December 23, 2004
Finn Associates
1236 Battery Ave.
Baltimore, Md. 21230
December 22, 2004
Jonathan Katz, Secretary
Securities Exchange Commission
450 5th Street
Washington D.C.
Dear Mr. Katz
This supplement to my December 20,2004 comment on the proposed NMS rules is prompted by the realization that a critical anti-competitive issue has been overlooked. It is the inclusion of non-SRO market centers and/or non-exclusive Securities Information Processors as full revenue-sharing participants in the NMS market data system plans. This was an anti-competitive issue raised in my comments In 1997, 1998, 1999 and occasionally in later years but it is not addressed in The Release or the proposals. It is important because SRO surpluses are used to enhance their facilities that compete with non-SRO market centers.
Market Data Revenue Sharing
The Release argues that the surpluses generated by exclusive processors are reasonable because they are used to cover SRO regulatory functions. However The Release ignores the byproduct nature of market data sales and the compliance costs of executing brokers and marketmakers that produce most of the underlying data. Moreover, tremendous listing fees are paid by corporations to SRO listing markets for the services of providing execution facilities and the publication of market information respecting the quotations and trades for the issuers shares.
Market data fees, particularly the discriminatory nonprofessional fees were introduced long after quotations and last sale data were being produced and distributed for trading and regulatory purposes. The only additional cost to produce the NBBO and NMS last sale tapes were exclusive processor costs. Thus the concern of the Commission respecting SRO regulatory costs and the uses of the surplus funds has not been as obvious as the CEO compensation and bonuses paid to keep the surpluses flowing.
Also, it is important to note that the Congressional legislative history refers to NMS participants in an unrestrictive way, not limiting the definition of NMS participants to SROs. Rather the references, often adopted by the SEC, are more to market centers, which include registered marketmakers and ECN,s especially those that are larger than most SRO,s. In addition, self-regulatory costs, particularly those associated with the production of market data, have increasingly been pushed on to marketmakers and brokers by the SROs through programs like OATS, NASDs Order Audit Trail System, quality of market center executions etc..
It follows that exclusive processor surpluses if any should be shared with non-SRO producers of the information that choose to become participants in the NMS plans and agree to meet those market data quality production requirements imposed upon SRO participants.
The Release suggests that the Commission might choose to allow rebate competition to accomplish this sharing but, having recently abolished sharing rules and the competition they represent, the SEC needs to explicitly provide their approval to new sharing rules to insure anti-trust protection for those information producers receiving the funds.
Irregardless of any other SEC actions, under no circumstances should the surpluses from discriminatory fees applied to small individual online investors be allowed to continue. Those fees should be abolished. It is one thing for the Commission to find protected momopoly fees exceeding costs reasonable. It is quite another to find differential fees, that are not cost based but are applied to similarly situated investors, reasonable and fair and not unreasonably discriminatory.
Let competition allocate any remaining market data, sub-penny rule, and access fee rule surpluses that occur. It will do a much better job than economic planning can ever dream of doing.
Thank you for your consideration of this additional comment.
Gene L. Finn