Conference Call: Schwab demands SEC curb on exchanges’ data fees

Stock exchanges have a monopoly on stock price quotes and the Securities and Exchange Commission should stop them from charging exorbitant fees to subsidize their operations, the general counsel of Charles Schwab Corp. told securities lawyers in Washington recently.

Speaking to a seminar on broker-dealer regulation sponsored by the American Law Institute-American Bar Association, Hardy Calcott, senior vice president and general counsel of the San Francisco-based discount brokerage, said: “Market data is a monopoly. All of the exchanges get together and set the rates and allocate resulting revenues among membership.”

800%-to-1000% markup

He said the markup that the New York Stock Exchange gets for its data is 1000%, while Nasdaq gets an 800% markup over the cost of disseminating the data.

According to the SEC, the stock exchanges took in $415 million in payments for their price quotes in 1998, 21% of which was used to fund regulatory functions the exchanges are legally required to perform. Michael Simon, chief regulatory officer for the International Securities Exchange, a new electronic options market in New York that has applied to the SEC for exchange status, said that if exchanges were not allowed to cover their regulatory costs through charges for market data, they would simply increase trading costs to cover them.

“We don’t use market data fees to subsidize non-market data producing operations,” said Big Board spokesman Ray Pellecchia, via telephone. “We use market data fees to help pay for the operations of the exchange that produce that market data. The fees don’t even cover those costs.”

The SEC in December issued a “concept release,” in which it asked the industry to comment on how market data should be priced. The agency plans new regulations on the matter.

Mr. Calcott was critical of legislation proposed in Congress that would make the price quotes the property of the stock exchanges. Schwab has been prominently involved on the issue of market data fees, because its online customers frequently check price quotes.

He also maintains that the issue will get more complex as the exchanges move to spin off their markets into profit-making enterprises, as the New York Stock Exchange and the Nasdaq plan to do.

“At least now there is a sort of cap, at least in theory,” he said. “Once they’re for-profit shareholder-owned institutions, there’s no longer even that minimal constraint on how they can use this market data monopoly.”

Should exchanges be able to cover their regulatory costs with market data fees? Mr. Calcott compared the issue to allowing local telephone company monopolies to use that revenue to subsidize the cost of providing long-distance service in competition with companies that only offer long-distance. “It’s a matter of regulating monopolies and regulating use of monopoly [prices] that that sort of cross-subsidization should not be permitted.”

Annette Nazareth, director of the SEC’s Division of Market Regulation, disagreed with Mr. Calcott’s comparison.

Telephone companies, she noted, “are not regulated by statute to surveil the market,” as the stock exchanges are. But, she added, with plans for the for-profit markets, “It really is essential that the market-data revenues, which do have these monopolistic issues swirling around them, are not used to subsidize one market over another.”

what will the traffic bear?

She also said that, since there is no competition in the sale of market data, “You have a situation where there may not be a sufficient incentive to keep costs as low as possible.’

The SEC has not taken a position on the legislation, but it maintains that it has the right to regulate the fees whether or not they are declared to be the private property of the exchanges, she added.

Another view was added by Sam Miller, a lawyer with Orrick Herrington & Sutcliffe LLP in New York, who represents Schwab on the issue:

“If the New York Stock Exchange would only take Marketing 101, they’d realize they ought not be charging for this stuff anyway, they’d give it away.” He compared it to “Wal-Mart charging you for a price list.”