BIG BOARD GAINS CONGRESSIONAL PALS IN QUOTE CHARGE WAR: ONLINE BROKERS FEAR LEGAL CONSEQUENCES

Cornered by New York Stock Exchange allies in Congress, a dozen online brokers are finally negotiating with the Big Board over fees they will be charged for market quotes.

The talks –between officials of the Big Board and such firms as Charles Schwab Corp., Bloomberg’s Tradebook system and Reuters’ Instinet–could end a two-year fight over costs. The firms are also battling in Washington over penalties for using quotes illegally.

With more than 3 million online investors checking stock quotes as they trade, the stakes are high. In 1997, the exchange doubled fees for real-time quotes to 1 cent under a pilot program awaiting final Securities and Exchange Commission approval. The SEC is just beginning to study the issue now.

The number of online brokerage accounts will exceed 14 million by 2002, according to Forrester Research Inc. of Cambridge, Mass. Depending on the pricing plan a firm chooses, they are charged per customer or per quote, cutting into the already-skimpy margins of online brokerages. Full-service brokerages are also hurt, but this is only one of many businesses for these better-capitalized firms.

Online brokerages, led by San Francisco based Schwab, are fighting legislation moving through the House of Representatives that they fear could turn contract disputes over quotes into criminal matters.

The Big Board, which received $80.9 million, or nearly 13%, of its 1997 revenue of $638.7 million from such fees, is talking to the brokerages about possibly reducing per-quote and flat monthly per-customer fees for the price quotes. Still, an official warns that any reduction in fee revenue would probably have to be made up by increasing either the fees it charges to regulate its members, trading fees or fees paid to list companies on the exchange.

“Market data revenues compensate the markets for the cost of collecting and disseminating the data, and they also help support self-regulatory functions,” says the official, who would not speak for attribution. “If you turned off market fee revenues, I don’t think a lot of the regionals could survive.”

One regional exchange, the Pacific Exchange in San Francisco, which counts Schwab as its largest member, sides with the online brokers.

Noting that in 1997 the Big Battle over quote fees reaches D.C.

Board doubled charges for real-time price quotes to 1 cent under the pilot program, Dale Carlson, vice president of corporate affairs for the Pacific Exchange, says: “We are not inclined to support an increase in fees. We are not inclined to see it become a profit center for the exchanges. We want to recover the cost of providing those services, but a big markup on top of that? It doesn’t seem justified.”

At issue is whether stock exchanges should be able to make a profit on the market quotes, or whether the data should be distributed at cost, since it is public information.

The legislation written by Rep. Howard Coble, R-N.C., chairman of the House Judiciary subcommittee on intellectual property, would give stock exchanges property rights — similar to copyright protection — to price quote data, online brokers say. The subcommittee is scheduled to start hearings on the bill this week.

‘limited from innovating’

Schwab, which pays “tens of millions of dollars a year” to obtain price quote data for its online customers, does not charge them for the data, says Frank Kelly, vice president of government affairs in the discount brokerage’s Washington office. “But we’re limited from innovating because we ultimately would have to start passing the cost on,” he says.

While full-service houses provide quotes to their own representatives, online firms give quotes to millions of customers, who check them many times before making trades.

Mr. Kelly says online brokers understand the need for stock exchanges to be protected from misappropriation of their data, particularly by entities beyond the reach of U.S. regulators, but feel the legislation goes too far.

“It would criminalize contract disputes,” he says of the bill.

Vince Garlock, counsel to the Judiciary subcommittee, denies this.

“We’re not experts in the stock market,” he says. “Our goal is to not interfere with the status quo,” and he points to language in the bill reaffirming the SEC’s role in regulating market data pricing.

“We’re trying to provide an incentive for the continued investment and development in collections of information,” he adds. “What’s happening is certain companies are finding they’ll put out a database, in printed and digital form, and have someone copy it and download it and sell it to competitors cheaper.”

priority for Sen. hatch

Senate Judiciary Committee Chairman Orrin Hatch, R-Utah, has said he intends to make the issue one of his priorities this year.

The SEC has become concerned with the issue. In late February, Chairman Arthur Levitt wrote stock exchanges that “The commission will be undertaking a review of the current fee structure for obtaining market data, and the role of data revenues in the operation of the markets.”

The SEC will issue a statement describing existing market data fees and revenues and ask for public comment, Mr. Levitt wrote in his letter.

The Securities Industry Association has commissioned Arthur Andersen to study the issue. “Every firm who does e-trade business has raised concerns about it,” says Jim Spellman, a spokesman for the lobbying group.