From: Gene Finn [glrfinn@worldnet.att.net] Sent: Monday, May 17, 2004 5:28 PM To: rule-comments@sec.gov Subject: S7-10-04 Gene L. Finn Finn Associates 1236 Battery Ave. Baltimore, Md. 21230 E-mail glrfinn@att.net Jonathan Katz, Secretary Securities and Exchange Commission 450 Fifth Street NW Washington, DC May 16, 2004 RE: S7-10-04 Dear Mr. Katz; My background as a former Chief Economist and Senior Economic Advisor for the SEC (1969-1982), former Chief Economist for NASD (1983-1995), a former outside Director on the Boards of Ameritrade Holding Corporation and Knight Trading Group and as a current online investor qualifies me to comment on the subject release (The Release). This comment focuses on the Market Data System proposal. It expands upon repeated requests for action by the SEC since July of 1997 requesting elimination of the discriminatory "nonprofessional" exclusive processor access fees charged exclusively to online investors. Exclusively means that no other nonprofessionals are charged a subscriber access fee. Online investors are those accessing market data from their brokers using their personal computers for use in managing their own accounts. These "nonprofessional fees" discriminate against those who would access such data from their brokers electronically (as compared to access over the telephone). Such fees have unnecessarily restrained competition and are not necessary for purposes of the Exchange Act. I request that those prior submissions and letters to the SEC be incorporated in the current record by reference. Market Data Proposal Need for Department of Justice and Federal Trade Commission comment on Market Data System proposed rule. The Release ignores the existing discriminatory nonprofessional subscriber fees that NYSE and NASDAQ exclusive processors force online brokers to impose upon online investors. More important, the proposed rules appear to permit exclusive processors to continue to extend the reach of their pricing power past the brokers to the brokers' customers in ways that are unrelated to distribution costs. This is equivalent to retail price maintenance and violative of anti-trust and Fair trade laws. Indeed the NMS market data system is laced with such anti-competitive practices. Consequently, The Commission should obtain the comments of the Department of Justice and the Federal Trade Commission on the proposed market data rule. While both the Commission and the SRO's have a legal obligation to avoid unnecessary anti-competitive and discriminatory practices, that are violative of Anti-trust statues, the SEC does not have a division of competition and investors would benefit from such intervention. Moreover, the facts and evidence demonstrate a failure of SRO's to restrain, as would be appropriate, the undoubtedly strong corporate instincts to maximize monopoly profits, thereby enhancing top officer compensation and SRO market share through use of enhanced payments for orderflow and promotional spending. Similarly, The Commission's belief, that there is justification in permitting the charging of discriminatory, monopolistic, above cost fees to make more revenues available for self-regulation, places The Commission, itself, in a conflict of interest position. If the normal Congressional appropriations processes can be bypassed by just shifting more and more of the cost burdens of regulation upon individual investors through SRO fees, then The Commission's ability to extend the SEC regulatory scope is virtually unrestricted by the normal appropriations review processes. Online Investor Access Fees When it comes to online investor access fees, one would have to conclude that The Commission has just not enforced the fairness provisions of the Exchange Act. Obstructed access---The "nonprofessional fee" not only discriminates against online investors it also obstructs their access to real-time quotation and last sale information. The NYSE, Amex, and NASDAQ "nonprofessional" subscriber access fees, which are imposed exclusively upon individual online investors account for at least $ 60 mil. of the $ 424 mil. total 2003 exclusive processor market data revenue reported in The Release. That is equivalent to 14.2% of total revenue and 158% of the total exclusive processor costs. The nonprofessional fees with a $1 per month cap for unrestricted access to each of the three markets' data or $36 per year per full access subscriber would suggest that total online investor electronic access is limited to a full time equivalent of 1.7 million ($60mil. divided by$ 36) out of a possible 20.0 million full time equivalents for the estimated 20 mil. online investors. This is an access rate of 8.5% of full access, with a 91.5% obstruction of access. If online brokers do not administer the access fee rigorously and do not limit access to investors for whom fees are not paid, their own access can be shut off and they themselves can be put out of business by the exclusive processors and the SRO's. In reality, competition frequently forces online brokers to pay the fee cap for access for large active investors. The use of real-time quotes by smaller inactive accounts is minimized by serving up real-time information only on the pre-trade screen to meet best execution obligations. Delayed information is served up for other inquiries. Excessive Fees---"Nonprofessional" fees that are 158% the total cost of the exclusive processor are excessive. When combined with other market data fees from professional and commercial users, The Release data show that processor total revenues yield a 91% profit that is shared among the SRO cartel. Discriminatory Fees---More important, 100% of the "nonprofessional" fees are paid by online investors. Other nonprofessional investors pay no fees. This discriminates against the online investors. Just think, if, to remove obstructed access, all online individual investor accounts paid a fee of $36 per year, revenue from the nonprofessional fee would mushroom to $720,000,000. If, to remove the discrimination, the same fee were charged the other estimated 20 million non-online individual direct investors, the nonprofessional fee would generate $1.44 billion in revenue that could be shared among the cartel. This is the "fee rate" being charged selectively to online investors and/or used to obstruct their access to real-time information. Obviously, Congress never intended this result when they passed the 1975 amendments to the Exchange Act. Fairness and Reasonableness---The "nonprofessional" fee should be eliminated because it is unfair and it is unreasonably discriminatory ---If it were extended to all individual investor accounts and limited to the costs of the exclusive processor, a reasonable fee would be about 2.64 cents per month for each market data set or 95 cents per year. Clearly, administration costs applied to customers of brokers would dwarf the fee itself and it makes no sense, except to a monopolist , who is not restrained by reasonableness or cost considerations Moreover, Online brokers should be permitted to eliminate the horrendous administrative costs required of online brokers by the SRO cartel to implement the current price discrimination and anti-competitive regime. The need for online brokers to maintain two market data systems, one for real-time and one for delayed prices, for their customers is costly; and the administrative costs of the non-professional fee add millions to the cost of this discriminatory system. Fee is not Necessary For Purposes of the Act---- The Release reports a $386 million exclusive processor profit in 2003 to be shared among cartel members. Elimination of the nonprofessional fee and provision of 100 percent access to nonprofessional clients of brokers would not compromise the NMS market data system. Indeed, online investors would be able to monitor on a real-time basis the best execution performance of their brokers, market transparency would be greatly enhanced, and SEC/SRO "best execution" enforcement costs would be reduced. By default, through inaction, The Commission supports exclusive processor nonprofessional fees, that help to produce a 91 percent profit, that incentivizes exorbitant SRO executive compensation, SRO governance problems, PFOF rebates and wash sales. This suggests that the SEC finds such fees fair, not excessive, and not unreasonably discriminatory. Before The Commission adopts more rules sprinkled with "fair and reasonable" and "not unreasonably discriminatory" the Commissioners should define what they mean. A good place to start would be to explain to online investors why a unique nonprofessional fee, unrelated to cost and applied solely to online investors, is not discriminatory and/or excessive but rather is fair and reasonable. New Market Data Rule May Worsen Obstruction of Data Access The fact that The Commission has not acted to eliminate this discriminatory pricing behavior against online investors and that the problem is not even mentioned in The Release suggests that such anti-competitive behavior would still be permitted. Indeed, The Release states directly and/or by inference that: 1) Fees need not be cost-based 2) The Commission has not yet decided whether regulation of access fees is necessary; but the SEC would find such rate regulation distasteful 3) The Commission has approved and continues to approve the fees as proposed by the SRO cartel on the grounds that the cartel has obtained an undefined consensus. 4) The Commission's Advisory Committee expressed an SRO concern that the SRO cartel members may be exposed to anti-trust liability 5) The Commission fears that absent the proposed rule or current NMS restrictions, single SRO's or market centers could charge monopoly gouging rates for market data. The only conclusion that can be drawn from these apparent contradictory rationalizations is that The Commission proposes the rule, not to protect investors, but rather to further insulate SRO's from anti-trust and to extend the scope of regulation of securities information distribution to include all potential future Internet competitors of the SRO cartel. The Commission, with the power in past to prevent the unfair, unreasonable and unreasonably discriminatory pricing behavior, reflected in the nonprofessional fees, has not acted to protect online investors from the SRO cartel. The new rules do not appear to change that policy. Moreover, they may worsen the online investor's access to real-time market data by restricting the distribution of such data over the Internet outside of the control of NMS plans. The proposed new rule states: "... that a national securities exchange or national securities association may, by means of an effective transaction reporting plan, condition such retransmission upon appropriate undertakings to ensure that any charges for the distribution of transaction reports or last sale data in moving tickers permitted by paragraph (d) of this section are collected." and "Nothing in this section shall preclude any national securities exchange or national securities association, separately or jointly, pursuant to the terms of an effective transaction reporting plan, from imposing reasonable, uniform charges (irrespective of geographic location) for distribution of transaction reports or last sale data." Thus the exclusive processors can continue to extend pricing control to retail brokers' customers and as noted above the new rule will protect them from new Internet competition. New Market Data Rule Not Needed The Commission does not need a new rule to prohibit anti-competitive restrictions imposed by exclusive processors on data providers that prevent them from selling or otherwise providing the identical information to other Internet information distributors. To the contrary, the rule, through new display requirements, ties the retail brokerage community to the use of exclusive processor data because their websites provide for trade execution as well as retrieval of market data for information purposes only. The Commission merely needs to write a letter to the SRO's and the Exclusive processors stating that NMS market data plans must be brought into compliance with the already existing statutory language below cited in The Release: 'The "fair and reasonable" and "not unreasonably discriminatory" requirements are derived from the language of Section 11A(c) of the Exchange Act. Under Section 11A(c)(1)(C), the more stringent "fair and reasonable" requirement is applicable to an "exclusive processor," which is defined in Section 3(a)(22)(B) as an SRO or other entity that distributes the market information of an SRO on an exclusive basis. The proposed amendment would extend this requirement to non-SRO market centers when they act in functionally the same manner as exclusive processors and are the exclusive source of their own data. Applying this requirement to non-SROs is consistent with Section 11A(c)(1)(F), which grants the Commission rulemaking authority to "assure equal regulation of all markets" for NMS Securities. If the Commission believes its own release, then they will not make online investors wait another six months or a year for relief from these discriminatory fees. Sincerely, Gene Finn