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Market Data Reform

Market Data Reform . Now or Never? By Jeffrey T. Brown, Senior Vice President Legislative and Regulatory Affairs The Charles Schwab Corporation. Market Data Reform. Why is market data important? Broad access to market data is critical to fair and transparent markets.

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Market Data Reform

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  1. Market Data Reform Now or Never? By Jeffrey T. Brown, Senior Vice President Legislative and Regulatory Affairs The Charles Schwab Corporation

  2. Market Data Reform • Why is market data important? • Broad access to market data is critical to fair and transparent markets. • The more it costs investors to access pricing information, the less access there is. • The more information available to investors, the better the investing decisions.

  3. Market Data Reform • A Brief History 1999 – Schwab petitions SEC for rulemaking - review unreasonable fee structure 1999 – SEC issues Concept Release on Market Information Fees and Revenues - Current arrangements for setting fees and distributing revenues may need to be revised. • Evaluate use of cost-based approach to total market data revenue • Retail demand for information

  4. Market Data Reform • Rather than act comprehensively, SEC defers: 2000 – SEC Formed Advisory Committee on Market Information • Chartered to consider how the fairness and reasonableness of fees should be evaluated. • After one year, failed to make a recommendation about how to evaluate fee levels.

  5. Market Data Reform • In 2002, SEC holds Market Structure Hearings • Considers market data issues • In 2004, following NMS proposal, SEC holds another Market Structure Hearing • Testimony regarding the reasonableness of fees and lack of full book information: • Nasdaq representative, “The $20 fee for professionals to obtain data in Nasdaq stocks is too high; . . .and that the $20 fee is a monopoly price set almost 20 years ago without any active review of how that relates. . .”

  6. Market Data Reform • In 2005, SEC adopts Regulation NMS stating: • Commenters stated that the level of market data fees should be reviewed and that, in particular, greater transparency concerning the costs of market data and the fee-setting process is needed. “The Commission agrees.” • So what does the Commission do? – Issues another concept release • SRO Concept Release – Study market data’s relationship to regulation • How much study do we need?

  7. Market Data Reform • Meanwhile, the market passes by the SEC like a house by the side of the road. • Exchanges become for-profit, publicly-held corporations: • with profits based on market data revenue streams. • ECNs dominate electronic trading and place all market data on internet for free. • Until, that is, the ECNs are swallowed by the Exchanges and start charging for their market data.

  8. Market Data Reform • What’s wrong with the current structure? • Exchanges operate as a cartel to fix market data prices • Limit access through high fees to critical data (full book) • Creates two-tiered market – pros have, retail doesn’t • Exchanges fail to justify the fee levels • no articulated standards of reasonableness and fairness • No reference to the cost of compiling data • Raw materials (orders) given to cartels for free • Cartels operate without public representation • Non-voting advisory committee insufficient • Not clear advisors can discuss issues with the industry they represent

  9. Market Data Reform • What’s wrong with the current structure? (cont.) • Exchanges use market data revenue to fund regulation or to subsidize competitive activities. • NYSE, Nasdaq keep market data in business entity - not tied to revenue regulatory costs • Exchanges restrict and control distribution of data through contracts of adhesion. • Nasdaq and industry working on significantly better contractual relationship. • Cartels impose idiosyncratic and costly administrative requirements: • Reporting, accounting, recordkeeping and auditing by multiple cartels • Each SIP and administrator has own definitions and requirements

  10. Market Data Reform • A new regulatory approach is necessary • Fees based on the actual cost of consolidation • Independent accounting • Public participation in governance of the cartels • A simple uniform fee structure and rules that minimize administrative burdens • Inclusion of additional information on market depth in the consolidated quote stream to increase market data quality so that retail investors are not disadvantaged

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