages and delays or that does not provide an effective mechanism for bringing buying and selling interests together. In neither case will the public have an accurate picture of the current market for a security. Moreover, in times of significant price volatility and spikes in trading volume, it is critically important that the markets, particularly the major markets operated by the SROs,120 remain fair and orderly and that investors continue to have access to a timely stream of market information. In Section 11A, Congress recognized this direct connection between the effective operation of a market and the quality of that market's information.
The Commission does not believe, however, that the cost of member regulation should be considered as part of the cost of market information. For example, although the financial soundness of broker-dealers is undoubtedly an essential factor in the overall integrity of the markets, the connection between this regulatory function and the quality of market information is much more attenuated than in the case of market operation and market regulation. Instead, an SRO's member regulation costs are more directly associated with the regulatory fees charged to members than with any other source of funding.
Finally, the cost of market information should not include costs that are directly associated with other SRO services (such as an SRO's advertising and marketing expenditures to obtain corporate listings).
In sum, the Commission preliminarily believes that the cost of market information should include, in addition to Plan costs, an appropriate percentage of the costs incurred by individual SROs in operating and regulating their markets.121 These costs must be borne by the SROs to meet their Exchange Act responsibilities and therefore must be funded in one way or another. If all of these costs were excluded from the cost of market information (and fees were reduced accordingly), the principal consequence would be to force the SROs to rely more heavily on their other sources of funding transaction fees, listing fees, and regulatory fees. In this regard, it warrants emphasis that all of these fees are passed on, directly or indirectly, to investors the ultimate consumers in the securities industry. The relevant funding issue, therefore, is not whether investors ultimately will pay the costs of effective market operation and market regulation, but how these costs are funded in the first instance and whether the funding furthers the objectives of the Exchange Act.
The Commission believes that market information fees remain an appropriate part of SRO funding. When used along with transaction services fees, listing fees, and regulatory fees, they provide a solid base of financial support for the SROs. Market information fees serve an important and unique role because they provide the broadest source of SRO funding. The fees are paid by all users of market information, including, for example, options and futures market participants that otherwise would not contribute (through transaction services fees or listing fees) to the funding of the particular markets on whose information they rely.
The Commission recognizes that allowing SROs to receive market information revenues to recover part of their market operation costs would provide them with a source of funding not available to other types of entities that also operate markets, particularly alternative trading systems that are regulated as broker-dealers under Regulation ATS. As the Commission noted in the ATS Release, however, alternative trading systems have a choice between either (1) registering as a national securities exchange and accepting the many responsibilities imposed by the Exchange Act on SROs,122 or (2) registering as a broker-dealer and complying with Regulation ATS. The choice between these two options is complex. The ATS Release compares the many different benefits and costs associated with becoming an SRO and those associated with remaining a broker-dealer.123 If an alternative trading system believes that the benefits of becoming an SRO (including a share in market information revenues) exceed the costs, it still has the option of registering as an exchange and becoming a participant in the national market system plans.
Although the costs incurred by the SROs in operating and regulating their markets could be included in the cost of market information, they also support other SRO services and therefore are common costs that must be allocated among these services. In particular, the costs of market operation and market regulation support the SROs' transaction and listing services, in addition to market information services. Transaction services are integrally related to the quality of a market's operation a poor market will attract few participants. Similarly, the quality of a market and its regulatory protections for investors are among the most important factors influencing a corporate issuer's decision of where to list its securities. Consequently, the SROs' costs of market operation and market regulation must be allocated among the three relevant sources of revenue listing fees, transaction services fees, and market information fees.
Finding an appropriate basis for allocating common costs, however, is an extremely difficult task. As one court has noted in the ratemaking context, "[t]he very problem at issue here allocation of common costs arises precisely because there is no purely economic method of allocation. In this sense no Commission choice among the various [fully distributed cost] methods could be justified solely on economic criteria; elements of fairness and other noneconomic values inevitably enter the analysis of the choice to be made."124
Allocation of the common costs of market information is not an exception to this widely-recognized problem. The Commission is not aware of a purely economic method of allocating the SROs' costs of market operation and market regulation among the SROs' transaction, listing, and market information services. The problem of allocation is exacerbated even further by the fact that an individual SRO often trades many different securities that are not all included in the same Network. Thus, not only must the costs of market information for each SRO be identified and allocated among the SRO's different services, the market information costs of the individual SROs also must be allocated among the different Networks.
In sum, any attempt to calculate the precise cost of market information presents severe practical difficulties. The Commission believes, however, that it may be possible to develop a more flexible, cost-based approach that avoids these practical difficulties, yet also maintains a reasonable connection between the cost of market information and the total amount of revenues derived from market information fees. Comment is requested on an outline of such an approach in section V.A below.
As noted in the Introduction, the Commission is considering whether the arrangements for disseminating market information should be modified in several respects. Its review thus far particularly has indicated the importance of adapting market information fees to the increasing retail investor demand for real-time information and to the changing structure of the securities industry. Prior to taking rulemaking or other action, the Commission believes it will be helpful to provide the public with a full opportunity to comment on issues relating to market information fees and revenues. This section first requests comment on the concept of a flexible, cost-based approach to evaluating the fairness and reasonableness of such fees and revenues. Comment then is requested on a conceptual approach to distributing the Networks' revenues to the individual SROs that could reflect more fully the Exchange Act's national market system objectives. Finally, comment is requested on a variety of issues relating to SRO and Plan disclosures and Plan governance, administration, and oversight. These include whether the Plans and SROs should provide greater public disclosure concerning their fees, revenues, and costs, and whether participation in the process of setting and administering fees should be broadened to include vendors, broker-dealers, and users of market information.
In formulating comments, the public is encouraged to consider the four principal objectives relating to market information set forth in Section 11A of the Exchange Act availability of information, neutrality of fees, quality of information, and fair competition/equal regulation.125 The role of fees in funding SRO functions also should be considered. In addition, the Commission encourages commenters to consider the extent to which proposals are capable of being implemented in an objective and reasonably efficient manner, particularly given the other uses to which the Commission's resources could be devoted. In the ratemaking context, courts have recognized that "[i]mplementation is as critical to a policy's success as theoretical design," and that it is justifiable for an agency to consider its limited resources in formulating a policy.126 The Commission's preferred choice for resolving market information issues will be to rely whenever possible on consensus among the SROs, the securities industry, and information users, but to enhance the potential for such a consensus by establishing more objective standards for setting fees and distributing revenues, by providing greater public disclosure of relevant information, and by broadening participation in the fee-setting process.
The Commission is considering the concept of a flexible, cost-based approach for evaluating market information fees and revenues. Rather than require a strict mathematical calculation of costs in every case, this approach would rely, when possible,127 on more flexible determinations of costs to determine whether fees are fair and reasonable. Costs are relevant to an assessment of fees and revenues in two different contexts. First, the total costs incurred to provide market information are relevant in assessing whether the total revenues derived from market information fees are fair and reasonable. Determining a total amount of revenues for each Network that is fair and reasonable is the issue addressed in section V.A.1 below. Second, costs are relevant in determining whether individual fees are fair and reasonable or unreasonably discriminatory when compared to other fees. Issues relating to specific fees, particularly the fees applicable to professional subscribers and retail investors, are discussed in section V.A.2 below.
Since the enactment of the 1975 Amendments, the Commission has relied primarily on consensus among the SROs and the securities industry to resolve issues concerning market information fees and revenues. The Commission believes, however, that recent changes in the securities markets may require a revised approach that provides greater guidance to the SROs and the rest of the securities industry. Particularly with the potential for a significant number of SROs that are for-profit entities, it appears that closer monitoring of the SROs' funding and internal allocation of resources will be necessary. The principal financial objective of membership organizations has been to recover their operating costs, while their members act as for-profit entities. The advent of for-profit SROs, who will have the financial objective of generating profits for their owners, potentially could result in increased pressure to raise fees and revenues and to cut back on costs not directly associated with a source of revenues. This is not to say that for-profit SROs are inherently unable to meet their Exchange Act responsibilities, but rather that their fees and financial structures may warrant increased oversight by the Commission.
Accordingly, the Commission is considering whether a cost-based limit should be established for the total market information revenues of each Network. In establishing their fee structures, the Networks would be required to adjust the particular fees charged to different categories of vendors and subscribers so that they did not generate a total amount of revenues that would exceed the limit. To implement this type of conceptual approach, the Networks would, at a minimum, need to provide sufficient periodic financial disclosures to demonstrate their compliance with relevant requirements. In section V.C below, comment is requested on issues relating to financial disclosure. In addition, the SROs would be required to file a proposed fee change with the Commission when necessary to maintain compliance with the limit. Comment is requested on whether there should be specific requirements relating to the frequency and timing of proposed fee changes. Finally, the Commission itself could initiate direct action if necessary to assure that the Networks comply with all relevant requirements.
The Commission requests comment on the following broad outline of a conceptual approach for setting a cost-based limit on a Network's total market information revenues. It would involve four steps. First, each SRO would calculate the amount of its direct market information costs. These would include, for example, the Plan costs incurred by processors and administrators of the Networks in performing their Plan responsibilities and any other costs incurred only and entirely for providing market information services.
Second, each SRO would calculate a gross common cost pool made up of the total amount of its costs that are appropriately classified as contributing substantially to the value of market information. The principles guiding such a classification are discussed in section IV.C above. Appropriate categories of costs would include the costs of market operation and market regulation, but would not include the costs of member regulation or other direct costs of services other than market information. Comment is requested on whether these categories are sufficiently distinct to provide the basis for a workable internal cost allocation. Comment also is requested on specific types of costs that should, and should not, be classified as substantially contributing to the value of market information.128
Third, each SRO would apply a standard allocation percentage to its gross common cost pool to determine its net common cost pool. A percentage allocation is necessary to reflect the fact that these costs are incurred by the SROs not only to provide market information services, but also to provide listing and transaction services. The percentage would be the same for all SROs.129 It could be derived from the historical experience of the SROs (on average, the SROs appear to fund between 30% and 40% of their market operation and market regulation costs through market information revenues)130 or based on any other rationale that furthers the national market system objectives of the Exchange Act. Comment is requested on what would be an appropriate standard allocation percentage.
Finally, in the fourth step, it would be necessary for each SRO to allocate its total cost of market information (direct costs plus the net common cost pool) to the various Networks whose securities it trades. This allocation could be done directly (for those costs that can be associated with a particular Network), with the remainder allocated based on the proportion of the SRO's total trading volume represented by a Network's securities. The total amount of the costs allocated to each Network from the individual SROs would represent a limit on the amount of revenues that could be generated by each Network's fees. It bears emphasis here that, under this conceptual approach, separate rules would govern the distribution of Network revenues, and therefore an individual SRO would not necessarily recover the amount of its total cost of market information in distributions from the Networks.131
The Commission requests comment on all aspects of the concept of setting a cost-based limit on market information revenues. It appears that the conceptual approach outlined above could have three principal benefits. First, it could provide a much closer and more objective link between SRO costs and market information revenues than has been required in the past. Second, it potentially could be implemented in a more efficient manner than a strict, cost-of-service approach that required each SRO to establish a basis for allocating its common costs down to the last dollar. Third, the conceptual approach outlined above could put all the Networks on a more equal footing in terms of the proportion of relevant costs funded by market information revenues, thereby possibly furthering the Exchange Act objective of fair competition. Comment is requested on the advisability and practicality of this approach, including whether a single approach is appropriate for each of the different Networks and for different types of securities. The Commission also would be interested in suggestions for any alternative approaches to setting a fair and reasonable limit on market information revenues.
A Network's fees cannot unreasonably discriminate among markets, vendors, broker-dealers, and users. To achieve this goal, the Commission believes that any disparities in fees should be justified by such legitimate factors as differences in relevant costs or degree of use. In this regard, it is important to recognize that the basic information stream (all of the transaction reports and quotations in a Network's securities) will be the same, and have the same production costs, no matter how many vendors and subscribers receive the information. Although there may be differences in a Network's costs of disseminating information to different categories of vendors and subscribers (such as the costs of administering a fee structure), it is vendors and broker-dealers who, for the most part, bear the costs of receiving the data stream from a Network processor and redisseminating it to individual subscribers. These redissemination costs incurred by parties other than the Networks are not appropriately incorporated into a Network's fee structure.
In addition, individual fees must be evaluated in terms of the national market system objective to assure the wide availability of market information. Accordingly, a Network's fees should not be set at levels that effectively restrict the availability of real-time information. As a theoretical matter, of course, lower prices always will result in greater marginal demand for a product. As a practical matter, however, the relevant Exchange Act question is whether the fees for particular classes of subscribers, given their economic circumstances and their need for and use of real-time information, are at a sufficiently high level that a significant number of users are deterred from obtaining the information or that the quality of their information services is reduced.
The various fee structures established by the Networks are described in section II above, and the amount of revenues derived from the various fees are set forth in Tables 5-8 in the Appendix. Comment is requested on the fairness and reasonableness of all of these fees, which include fees for vendor access and a variety of other services.132 This subsection will discuss the fees that apply to users of market information and generate 94% of total market information revenues the monthly fees applicable to professional subscribers and the fees applicable to retail investors (which include both monthly nonprofessional subscriber fees and per-query fees). These fees are set forth in Tables 1-4 in the Appendix.
a. Professional Subscriber Fees
Fees for professional subscribers generally range from $18.50 to $50 per month.133 These fees produced revenues of $351.1 million in 1998, compared to $231.1 million in 1994, for an increase of 52%. The revenues generated by professional subscriber fees represented approximately 85% of the total amount of the Networks' revenues in 1998. The fees themselves have remained essentially the same over the last five years.134 It is an increase in the number of professional subscribers that has produced the increase in revenues. For example, there were 338,010 Level 1 subscribers and 57,535 NQDS subscribers to Nasdaq System information in 1998, compared with only 260,500 Level 1 subscribers and 17,000 NQDS subscribers in 1994.135 Similarly, there were 384,661 devices displaying Network A market information in 1998, compared with only 266,718 in 1994.136 Moreover, the expansion in trading volume in recent years has produced an explosion in the volume of information disseminated by the Networks. As noted in section II.C above, for example, SIAC processed 634 million transaction reports and quotations in 1998 for Networks A and B, compared with only 188 million in 1994. Thus, monthly fees for professionals have remained steady despite a substantial increase in the amount of information provided.
Comment is requested on the fairness and reasonableness of professional subscriber fees. In this regard, it is important to consider whether they further the Exchange Act objective of making market information widely available. Based on an average of 21 trading days per month and monthly fees ranging from $18.50 to $50, a professional subscriber generally is charged from approximately $0.90 to $2.40 per trading day for market information. Given the importance of this information to the livelihood of a professional subscriber, comment is requested on whether these fees, in practice, limit the availability of market information.
b. Retail Investor Fees
The revenues from fees applicable to retail investors (which include monthly fees for nonprofessional subscribers and per-query fees) have grown exponentially in recent years. In 1994, such revenues amounted to $3.7 million. In 1998, they amounted to 38.9 million, for an increase of 951%. Most of this increase is attributable to increased demand by investors and not to fee increases by the SROs.137 In addition, the nonprofessional subscriber fees for Nasdaq, Network A, and Network B securities have been substantially reduced in 1999. The Commission remains concerned, however, that the Networks' fee structures have not kept pace with advancing technology and increased demand.
The fees currently applicable to retail investors range from $0.50 to $2.50 per month for unlimited access to a particular Network's information, and the per-query fees range from $0.0025 to $0.02. The Commission requests comment on whether these fees now are low enough and structured in such a way that they do not significantly limit the availability of real-time information to retail investors, both in terms of the number of subscribers and the quality of information services. For example, does a monthly fee of $0.50 or $1 per Network deter a significant number of retail investors from using real-time market information or preclude broker-dealers from providing enhanced information services to their retail customers? Thus far, per-query fees have generated much greater revenues than the monthly fees that allow unlimited use of information. The fees allowing unlimited use, however, would appear to provide a greater opportunity for broker-dealers to provide retail investors with a much improved quality of service, including potentially the opportunity to obtain dynamically-updated displays of quotations and transaction reports in a security. Compared to receiving information based on a single query at a time, a real-time stream of dynamically-updated information could offer retail investors a greater ability to control their securities transactions, including possibly the ability to execute transactions in the market of their choice (for example, by directing a limit order to a specific market) or monitoring the quality of execution by their broker-dealers. Comment is requested on whether the current fee schedules could inappropriately restrict the information services that broker-dealers provide to their retail customers.
In addition, comment is requested on whether the fees applicable to retail investors are unreasonably discriminatory compared to those for professional subscribers. The monthly fees for nonprofessional subscribers are significantly less than the monthly fees for professional subscribers, yet it also appears that retail investors are unlikely to use real-time market information nearly as much as professional investors. With the monthly rates, for example, each class of subscribers theoretically receives the same service an unlimited amount of real-time information for a Network's securities. Professional investors, however, are likely to monitor the stream of real-time market information for a substantial portion of each trading day during a month. Assuming an average of 21 trading days in a month and 6 1/2 hours per trading day, professional investors may monitor real-time information for as many as 136 hours in a month. It does not appear that retail investors are likely to monitor real-time information for anywhere near as many hours during a month. Comment is requested on whether the difference in rates between professional and nonprofessional subscribers adequately reflects this difference in use.138
A petition to the Commission for rulemaking has asserted, among other things, that any fee applicable to retail investors for on-line access to market information constitutes unreasonable discrimination against on-line investors and their broker-dealers.139 The petition argues that, by comparison, traditional broker-dealers pay the monthly professional fee and provide market information to their customers by personal telephone call without incurring additional fees. The Commission requests comment on this issue, as well as on any other issue relating to the effect of market information fee structures on broker-dealers conducting different types of business. In this regard, it appears that the degree of use and the quality of the service provided to customers of an on-line broker-dealer (particularly under a monthly fee structure providing instant access to unlimited information) may be superior to the service provided to customers of a traditional broker-dealer (who must initiate a separate telephone call and speak personally with an employee of their broker-dealer each time they want to update their information). Comment is requested on whether fees for on-line access to market information by retail investors are warranted by the degree of use and the quality of service provided.
c. Fee Discounts
The fee structures for Network A, Network B, and the OPRA System include various discounts that are based on the size of the subscribing firm or on whether the firm is a member of an SRO that is participant in the particular Network. They include (1) a Network A "enterprise arrangement" that caps the aggregate amount a registered broker-dealer must pay for most of the information services provided to its employees and customers at $500,000 per month,140 (2) Network A monthly professional subscriber fees that range from $18.75 per device for subscribers with more than 10,000 devices to $127.25 for subscribers with a single device, (3) OPRA monthly professional subscriber fees that are $6-$10 less per device for members of an SRO that is a participant in OPRA than for non-members, (4) Network A nonprofessional subscriber fees that are $1 per month for the first 250,000 subscribers per vendor, and 50¢ per month for subscribers above 250,000, and (5) Network A, Network B, and OPRA per-query fees that are reduced based on the number of quotes distributed by a vendor during a month.
The Commission requests comment on whether these discounts are consistent with the Exchange Act objective that exclusive processors of information should remain neutral in their treatment of firms and customers. As noted above, the Commission believes that disparities in fees should be justified by such legitimate factors as differences in relevant costs, degree of use, or quality of service. In the past, the Networks have justified these fee discounts as reflecting differences in the administrative costs associated with different categories of subscribers.141 The Commission has not, however, required the Networks to demonstrate that the size of the discounts corresponds with the size of the relative difference in administrative costs. Comment is requested on whether the size of these discounts should be strictly limited to differences in administrative costs.
The current rules for distributing Network revenues to the SROs are described in section II.E above. In general, each of the Networks first distributes revenues directly to their respective administrators and processors to cover expenses incurred in performing their Plan functions. After these Plan costs are funded, the remaining revenues then are distributed to the SRO participants in a Network in accordance with a formula based on each SRO's percentage of trading volume in the Network's securities. For ease of reference, the initial distribution to cover specific costs will be referred to as the "Direct Distribution," while the subsequent distribution of a Network's remaining revenues will be referred to as the "Proportional Distribution."
The Commission is considering a conceptual approach to distributing Network revenues that could reflect more fully and directly the objectives of the Exchange Act. Specifically, comment is requested on (1) whether certain individual SRO costs that most directly enhance the integrity of market information (principally, the cost of market regulation) should be funded as part of the Direct Distribution in addition to Plan costs, and (2) whether the formula for making the Proportional Distribution should be revised to compensate the SROs more in accordance with the value of the information they contribute to the stream of consolidated information. Finally, comment is requested on whether the SROs should be permitted to rebate market information revenues to their members.
The Commission requests comment on whether a portion of market information revenues should be earmarked in the Direct Distribution to fund, in addition to Plan costs, SRO costs that directly enhance the integrity and reliability of market information. These could include primarily the costs incurred by the SROs in performing their market regulation function (as opposed to member regulation). Market regulation by the SROs helps assure that the information on which investors rely is not tainted by fraud or manipulation and that market participants comply with trading rules designed to enhance the efficiency and fairness of the SROs' markets. Although the benefits of market regulation extend directly to all those who use an SRO's information, the function does not appear to be as directly associated with a specific source of revenues as are other SRO functions. The Commission is concerned that competitive pressures among markets could lead to cutbacks in the substantial expenditures necessary to maintain full funding for this critically important Exchange Act responsibility.
Comment is requested on whether allocating market information revenues directly to fund specified market oversight and information integrity and reliability costs would further Exchange Act objectives.142 The potential benefits of such an allocation appear to be two-fold. First, it could help ensure that this vital SRO function is fully funded, thereby helping to prevent the publication of fraudulent, deceptive, or manipulative market information, Section 11A(c)(1)(A), and to assure the prompt, accurate, reliable, and fair publication of market information, Section 11A(c)(1)(B). Second, the funding would be shared among all users of market information, rather than falling on the particular SRO that incurs the particular costs. To the extent that market regulation costs benefit the market for a security as a whole, the objectives of fair competition, equal regulation, and an equitable allocation of SRO costs might be furthered.
Comment is requested on the advisability and practicality of pursuing this type of approach. In particular, would identification of the cost of market regulation be a reasonably objective task that could be accomplished without excessive accounting and auditing costs? Are there pragmatic methods that could simplify this task while still achieving the goal of adequately funding appropriate costs? Finally, comment is requested on whether direct funding would create an inappropriate incentive for the SROs to increase these costs beyond reasonable levels.
Comment also is requested on whether the formula for making the Proportional Distribution should be revised to reflect more directly the value that each SRO's information contributes to the stream of consolidated information made available to the public. In particular, does the current practice of allocating revenues based solely on an SRO's proportion of transaction volume adequately further the Exchange Act objectives of maintaining the quality of market information and encouraging fair competition?
As discussed in section III.A above, one of the fundamental policy decisions made by Congress and the Commission in the mid-1970's was to require all the SROs to make their market information, particularly their quotations, available to the public. It is important to recognize that the basis for this policy determination was not to prevent the SROs from charging reasonable fees for their information. Rather, Congress and the Commission determined that the information was too important to investors and too affected with the public interest to allow the SROs to restrict its availability. Although the SROs are no longer allowed to act individually in setting fees or otherwise capitalizing on the value of their information, the Commission believes that they should be encouraged to generate high-quality market information that enhances the value of the stream of consolidated information made available to the public. Comment is requested on whether the formula for the Proportional Distribution should be revised to reflect this objective.
Under current practice, for example, the Proportional Distribution is based solely on transaction volume. It therefore does not attempt to reward markets for the value of their quotations, except insofar as an SRO's percentage of transaction volume is a surrogate for the value of its quotations. Comment is requested on whether, in fact, transaction volume accurately reflects the value of an SRO's quotations, or whether some other basis should be found for distributing a portion of Network revenues based directly on the value of quotations. For example, is it possible to devise a pragmatic formula or algorithm (or a combination of different formulas or algorithms) that would reward markets that provide "price discovery" to which other market participants look to set their own prices? Similarly, is there a way to reward markets that are the first to publish quotations at the best prices and in the largest sizes? Finally, assuming a formula could be found to assess the value of quotations in an individual security, how should the results be aggregated for all of the securities that are included in a Network? For example, should there be an adjustment to account for differences in trading volume or is it more appropriate for each security to be given equal weight regardless of trading volume?
It bears emphasis that a formula or algorithm that merely produced appropriate results retrospectively based on historical data would not be satisfactory. Instead, it must be capable of producing appropriate results prospectively when market participants will have the opportunity to adjust their behavior in response to the formula. In other words, a value-oriented distribution would need to be resistant to being "gamed" and to avoid awarding markets a share of market information revenues when they have not in fact enhanced the value of the stream of consolidated information.
Some of the SROs have established programs that in effect award rebates of market information revenues to their members.143 In general, these rebates are given to the members responsible for effecting the transactions that resulted in a Network's revenues being distributed to the SRO. The Commission requests comment on whether such rebates are consistent with the Exchange Act objective of fair competition. In addition, do rebate programs constitute an equitable allocation of an SRO's charges among its members when only selected members receive a rebate based on their transaction volume in a particular type of security? At least thus far, the rebate programs have been established solely for securities in which the SRO granting the rebate does not operate the primary market. Comment is requested on whether changing the rules for distribution of Network revenues as discussed above (to fund information integrity and reliability costs directly and to reward the SROs that provide the highest quality market information) would address the extent to which rebates could constitute unfair competition. Moreover, do rebate programs indicate that market information revenues exceed self-regulatory funding requirements?
Each of the Plans requires that audited financial statements be prepared for a Network's operations, primarily to allow its participants to verify that the financial provisions of the Plans have been satisfied. Currently, the Plans are not required to file publicly-available financial statements with the Commission.144 In this regard, the Commission proposed Rule 11Ab2-2 in 1975, which would have required registered SIPs to file an annual amendment to their Form SIP that included financial statements. The rule was never adopted. The Commission requests comment on whether the Plans should be required to make annual filings for the Networks that would be available to the public. These filings could include (1) a complete listing of all their fees, and (2) the number of users participating in each of their different fee programs, and (3) audited financial statements setting forth their revenues (including an itemized listing of revenues attributable to their different fees), expenses, and distributions.
In contrast with the Plans, the SROs currently are required to file publicly-available financial statements with the Commission as part of the annual amendments to Form 1 for the national securities exchanges (Rule 6a-2(b)(1)), or to Form X-15AJ-2 for the national securities association (Rule 15Aj-1(c)(2)). These financial statements, however, provide little information concerning the SROs' internal cost structures. Comment is requested on whether the SROs should be required to provide greater disclosure of their financial condition, including disclosure of the costs associated with the performance of their various SRO functions. The Commission notes that, at the very least, the SROs will need to provide financial disclosures that are sufficient to support whatever approaches ultimately are adopted for the evaluation of fees and distribution of revenues.
Each of the Plans has adopted essentially the same governance structure. All important operational decisions are to be made by a committee composed of one representative of each of the Plan's participants ("Operating Committee"). In addition, each Plan has designated one of its participants to administer its day-to-day affairs. Some of the Plans also have established committees to address particular aspects of their operations (for example, a technical committee to address technology issues).
None of the Plans provides for broader securities industry or public participation in the governance of its operations. The Commission is concerned that the Plans should be responsive (in a timely manner) to the concerns of vendors, broker-dealers, and investors in disseminating consolidated market information to the public. It also recognizes that the Plans operate substantial enterprises and must have governance structures that permit them to operate these enterprises effectively. Comment is requested on whether these governance structures should be broadened to include such parties as vendors, broker-dealers, and investors. If participation in the governance of the Plans were broadened, a variety of issues would need to be addressed. Should non-SRO parties be included on the Operating Committee? Should additional committees with broad participation be established to address the particular issues of most direct concern to parties that are not SROs (for example, a committee for establishing or reviewing fee structures)? What should be the mechanism for selecting non-SRO representatives to a committee? In what capacity should such representatives be allowed to participate (for example, voting or non-voting)? If given the power to vote, what should be the relative proportion of voting weight between the SRO and non-SRO representatives? Finally, comment is requested on whether, as an alternative to formal participation in Plan governance, the creation of an industry advisory committee on market information arrangements would constitute a more efficient and flexible vehicle to convey a broad range of views to the Plans and to the Commission.
With respect to the administration of fee structures, there appears to be considerable potential for making this process more efficient by standardizing and streamlining the agreements, policies, and reporting requirements that apply to vendors, broker-dealers, and subscribers.145 Many of these operational issues require detailed attention and are perhaps best addressed in the context of improved Plan governance rather than by direct Commission action. Nevertheless, the existence of four Networks, each with its own fee structures and requirements, inherently limits the extent to which any Network, acting alone, could substantially reduce the cumulative administrative costs incurred by vendors, broker-dealers, and subscribers. Comment is requested on whether the Plans should establish industry-wide standards for administering their fee structures and, if so, the most appropriate means for the Plans to act jointly in developing such standards.
Finally, the Commission is concerned that the Plans have used their "pilot program" provisions to implement fee structures for periods of time beyond that which the provisions originally were intended to cover.146 Comment is requested on the advisability and usefulness of pilot programs. Should they be eliminated entirely or should the Plans have some flexibility to experiment with innovative services and fee structures without first going through the process of a Commission filing and public comment? If pilot programs should continue in some form, comment is requested on whether they should be limited to a specified time period (for example, one year), after which the program could not be continued unless it was filed with the Commission. Finally, comment is requested on whether the terms and conditions of all pilot programs should be made available to the public in some fashion prior to initiation of the program.
The Commission invites public comment on all of the foregoing matters, as well as on any other matters relating to the arrangements for disseminating market information that commenters believe the Commission should consider in concluding its review and formulating proposals.
By the Commission.
Jonathan G. Katz
Secretary
Dated: December 9, 1999
Tables 1 through 4 set forth the Plans' principal fees for subscribers to market information services as they currently exist and as they existed at the end of 1998 and 1994. In addition to these subscriber fees, the Plans have a variety of other fees that apply to information vendors and others.
Table 1 Network A Subscriber Fees | |||
Current | 1998 | 1994 | |
Professional (monthly per device) | |||
no. of devices | |||
1 | $127.25 | unchanged | unchanged |
2 | 79.50 | ||
3 | 58.25 | ||
4 | 53.00 | ||
5 | 47.75 | ||
6 to 9 | 39.75 | ||
10 to 19 | 31.75 | ||
20 to 29 | 30.25 | ||
30 to 99 | 27.50 | ||
100 to 249 | 26.50 | ||
250 to 749 | 23.75 | ||
750 to 4999 | 20.75 | ||
5000 to 9999 | 19.75 | ||
10,000 and up | 18.75 | ||
Nonprofessional (monthly per subscriber) | $5.25 | $4.25 | |
1 to 250,000 subscribers per vendor |
1.00 | n/a | n/a |
250,001 subscribers and up |
.50 | n/a | n/a |
Per Query (processed by vendor per month) | .01 | .005 | |
1 to 20,000,000 |
.0075 | n/a | n/a |
20,000,001 to 40,000,000 |
.005 | n/a | n/a |
40,000,001 and up |
.0025 | n/a | n/a |
Table 2 Nasdaq System Subscriber Fees | |||
Current | 1998 | 1994 | |
Level 1/Last Sale (monthly per device) | $20.00 | $20.00 | $19.00 |
NQDS (monthly per device) | 50.00 | unchanged | unchanged |
Nonprofessional (monthly per person) | 2.00 | 4.00 | 4.00 |
Per Query | .005 | .01 | .015 |
Table 3 Network B Subscriber Fees | |||
Current | 1998 | 1994 | |
Professional (monthly per device) | |||
Members | |||
Last Sale | $13.60 | unchanged | unchanged |
Bid-Ask | 13.65 | unchanged | unchanged |
Non-Members | |||
Last Sale | 14.60 | unchanged | unchanged |
Bid-Ask | 15.60 | unchanged | unchanged |
Nonprofessional (monthly per person) | 1.00 | 3.25 | 3.25 |
Per Query (processed by vendor per month) | |||
1 to 20,000,000 |
.0075 | n/a | n/a |
20,000,001 to 40,000,000 |
.005 | n/a | n/a |
40,000,001 and up |
.0025 | n/a | n/a |
Per Query (per user, per month): | |||
1 to 50 Quotes |
n/a | .50 | n/a |
51 to 250 Quotes |
n/a | 3.25 | n/a |
More than 251 Quotes |
n/a | 35.00 | n/a |
Table 4 OPRA System Subscriber Fees* | ||||||
Current | 1998 | 1994 | ||||
Professional (monthly per device) |
||||||
no. of devices |
Member | Non-Member | Member | Non-Member | Member | Non-Member |
1 to 9 |
$16.00 | $26.00 | $15.00 | $24.00 | $21.00- 55.00 | $22.00- 55.00 |
10 to 29 |
16.00 | 22.00 | 15.00 | 20.00 | 12.00 | 13.00 |
30 to 99 |
13.00 | 22.00 | 12.00 | 20.00 | 9.00 | 10.00 |
100 to 749 |
13.00 | 15.50 | 12.00 | 14.50 | 9.00 | 10.00 |
750 or more |
10.00 | 15.50 | 9.40 | 14.50 | 7.00 | 8.00 |
Nonprofessional (monthly per person) |
2.50 | 2.00 | 2.00 | |||
Per Query (tiered by volume) |
.02 to .01 | .02 to .01 | .02 |
* The fees are applicable to the OPRA System's basic service (equity options and index options). It charges separately for information on foreign currency options.
Tables 5-8: Network Revenues, Expenses, and Distributions
Tables 5 through 8 set forth the Networks' revenues, expenses, and distributions to their participant SROs in 1998 and 1994. As discussed in section II above, the four Networks are responsible for receiving market information from the their SRO participants, consolidating the information, and distributing it to vendors, broker-dealers, and other subscribers. The Networks' administrators and processors perform most of these functions, and their costs are defined in the Plans as "operating expenses" that may be deducted from Network revenues prior to any distribution to participants The following costs are not included in the Networks' operating expenses: (1) the costs incurred by the SROs in collecting their market information and reporting it to the Network processors, and (2) the costs associated with the SROs' market surveillance function.
Table 5 Network A Revenues, Expenses, and Distributions | ||
For the years ended December 31, | 1998 | 1994 |
Revenues: | ||
Professional Subscribers | $112,444,000 | $79,519,000 |
Nonprofessional Subscribers | 6,040,000 | 825,000 |
Per Query | 8,236,000 | 276,000 |
Cable TV | 1,917,000 | 0 |
Access Fees | 9,682,000 | 4,133,000 |
Program Application Fees | 2,634,000 | 1,608,000 |
Ticker Communications Fees | 2,776,000 | 2,231,000 |
Other | 0 | 369,000 |
Total Revenues | 143,729,000 | 88,961,000 |
Expenses: | ||
Data Processing | 5,997,000 | 5,457,000 |
Ticker Network | 2,444,000 | 1,709,000 |
NYSE Allocated Support Costs | 8,697,000 | 5,304,000 |
Other | 1,360,000 | 326,000 |
Total Operating Expenses | 18,498,000 | 12,796,000 |
Income before Taxes | 125,231,000 | 76,165,000 |
Provision for Taxes | (36,000) | (863,000) |
Net Income Available for Distribution | 125,195,000 | 75,302,000 |
Distributions: | ||
NYSE | 93,223,000 | 54,594,000 |
NASD | 13,209,000 | 6,902,000 |
CHX | 6,898,000 | 4,153,000 |
PCX | 4,531,000 | 3,788,000 |
BSE | 3,390,000 | 1,748,000 |
CSE | 2,279,000 | 2,311,000 |
Phlx | 1,664,000 | 1,806,000 |
CBOE | 1,000 | 0 |
Table 6 Nasdaq System Revenues, Expenses, and Distributions | ||
For the years ended December 31, | 1998 | 1994 |
Revenues: | ||
Level 1/Last Sale (Professional) | $86,713,000 | $52,953,000 |
NQDS | 21,155,000 | 6,611,000 |
Nonprofessional Subscriber | 4,445,000 | 770,000 |
Per Query | 13,473,000 | 517,000 |
Voice Response | 1,956,000 | 592,000 |
Cable TV | 241,000 | 0 |
Other | 517,000 | 603,000 |
Total Revenues | 128,500,000 | 62,046,000 |
Distributions: | ||
NASD Retention | 128,088,000 | 61,946,000 |
CHX | 412,000 | 100,000 |
Table 7 Network B Revenues, Expenses, and Distributions | ||
For the years ended December 31, | 1998 | 1994 |
Revenues: | ||
Professional Subscriber | $91,576,000 | $68,677,000 |
Nonprofessional Subscriber | 1,625,000 | 416,000 |
Pilots (including per query) | 2,316,000 | 279,000 |
Tickers | 2,009,000 | 2,154,000 |
Computer Program Charges | 746,000 | 557,000 |
Indirect Access Charges | 853,000 | 116,000 |
Other | 123,000 | 152,000 |
Total Revenues | 99,248,000 | 72,351,000 |
Expenses: | ||
Data Processing Services | 579,000 | 895,000 |
Ticker Network Expenses | 663,000 | 433,000 |
Amex Allocated Support Costs | 3,771,000 | 2,852,000 |
Total Expenses | 5,013,000 | 4,180,000 |
Net Income Available for Distribution | 94,235,000 | 68,171,000 |
Distributions: | ||
Amex | 67,090,000 | 56,460,000 |
CHX | 12,722,000 | 4,507,000 |
NASD | 9,020,000 | 2,783,000 |
PCX | 2,855,000 | 2,164,000 |
BSE | 782,000 | 1,264,000 |
Phlx | 528,000 | 881,000 |
CSE | 236,000 | 112,000 |
CBOE | 85,000 | 0 |
DIAMONDS | 917,000 | 0 |
Table 8 OPRA System Revenues, Expenses, and Distributions | ||
For the years ended December 31, | 1998 | 1994 |
Revenues: | ||
Professional Subscriber | $39,251,000 | $23,333,000 |
Nonprofessional Subscriber | 774,000 | 219,000 |
Vendor Fees | 1,452,000 | 1,655,000 |
Other (including per-query) | 2,031,000 | 360,000 |
Interest | 148,000 | 56,000 |
Total Revenues | 43,656,000 | 25,623,000 |
Expenses: | ||
Administrative and Operating Expenses | 1,557,000 | 1,044,000 |
Processing Costs | 3,324,000 | 1,772,000 |
Total Expenses | 4,881,000 | 2,816,000 |
Net Income Available for Distribution | 38,775,000 | 22,807,000 |
Distributions: | ||
CBOE | 18,582,000 | 12,818,000 |
Amex | 9,889,000 | 4,960,000 |
Phlx | 4,939,000 | 2,448,000 |
PCX | 5,365,000 | 2,392,000 |
NYSE | 0 | 189,000 |
Tables 9-17: SRO Revenues and Expenses
Tables 9 through 17 set forth for 1998 and 1994 the SROs' revenues (including their distributions from the Networks), expenses, and an analysis of their sources of revenues (each source of revenues is represented as a percentage of total revenues). The figures are derived primarily from the SROs' audited financial statements and their accompanying notes, which should be referred to for a complete and fair presentation of their financial condition. The following tables are provided for convenience of comparison.
Table 9 NYSE Consolidated Revenues and Expenses | ||
For the years ended December 31, | 1998 | 1994 |
Revenues: | ||
Market Information Revenues: | ||
Network A: | ||
Distribution | $93,223,000 | $54,594,000 |
Allocated Support Costs | 8,697,000 | 5,304,000 |
OPRA System Distribution | 0 | 189,000 |
Other | 9,573,000 | 7,976,000 |
Total Market Information Revenues | 111,493,000 | 68,063,000 |
Listing Fees | 296,022,000 | 180,561,000 |
Trading Fees | 123,795,000 | 92,080,000 |
Regulatory Fees | 93,116,000 | 50,512,000 |
Facility and Equipment Fees | 41,865,000 | 33,643,000 |
Membership Fees | 7,361,000 | 6,125,000 |
Investment and Other Income | 55,022,000 | 21,295,000 |
Total Revenues | 728,674,000 | 452,279,000 |
Expenses: | ||
Compensation | 204,711,000 | 152,194,000 |
Systems and Related Support | 201,913,000 | 140,049,000 |
General and Administrative | 51,703,000 | 22,613,000 |
Depreciation and Amortization | 37,947,000 | 21,732,000 |
Professional Services | 29,607,000 | 13,473,000 |
Occupancy | 24,071,000 | 22,079,000 |
Total Expenses | 549,952,000 | 372,140,000 |
Income before Taxes | 178,722,000 | 80,139,000 |
Analysis of Sources of Revenues
(percent of total revenues) | ||
Market Information | 15.3 | 15.0 |
Listing Fees | 40.6 | 39.9 |
Trading Fees | 17.0 | 20.4 |
Regulatory Fees | 12.8 | 11.2 |
Facility and Equipment Fees | 5.7 | 7.4 |
Membership Fees | 1.0 | 1.4 |
Investment and Other Income | 7.6 | 4.7 |
Table 10 NASD Consolidated Revenues and Expenses
(excluding Amex subsidiary) | ||
For years ended December 31, | 1998 | 1994 |
Revenues: | ||
Market Information Revenues: | ||
Nasdaq System Retention | $128,088,000 | $61,946,000 |
Network A Distribution | 13,209,000 | 6,902,000 |
Network B Distribution | 9,020,000 | 2,783,000 |
Other | 1,937,000 | 2,798,000 |
Total Market Information Revenues | 152,254,000 | 74,429,000 |
Issuer Services | 137,344,000 | 79,219,000 |
Transaction Services | 126,913,000 | 60,653,000 |
Member Assessments | 91,313,000 | 44,152,000 |
Registration and Qualification Fees | 78,662,000 | 45,761,000 |
Regulatory Fees and Fines | 47,880,000 | 18,406,000 |
Interest and Other | 27,871,000 | 25,988,000 |
Arbitration Fees | 21,427,000 | 7,592,000 |
Corporate Finance Fees | 16,143,000 | 15,787,000 |
Total Revenues | 699,807,000 | 371,987,000 |
Expenses: | ||
Compensation | 271,608,000 | 132,444,000 |
Professional and Contract Services | 154,311,000 | 67,142,000 |
Computer Operation and Data Communications | 65,101,000 | 31,355,000 |
Depreciation and Amortization | 60,573,000 | 20,380,000 |
Occupancy | 24,092,000 | 19,840,000 |
Publications, Supplies, and Postage | 23,352,000 | 10,996,000 |
Travel, Meetings, and Training | 22,907,000 | 16,121,000 |
Other | 22,586,000 | 13,598,000 |
Systems Technology Migration | 0 | 29,053,000 |
Intercompany (Amex) | (20,632,000) | 0 |
Total Expenses | 623,898,000 | 340,929,000 |
Income before Provision for Income Taxes | 75,909,000 | 31,058,000 |
Analysis of Sources of Revenues
(percent of total revenues) | ||
Market Information | 21.8 | 20.0 |
Issuer Services | 19.6 | 21.3 |
Transaction Services | 18.1 | 16.3 |
Member Assessments | 13.0 | 11.9 |
Registration and Qualification Fees | 11.2 | 12.3 |
Regulatory Fees and Fines | 6.8 | 4.9 |
Interest and Other | 4.0 | 7.0 |
Arbitration Fees | 3.1 | 2.0 |
Corporate Finance Fees | 2.3 | 4.2 |
Table 11 Amex Consolidated Revenues and Expenses
(includes two-month period after acquisition by NASD on October 30, 1998) | ||
For the years ended December 31, | 1998 | 1994 |
Revenues: | ||
Market Information Revenues: | ||
Network B: | ||
Distribution | $67,090,000 | $56,460,000 |
Allocated Support Costs | 3,771,000 | 2,852,000 |
OPRA System Distribution | 9,889,000 | 4,960,000 |
Other | 2,160,000 | 1,993,000 |
Total Market Information Revenues | 82,910,000 | 66,265,000 |
Trading Fees | 91,937,000 | 45,107,000 |
Members' Dues and Regulatory Fines and Fees | 17,679,000 | 2,875,000 |
Listing Fees | 16,265,000 | 15,151,000 |
Investment and other income | 15,257,000 | 14,157,000 |
Total Revenues | 224,048,000 | 143,555,000 |
Expenses: | ||
Compensation and benefits | 65,484,000 | 57,708,000 |
Systems and Related Support Costs | 45,638,000 | 29,231,000 |
Professional Services | 23,636,000 | 4,498,000 |
Facilities Costs | 11,186,000 | 9,648,000 |
Depreciation and amortization | 9,225,000 | 9,205,000 |
General Administrative and Other Expenses | 26,003,000 | 18,833,000 |
Intercompany (after NASD acquisition) | 20,632,000 | 0 |
Total Expenses | 201,804,000 | 129,123,000 |
Income before Income Taxes | 22,244,000 | 14,432,000 |
Analysis of Sources of Revenues
(percent of total revenues) | ||
Market Information | 37.0 | 46.2 |
Trading Fees | 41.0 | 31.4 |
Members' Dues and Regulatory Fines and Fees | 7.9 | 2.0 |
Listing Fees | 7.3 | 10.6 |
Investment and other income | 6.8 | 9.7 |
Table 12 CBOE Consolidated Revenues and Expenses | ||
For the years ended June 30, | 1998 | 1994 |
Revenues: | ||
Total Market Information Revenues* | $17,538,000 | $11,052,000 |
Transaction Fees | 84,639,000 | 68,205,000 |
Other Member Fees | 19,703,000 | 14,272,000 |
Interest | 1,133,000 | 1,059,000 |
Equity in Income of CSE | 515,000 | 1,078,000 |
Other | 3,012,000 | 1,997,000 |
Total Revenues | 126,540,000 | 97,663,000 |
Expenses: | ||
Employee Costs | 57,395,000 | 41,974,000 |
Outside Services | 14,948,000 | 7,173,000 |
Facilities Cost | 3,887,000 | 3,663,000 |
Communications | 726,000 | 830,000 |
Data Processing | 8,400,000 | 6,028,000 |
Travel and Promotional Expenses | 15,585,000 | 5,071,000 |
Depreciation and Amortization | 16,571,000 | 6,997,000 |
Other | 8,733,000 | 4,360,000 |
Total Expenses | 126,245,000 | 76,096,000 |
Income before Income Taxes | 295,000 | 21,567,000 |
Analysis of Sources of Revenues
(percent of total revenues) | ||
Market Information | 13.9 | 11.3 |
Transaction Fees | 66.9 | 69.8 |
Other Member Fees | 15.6 | 14.6 |
Interest | 0.9 | 1.1 |
Equity in Income of CSE | 0.4 | 1.1 |
Other | 2.4 | 2.0 |
* The CBOE's reporting period ends on June 30. This reporting period renders inapplicable the CBOE distributions listed on Tables 5, 7, and 8 for the years ended December 31, 1998 and 1994.
Table 13 PCX Consolidated Revenues and Expenses | ||
For the years ended December 31, | 1998 | 1994 |
Revenues: | ||
Market Information Revenues: | ||
Network A Distribution | $4,531,000 | $3,788,000 |
Network B Distribution | 2,855,000 | 2,164,000 |
OPRA System Distribution | 5,365,000 | 2,392,000 |
Other | 191,000 | 78,000 |
Total Market Information Revenues | 12,942,000 | 8,422,000 |
Transaction and Service Charges | 53,782,000 | 30,450,000 |
Peripheral Equipment and Market Data Fees | 1,900,000 | 1,919,000 |
Listing Fees | 1,986,000 | 2,014,000 |
Member and Participant Dues | 1,659,000 | 1,825,000 |
Interest Income | 1,580,000 | 681,000 |
Regulatory and Registration Fees | 1,294,000 | 687,000 |
Other | 1,840,000 | 801,000 |
Total Revenues | 76,983,000 | 46,799,000 |
Expenses: | ||
Compensation and Other Employee Costs | 33,878,000 | 19,662,000 |
Facilities | 8,959,000 | 6,776,000 |
Equipment | 8,497,000 | 6,433,000 |
Communications | 5,604,000 | 3,453,000 |
Professional Services | 5,764,000 | 730,000 |
Travel Expenses | 1,854,000 | 0 |
Outside Data Processing Services | 951,000 | 1,073,000 |
Expenditures Relating to New Facilities Project | 4,150,000 | 0 |
Financing Costs | 0 | 453,000 |
General and Administrative Expenses | 6,328,000 | 3,409,000 |
Total Expenses | 75,985,000 | 41,989,000 |
Income before Income Taxes | 998,000 | 4,810,000 |
Analysis of Sources of Revenues
(percent of total revenues) | ||
Market Information | 16.8 | 18.0 |
Transaction and Service Charges | 70.0 | 65.1 |
Peripheral Equipment and Market Data Fees | 2.5 | 4.1 |
Listing Fees | 2.6 | 4.3 |
Member and Participant Dues | 2.2 | 3.9 |
Interest Income | 2.1 | 1.5 |
Regulatory and Registration Fees | 1.7 | 1.5 |
Other | 2.4 | 1.7 |
Table 14 CHX Consolidated Revenues and Expenses | ||
For the years ended December 31, | 1998 | 1994 |
Revenues: | ||
Market Information Revenues: | ||
Network A Distribution | $6,898,000 | $4,153,000 |
Network B Distribution | 12,722,000 | 4,507,000 |
Nasdaq System Distribution | 412,000 | 100,000 |
Total Market Information Revenues | 20,032,000 | 8,760,000 |
Operations | 24,709,000 | 20,204,000 |
Interest | 1,111,000 | 689,000 |
Total Revenues | 45,852,000 | 29,653,000 |
Expenses: | ||
Employee Compensation & Benefits | 15,022,000 | 13,693,000 |
Systems & Related Support | 4,444,000 | 3,494,000 |
Rent, Maintenance & Utilities | 4,166,000 | 4,226,000 |
Professional & Other | 7,365,000 | 2,031,000 |
General & Administrative | 3,859,000 | 2,374,000 |
Depreciation & Amortization | 3,887,000 | 3,758,000 |
Other | 0 | 701,000 |
Total Expenses | 38,743,000 | 30,277,000 |
Income before Income Taxes | 7,109,000 | (624,000) |
Analysis of Sources of Revenues
(percent of total revenues) | ||
Market Information | 43.7 | 29.5 |
Operations | 53.9 | 68.1 |
Interest | 2.4 | 2.3 |
Table 15 Phlx Consolidated Revenues and Expenses | ||
For years ended December 31, | 1998 | 1994 |
Revenues: | ||
Market Information Revenues: | ||
Network A Distribution | $1,664,000 | $1,806,000 |
Network B Distribution | 528,000 | 881,000 |
OPRA System Distribution | 4,939,000 | 2,448,000 |
Total Market Information Revenues | 7,131,000 | 5,135,000 |
Transaction Fees | 22,556,000 | 14,426,000 |
Depository | 0 | 10,613,000 |
Clearing and Settlement | 5,950,000 | 4,165,000 |
Floor Charges | 1,595,000 | 1,732,000 |
Dividend and Interest Income | 1,287,000 | 1,700,000 |
Other | 5,159,000 | 2,865,000 |
Total Revenues | 43,678,000 | 40,636,000 |
Expenses: | ||
Staffing Costs | 22,114,000 | 23,213,000 |
Data Processing and Communication Costs | 4,041,000 | 4,540,000 |
Occupancy Costs | 2,817,000 | 3,337,000 |
Professional Services | 2,783,000 | 494,000 |
Other | 7,427,000 | 9,975,000 |
Total Expenses | 39,182,000 | 41,559,000 |
Income from Continuing Operations before Income Taxes | 4,496,000 | (923,000) |
Analysis of Sources of Revenues
(percent of total revenues) | ||
Market Information | 16.3 | 12.6 |
Transaction Fees | 51.6 | 35.5 |
Depository | 0.0 | 26.1 |
Clearing and Settlement | 13.6 | 10.2 |
Floor Charges | 3.7 | 4.3 |
Dividend and Interest Income | 2.9 | 4.2 |
Other | 11.8 | 7.1 |
Table 16 BSE Consolidated Revenues and Expenses | ||
For years ended September 30, | 1998 | 1994 |
Revenues: | ||
Market Information Revenues: | ||
Network A Distribution* | $3,029,000 | $1,712,000 |
Network B Distribution* | 783,000 | 1,301,000 |
Total Market Information Revenues | 3,812,000 | 3,013,000 |
Transaction Charges | 10,438,000 | 7,588,000 |
Members' Dues and Fees | 2,451,000 | 2,418,000 |
Listing Fees | 825,000 | 1,187,000 |
Interest | 743,000 | 390,000 |
Other | 97,000 | 305,000 |
Total Revenues | 18,366,000 | 14,901,000 |
Expenses: | ||
Employee Costs | 7,799,000 | 6,387,000 |
Data Processing | 1,098,000 | 1,049,000 |
Occupancy Costs | 1,524,000 | 1,530,000 |
Telecommunications | 1,411,000 | 1,132,000 |
Clearing Fees and Related Costs | 465,000 | 327,000 |
Professional Services | 2,001,000 | 678,000 |
Depreciation and Amortization | 941,000 | 900,000 |
Office and Other Related Expenses | 548,000 | 489,000 |
Interest | 63,000 | 82,000 |
Maintenance and Repairs | 624,000 | 553,000 |
Other | 1,129,000 | 728,000 |
Total Expenses | 17,603,000 | 13,855,000 |
Income before Taxes | 763,000 | 1,046,000 |
Analysis of Sources of Revenues
(percent of total revenues) | ||
Market Information | 20.8 | 20.2 |
Transaction Charges | 56.8 | 50.9 |
Members' Dues and Fees | 13.3 | 16.2 |
Listing Fees | 4.5 | 8.0 |
Interest | 4.0 | 2.6 |
Other | 0.5 | 2.0 |
* The BSE's reporting period ends on September 30. This reporting period renders inapplicable the BSE distributions listed on Tables 5 and 7 for the years ended December 31, 1998 and 1994.
Table 17 CSE Revenues and Expenses | ||
For the year ended June 30, | 1998 | 1994* |
Revenues: | ||
Market Information Revenues: | ||
Network A Distribution* | $2,450,000 | $970,000 |
Network B Distribution* | 173,000 | 20,000 |
Total Market Information Revenues | 2,623,000 | 990,000 |
Transaction Fees | 2,607,000 | 2,072,000 |
Members' Dues and Fees | 451,000 | 92,000 |
Service Fees | 136,000 | 428,000 |
Total Operating Revenues | 5,817,000 | 3,582,000 |
Expenses: | ||
Computer and Other Costs of Services | 2,605,000 | 997,000 |
Salaries, Wages and Employee Benefits | 1,766,000 | 675,000 |
Professional Services | 116,000 | 165,000 |
Communications | 140,000 | 110,000 |
Occupancy | 351,000 | 76,000 |
Travel and Promotional | 146,000 | 0 |
Other | 323,000 | 152,000 |
Total Operating Expenses | 5,447,000 | 2,175,000 |
Operating Income | 370,000 | 1,407,000 |
Non-Operating Income--Net | 694,000 | 20,000 |
Income before Provision for Income Taxes | 1,064,000 | 1,427,000 |
Analysis of Sources of Revenues
(percent of total revenues) | ||
Market Information | 45.1 | 27.6 |
Transaction Fees | 44.8 | 57.8 |
Members' Dues and Fees | 7.8 | 2.6 |
Service Fees | 2.3 | 11.9 |
* Due to a change in reporting period, 1994 information is for the six-month period ending June 30, 1994. In addition, the June 30 reporting period renders inapplicable the CSE distributions listed on Tables 5 and 7 for the years ended December 31, 1998 and 1994.
1 Currently, the national securities exchanges are the American Stock Exchange LLC ("Amex"), the Boston Stock Exchange, Incorporated ("BSE"), the Chicago Board Options Exchange, Incorporated ("CBOE"), the Chicago Stock Exchange, Incorporated ("CHX"), the Cincinnati Stock Exchange ("CSE"), the New York Stock Exchange, Inc. ("NYSE"), the Pacific Exchange, Inc. ("PCX"), and the Philadelphia Stock Exchange, Inc. ("Phlx"). The national securities association is the National Association of Securities Dealers, Inc. ("NASD").
2 Pub. L. No. 94-29, 89 Stat. 97 (1975).
3 The fees applicable to professional subscribers and retail investors, as well as the revenues derived from such fees for 1994 and 1998, are set forth in Tables 1-8 in the Appendix. The fee structures are described in section II.E below.
4 See Securities Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR 70844 ("ATS Release").
5 15 U.S.C. §§78a-78mm.
6 Itemized revenues and expenses for the SROs in 1994 and 1998 are set forth in Tables 9-17 in the Appendix.
7 While SRO revenues and costs have grown rapidly during the expansion in trading volume, they still have been outpaced by the growth in revenues, costs, and profits of the securities industry as a whole. See section IV.B below.
8 See, e.g., Susan B. Garland, "Whose Info Is It, Anyway?", Business Week, Sept. 13, 1999, at 114, 118; Diana B. Henriques, "Who Holds the Deed to Stock Data?", N.Y. Times, Mar. 28, 1999, at 7.
9 See section III.A below for a discussion of the SROs' legal rights with respect to market information prior to implementation of the national market system in the mid-1970's.
10 The Exchange Act's national market system objectives are discussed in section III.B below.
11 17 CFR 240.11Aa3-1.
12 A "national market system security" is defined in Rule 11Aa2-1, 17 CFR 11Aa2-1, as any "reported security" as defined in Rule 11Aa3-1. Currently, reported securities under Rule 11Aa3-1 are equity securities that are listed on a national securities exchange or that are included in the National Market tier of Nasdaq.
13 17 CFR 240.11Ac1-1.
14 17 CFR 240.11Ac1-2.
15 17 CFR 240.11Aa3-2.
16 CTA Plan, Sections I(p) and VII(a)(i).
17 The CQ Plan is administered by an Operating Committee that is substantially the same as the CTA.
18 SIAC is jointly owned by the NYSE and Amex and is a registered SIP under Section 11A(b).
19 CTA Plan, Sections I(q) and VII(a).
20 See, e.g., CTA Plan, Section XII(a) ("Except as otherwise indicated, each income, expense and cost item, and each formula therefor described in this Section XII, applies separately to each of the two CTA networks and its respective Participants.").
21 See NASD Rule 4200(a)(27).
22 See, e.g., NASD Rule 7010(a).
23 A "limited participant" is a national securities exchange whose participation in the Nasdaq/UTP Plan is restricted to reporting market information.
24 OPRA Plan, Section III(a).
25 The NYSE no longer trades listed options.
26 See, e.g., CQ Plan, Sections IV(c) and IX(b)(iii); Nasdaq/UTP Plan, Section IV.C.2.
27 See, e.g., CTA Plan, Section IV(a) ("CTA will be primarily a policy-making body as distinguished from one engaged in operations of any kind. CTA, directly or by delegating its functions to individuals, committees established by it from time to time, or others, will administer this CTA Plan and will have the power and exercise the authority conferred upon it by this CTA Plan as described herein.").
28 CQ Plan, Sections I(b) and VI(c); Nasdaq/UTP Plan, Section VI.C.1.
29 The total revenues for Network A and Network B were $161.3 million in 1994 and $243.0 million in 1998. See Tables 5 and 7 in the Appendix. A fuller comparison of the growth in market data revenues and expenses compared to other securities industry benchmarks is provided in section IV.B.2 below.
30 The OPRA Plan is somewhat different from the others in that it provides for three separate "accounting centers" basic, index options, and foreign currency options for the allocation of revenues and expenses. OPRA Plan, Section VIII(a).
31 See, e.g., CTA Plan, Section XII(c)(v) ("Except as otherwise provided in this Section XII(c), each Participant and each other reporting party shall be responsible for paying the full cost and expense (without any reimbursement or sharing) incurred by it in collecting and reporting to the Processor in New York City last sale price information relating to Eligible Securities or associated with its market surveillance function."); OPRA Plan, Section VIII(a)(ii) ("Each party shall be responsible for paying the full cost incurred by it in collecting and reporting to the Processor last sale reports and quotation information related to eligible securities for dissemination through the OPRA System.").
32 See CTA Plan, Section XII(a); CQ Plan, Section IX(a); OPRA Plan, Section XIII(b). The Nasdaq/UTP Plan distribution formula is a little different from the other plans in that it is based on an average of the percentage of total transaction volume and the percentage of total share volume. The Nasdaq/UTP Plan also provides for certain minimum payments to new participants. See Nasdaq/UTP Plan, Exhibit A. Thus far, CHX is the only non-NASD participant in the Nasdaq/UTP Plan to receive a distribution.
33 CTA Plan, Section XII(a)(v); CQ Plan, Section IX(a)(v); Nasdaq/UTP Plan, Section XIV(C); OPRA Plan, Section VIII(a)(v).
34 A detailed discussion of the process for obtaining market information from the Networks, including the applicable forms and their terms and conditions, is provided in a report on market data pricing commissioned by the Securities Industry Association. Arthur Andersen LLP, Report on Market Data Pricing 8-15 (June 1999) ("Andersen Report").
35 See, e.g., CTA Plan, Section IX(a) (specifying a "Consolidated Vendor Form" and a "Consolidated Subscriber Form").
36 Fees are set separately for each of the four Networks.
37 See Andersen Report, note 34 above, at Exhibit 4 (listing the various fees and charges imposed on vendors and subscribers).
38 A packet generally includes a variety of information relating to a single security (e.g., last sale price, best bid, best offer, and volume).
39 See, e.g., Securities Exchange Act Release No. 35393 (February 17, 1995), 60 FR 10625 (NASD's purpose in establishing a per-query fee structure was "to provide retail customers with a cost-effective alternative to calling their brokers for current market information").
40 Securities Exchange Act Release No. 42138 (Nov. 15, 1999), 64 FR 63350 (Network B fee reduction); Securities Exchange Act Release No. 41977 (Oct. 5, 1999), 64 FR 55503 (Network A fee reduction); Securities Exchange Act Release No. 41499 (June 9, 1999), 64 FR 32910 (Nasdaq System fee reduction).
41 For Network A, per-query fees are capped at the $1 monthly fee that applies to the first 250,000 nonprofessional customers of a vendor.
42 The administrative burdens associated with the monthly and per-query fee structures are discussed at length in the Andersen Report, note 34 above.
43 See Securities Exchange Act Release No. 38204 (Jan. 24, 1997), 62 FR 4553.
44 See Securities Exchange Act Release No. 41977, note 40 above.
45 Section VII(e) of the CQ Plan contains a provision that is nearly identical to the CTA Plan provision.
46 See, e.g., Securities Exchange Act Release No. 40689 (Nov. 19, 1998), 63 FR 65626 (NASD proposed rule change to make permanent a pilot program for delivery of market information through automated voice response services that had been in operation for eleven years); Securities Exchange Act Release No. 39235 (Oct. 14, 1997), 62 FR 54886 (Network A proposal to include a per-query fee in its permanent fee schedule; noting that Network A had conducted pilot programs for per-query fees since 1991).
47 Although the Commission has not yet exercised its rulemaking authority under Section 11A(c)(1)(C) or (D) to specify the fees that can be charged for market information, these provisions plainly indicate Congress' intent that an exclusive processor's fees be "fair and reasonable" and "not unreasonably discriminatory." Consequently, these requirements are applicable to the Commission's review of fees in the context of a proposed rule change by an SRO under Section 19(b) or a national market system plan under Rule 11Aa3-2(c), as well as proceedings under Section 11A(b)(5) to review a registered SIP's limitation on access to market information. In each of these contexts, the Commission is required to determine whether a proposed fee is consistent with the provisions of the Exchange Act.
48 See, e.g., MCI Telecommunications Corp. v. FCC, 675 F.2d 408, 410 (D.C. Cir. 1982) ("A basic principle used to ensure that rates are 'just and reasonable' is that rates are determined on the basis of cost.") (footnote omitted); James C. Bonbright, et al., Principles of Public Utility Rates 109 (2d ed. 1988) ("[O]ne standard of reasonable rates can fairly be said to outrank all others in the importance attached to it by experts and public opinion alike the standard of costs of service, often qualified by the stipulation that the relevant cost is necessary, true (i.e., private and social) cost or cost reasonably and prudently incurred.").
49 See Bonbright, note 48 above, at 109 ("Rates found to be far in excess of cost are at least highly vulnerable to the charge of unreasonableness. Rates found well below cost are likely to be tolerated, if at all, only as a necessary and temporary evil. For if rates are not compensatory, they are not subsidy free.").
50 See section III.C below for a discussion of the Commission's adoption of a strict cost-of-service standard in the context of a limitation of access proceeding under Section 11A(b)(5) involving the NASD and Institutional Networks Corporation ("Instinet").
51 In section V.A below, the Commission requests comment on a flexible, cost-based approach to assessing the fairness and reasonableness of market information fees.
52 Board of Trade v. Christie Grain & Stock Co., 198 U.S. 236 (1905); Hunt v. New York Cotton Exchange, 205 U.S. 322 (1907); Moore v. New York Cotton Exchange, 270 U.S. 593 (1926). Many years have passed since these cases were decided. They are discussed in this release not because they necessarily would be decided the same way today, but to set forth the legal context surrounding the initiation of the national market system.
53 For example, the NYSE generally made last-sale prices available to members, non-members, and telegraphic distributors pursuant to this type of agreement. See Letter from Robert W. Haack, President, NYSE, to William J. Casey, Chairman, SEC, dated May 22, 1972 ("NYSE Letter"). Some of the regional exchanges, however, did not restrict access to their market information. For example, the PCX publicized its transactions on a tickertape, which was made available to the vendors and the press, but imposed no restrictions on the use or dissemination of the information. See Letter from Thomas P. Phelan, President, PCX, to Ronald F. Hunt, Secretary, SEC, dated May 19, 1972.
54 198 U.S. 236 (1905).
55 Certain telegraph companies were the only entities authorized to receive and distribute the CBOT's quotations, pursuant to an agreement that they not furnish the quotations to "bucket shops." The defendants did not receive the quotations through these telegraph companies. 198 U.S. at 245.
56 Id. at 250.
57 Id. at 251.
58 205 U.S. 322 (1907).
59 Id. at 333, 336.
60 Letter from Paul Kolton, President, Amex, to Ronald F. Hunt, Secretary, SEC, dated May 22, 1972.
61 See NYSE Letter, note 53 above.
62 SEC, Institutional Investor Study Report, H.R. Doc. No. 92-64, 92d Cong., 1st Sess. (1971).
63 Id. at xxiv.
64 Statement of the Securities and Exchange Commission on the Future Structure of the Securities Markets (February 2, 1972), 37 FR 5286.
65 Securities Exchange Act Release No. 9529 (March 8, 1972), 37 FR 5760 (proposing Rule 17a-14 for quotation dissemination); Securities Exchange Act Release No. 9530 (March 8, 1972), 37 FR 5761 (proposing Rule 17a-15 for transaction reporting).
66 NYSE Letter, note 53 above.
67 Securities Exchange Act Release No. 9731 (August 14, 1972) (reproposing the transaction reporting rule).
68 Securities Exchange Act Release No. 10969 (August 14, 1974), 39 FR 31920 (reproposing the quotation dissemination rule).
69 Securities Exchange Act Release No. 11288 (March 11, 1975), 40 FR 15015. In making this request, however, the Commission stated that it did "not view as a restriction reasonable charges for providing access to, or permitting use of, quotation information." Id. at n.8
70 Securities Exchange Act Release No. 11406 (May 7, 1975).
71 NYSE, 1975 Annual Report 16; Amex, 1975 Annual Report 14.
72 S. Rep. No. 94-75, 94th Cong., 1st Sess. 7 (1975) ("Senate Report").
73 H.R. Rep. No. 94-229, 94th Cong., 1st Sess. 93 (1975) ("Conference Report").
74 Id. at 92.
75 Id.
76 Id. at 93.
77 Senate Report, note 72 above, at 11.
78 Id. at 12.
79 Id. at 10.
80 Congress explicitly defined "equal regulation" in the Exchange Act in terms of the effect of regulation on competition. Section 3(a)(36) provides that a "class of persons or markets is subject to 'equal regulation' if no member of the class has a competitive advantage over any other member thereof resulting from a disparity in their regulation under this title which the Commission determines is unfair and not necessary or appropriate in furtherance of the purposes of this title." The legislative history of this section emphasizes that equal regulation "is a competitive concept intended to guide the Commission in its oversight and regulation of the trading markets and the conduct of the securities industry." Id. at 94.
81 Conference Report, note 73 above, at 92.
82 Securities Exchange Act Release No. 14415 (January 26, 1978), 43 FR 4342.
83 Id.
84 Securities Exchange Act Release No. 35721 (May 16, 1995), 60 FR 27148.
85 Securities Exchange Act Release No. 37686 (September 16, 1996), 61 FR 49801.
86 Securities Exchange Act Release No. 39235 (October 14, 1997), 62 FR 54886.
87 In the Matter of Bunker Ramo Corp., GTE Information Systems, Inc., and Options Price Reporting Authority, Securities Exchange Act Release No. 15372 (November 29, 1978).
88 Id.
89 Securities Exchange Act Release No. 20874 (April 17, 1984), 49 FR 17640.
90 The NASD provided its most basic quotation service, Nasdaq Level 1 (which included only the best bid and offer), solely through vendors. In contrast, it provided its enhanced Nasdaq Level 2 service (which included a full montage showing each market maker and its quotations) directly to subscribers. Instinet also wanted to participate in the market for providing the full montage to subscribers. The NASD had proposed to charge Instinet's subscribers a fee based on the fee it charged its own subscribers, thereby charging a retail price to a competitor in the wholesale market.
91 Id.
92 Id. (emphasis added).
93 801 F.2d 1415 (D.C. Cir. 1986).
94 801 F.2d at 1419.
95 801 F.2d at 1420-1421.
96 Securities Exchange Act Release No. 22376 (August 30, 1985), 50 FR 36692.
97 Securities Exchange Act Release No. 22935 (February 21, 1986), 51 FR 6957.
98 Securities Exchange Act Release No. 26119 (September 27, 1988), 53 FR 39002.
99 The six resources were (1) network/communications 2400-baud lines, (2) network/ communications 9600-baud lines, (3) UNISYS processor, (4) Tandem processor, (5) UNISYS data storage, and (6) Tandem data storage.
100 The eleven services were (1) Level 1, (2) Last Sale, (3) Level 2/3, (4) NQDS, (5) SOES, (6) TARS/MBARS, (7) CAES, (8) CTCI, (9) Mutual Funds, (10), NASDAQ/NMS Ticker, and (11) ACES.
101 Securities Exchange Act Release No. 28200 (July 12, 1990), 55 FR 29446.
102 Securities Exchange Act Release No. 28539 (October 15, 1990), 55 FR 42796.
103 Id.
104 See Tables 9 through 17 in the Appendix.
105 S. Rep. No. 1455, 75th Cong., 3d Sess. 3 (1938).
106 Id. at 4.
107 Senate Report, note 72 above, at 22.
108 Id. at 23.
109 Securities Exchange Act Release No. 29185 (May 9, 1991), 56 FR 22490; Securities Exchange Act Release No. 27445 (Nov. 16, 1989), 54 FR 48703.
110 Section 15(b)(9) of the Exchange Act requires all broker-dealers to become members of a national securities association unless they limit their activities to effecting transactions in securities solely on a national securities exchange of which they are a member. As a result, all broker-dealers doing a public business currently must become members of the NASD, as well as of the exchanges on which they conduct business.
111 See, e.g., SEC, 46th Annual Report 110-111 (1980) (setting forth total revenues and market information revenues (then labeled "communication revenues") for each of the SROs from 1975 to 1979).
112 The principal exception is SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." As discussed further below, the NASD has provided, pursuant to this accounting standard, the fullest disclosure of its internal cost structure of all the SROs. The notes to the NASD's 1998 consolidated financial statements provide disclosure of financial information for its NASD Regulation and Nasdaq-Amex business segments.
113 In section V.C below, the Commission requests comment on whether the SROs should be required to provide greater disclosure concerning their internal cost structures.
114 Securities Industry Association, 1999 Securities Industry Factbook 43 (1999) ("SIA Factbook"). The Securities Industry Association estimates that the NYSE members doing a public business accounted for approximately 72% of the total revenues of all U.S.-registered broker-dealers. Id. at 27.
115 The SROs' market data revenues were $246.1 million in 1994 and $410.6 million in 1998. The SROs' total revenues were $1.20 billion in 1994 and $1.97 billion in 1998. See Tables 9-17 in the Appendix. The securities industry's total revenues were $71.4 billion in 1994 and $170.8 billion in 1998. SIA Factbook at 42.
116 In addition to broker-dealers, other entities, such as institutional investors and information vendors, provide a portion of total market information revenues.
117 The NASD did not acquire Amex as a subsidiary until October 30, 1998. Amex therefore has been treated separately from the NASD throughout this release.
118 Nasdaq has, however, retained some responsibilities for market surveillance in its MarketWatch group.
119 See, e.g., Principles of Public Utility Rates, note 48 above, at 118 ("Direct costs are incurred only and entirely for the provision of a particular service."); Gordon Shillinglaw, "Economic Concepts in Cost Accounting," in Handbook of Cost Accounting 4-14 (Sidney Davidson & Roman L. Weil, eds., 1978) ("A common cost is a cost incurred for the support of two or more cost objectives, not traceable to any one of them. Accountants refer to these as indirect costs or, more clearly, as nontraceable costs.").
120 Under Exchange Act Rule 3a1-1(b), 17 CFR 240.3a1-1(b), the Commission may require an alternative trading system to register as an exchange if it becomes a major market in any class of securities. In making its determination, the Commission would consider "the objectives of the national market system under Section 11A."
121 Only a percentage of market operation and market regulation costs should be allocated to the cost of market information because, as discussed below, these costs also are associated with listing and transaction services. The costs therefore are common costs and must be allocated among the three services listing, transaction, and market information.
122 National securities exchanges are subject to the Commission's authority under Section 11A(a)(3)(B) to require SROs to act jointly in furtherance of a national market system for securities.
123 See, e.g., ATS Release, note 4 above, Section IX.A Costs and Benefits of the Rules and Amendments Regarding Alternative Trading Systems.
124 MCI Telecommunications Corp v. FCC, 675 F.2d 408, 415-416 (D.C. Cir. 1982). See also Charles F. Phillips, Jr., The Regulation of Public Utilities: Theory and Practice 225 (1993) ("Accounting regulation offers little guidance in developing cost allocation methods, since common or joint costs cannot generally be identified with any customer class, specific service or jurisdiction . . . As Justice Douglas has put it: . . . 'Allocation of costs is not a matter for the slide-rule. It involves judgment on a myriad of facts. It has no claim to an exact science.' Stated another way, any cost allocation method involves elements of arbitrariness.").
125 See section III.B above.
126 MCI Telecommunications Corp., 675 F.2d at 414.
127 As indicated by the Instinet Order (discussed in Section III.C above), there may be some circumstances in which a strict, mathematical calculation of costs will be necessary to assure the fairness and reasonableness of a fee. The subsequent history of the Instinet proceedings also indicates, however, the practical difficulties inherent in such an approach.
128 For example, public utilities generally are entitled to earn a "fair rate of return" in addition to their allowable operating costs. See, e.g., Instinet Order, note 89 above, at n.68 ("Although utility ratemaking proceedings also involve the calculation of a rate of return for the utility's shareholders and bond-holders, such a calculation is unnecessary in this proceeding. The NASD has stated that it 'does not build in any rate of return in its fees' as '[t]here are no shareholders, save the NASD, and no dividends have ever been paid or are contemplated.'") (citation omitted). Comment is requested on whether the cost of market information should include an allowance to provide a fair rate of return and, if so, how a fair rate of return should be determined.
129 If different allocation percentages applied to different SROs, it might result in some Networks being entitled to charge higher fees in relation to costs than other Networks. SROs that primarily traded the securities of the favored Network could receive a higher proportion of their funding from market information fees than other SROs. Comment is requested on whether this situation would be consistent with the Exchange Act objective of fair competition or whether there are appropriate reasons for allocation percentages to vary from SRO to SRO.
130 For example, as noted in section IV.B.2 above, the costs associated with Nasdaq's market operation, market regulation, and listing functions in 1998 were funded 30% by transaction services revenues, 32% by listing revenues, 35% by market information revenues, and 3% by other revenues. The SROs have not, however, provided detailed disclosures concerning their internal cost structures. It therefore has not been possible to make precise calculations of how they have funded their market operation and market regulation costs. The 30-40% figures given in the text necessarily represent a rough estimate.
131 Currently, for example, revenues are distributed in accordance with an SRO's proportion of trading volume in a Network's securities. Comment is requested in section V.B below on whether the rules for the distribution of Network revenues should be revised to further more directly national market system objectives.
132 A full description of Network fee structures, including fees applicable only to vendors, is provided in the Andersen Report, note 34 above.
133 Network A, Network B, and OPRA provide a variety of discounts in these fees depending on the size of the subscriber or the SRO membership status of the subscriber. These discounts are addressed in section V.A.2.c below.
134 Nasdaq fees for professional subscribers increased $1 per month in the period from 1994 to 1998. OPRA professional subscriber fees generally increased from $3 to $4 per month. Network A and Network B professional subscriber fees were unchanged.
135 The numbers of Nasdaq System subscribers are set forth in Exhibit Q to the annual amendments to Form SIP filed by Nasdaq for the years 1994 and 1998.
136 NYSE, 1998 Fact Book 103.
137 For example, the NASD's per-query fee for Nasdaq System securities has remained at one cent since 1995. Revenues attributable to this fee grew from $2.6 million in 1997 to $13.5 million in 1998.
138 For example, dividing a monthly professional fee of $20 by 136 hours produces a per-minute rate of approximately 1/4 cent. At this rate, a nonprofessional subscriber fee of $2 per month would cover 800 minutes, or 13 1/3 hours. Comment is requested on the number of hours in a month that retail investors, on average, could be expected to monitor real-time information.
139 Letter submitted on behalf of Charles Schwab & Co., Inc., by Sam Scott Miller, Orrick, Herrington & Sutcliffe, LLP, to Jonathan G. Katz, Secretary, SEC, dated June 29, 1999. The petition requests rulemaking on a broad range of issues relating to market information fees and revenues, including fair and reasonable fees, non-discriminatory fees, and oversight of CTA practices. A copy of the petition is available for inspection and copying in the Commission's Public Reference Room, File No. 4-425.
140 The terms and conditions of the Network A enterprise arrangement are described in Securities Exchange Act Release No. 41977 (October 5, 1999), 64 FR 55503.
141 See, e.g., Securities Exchange Act Release No. 26689 (April 3, 1989), 54 FR 14306 (discounts for subscribers that are members of OPRA participants explained on the basis of higher administrative costs for non-member subscribers); Securities Exchange Act Release No. 24130 (February 20, 1987), 52 FR 6413 (Network A fee structure requiring subscribers with a single device to pay a monthly device fee that is 6 1/2 times higher than the fee for large subscribers "reflect[s] the fact that total CTA and CQ Plan administrative costs for any subscriber on an average per terminal basis decrease as the average number of terminals increases").
142 Comment also is requested on whether any other categories of SRO costs that directly enhance the integrity and reliability of market information should be funded in the Direct Distribution. For example, technology systems with sufficient capacity and reliability to handle the highest-volume trading days help assure that the stream of consolidated information is not subject to unexpected interruptions. Comment is requested on whether some portion of technology costs that directly relate to the integrity and reliability of information (such as costs incurred to comply with the policies set forth in the Commission's ARP Releases) should be funded in the Direct Distribution.
143 See, e.g., Securities Exchange Act Release No. 41238 (Mar. 31, 1999), 64 FR 17204 (CSE grants members a 50% pro rata transaction credit of Network B revenues); Securities Exchange Act Release No. 41174 (Mar. 16, 1999), 64 FR 14034 (NASD establishes pilot program to provide a transaction credit to members that trade listed securities in the over-the-counter market); Securities Exchange Act Release No. 40591 (Oct. 22, 1998), 63 FR 58078 (BSE establishes revenue-sharing program for members that is based, in part, on Network A and Network B revenues); Securities Exchange Act Release No. 38237 (Feb. 4, 1997), 62 FR 6592 (CHX establishes transaction credit for specialists based on a percentage of Network A and Network B revenues).
144 The Plans regularly have provided financial statements to the Commission's staff. The financial statements have shown total revenues, expenses, and distributions, but have not itemized the amount of revenues attributable to different fees.
145 The burdens and costs currently associated with administering the Networks' fee structures are described at length in the Andersen Report, note 34 above.
146 The pilot program provisions are set forth in section II.F above.
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