New York Stock Exchange, Inc. Comments to Securities and Exchange Commission Concept Release on "Regulation of Market Information Fees and Revenues" (Release No. 34-42208; File No. S7-28-99) APPENDIX D Network A in Perspective: 1975 - 2000 Table of Contents
Comments toSecurities and Exchange Commission Concept Release on "Regulation of Market Information Fees and Revenues"(Release No. 34-42208; File No. S7-28-99)
APPENDIX DNetwork A in Perspective: 1975 - 2000
NYSE was instrumental in the creation of Network A under the CTA Plan and the CQ Plan and has led its evolution.
The purpose of this document is to provide a factual record for Network A and to provide information and background regarding the evolution of Network A rates, policies and practices over the past 25 years.
Section I places Network A in a factual context. Section II highlights Network A’s evolution over the past two and one-half decades. Section III provides a historical look at each component of the Network A revenue stream and fee structure.
1 NYSE, not Network A, does impose a fee for the redistribution of delayed last sale prices over cable television.
2 SIAC, Two Year Processor Review – Period ended December 31, 1998.
As the Concept Release notes, for 1998, total industry market data revenues amounted to less than one-quarter of one percent of all securities industry revenues. On a unit cost basis, the industry’s cost of Network A data has declined significantly over the past fifteen years. Considering that data revenue to the exchanges equals data costs to the industry, the unit cost to the securities industry overall for each Network A real-time trade/quote message disseminated has shrunk from an average of $1.00 per message in 1985 to $0.23 per message in 1999.
Unit Cost Per Transaction
Market Data Revenues as a Percent of All NYSE Revenues
3 As a bit of historical trivia, NYSE notes that in the 1880’s, NYSE charged approximately $25 per month (actually $6 per week per terminal) for the NYSE ticker service. At the end of December 1999, NYSE (Network A) charged professional subscribers a blended average of $24.90 per terminal per month. Applying the Consumer Price Index adjustment to the cost of NYSE last rate prices in the 1880’s yields an amount for the same service today of $420 per month.
London Stock Exchange
NASDAQ – Level 2
– Level 1
Amsterdam Stock Exchange
Australian Stock Exchange
Canadian Exchange Group
Brussels Stock Exchange
Network B – Non-Member
Hong Kong Stock Exchange
Tokyo Stock Exchange
In July 1978, the Commission declared the Consolidated Quotation Plan effective. In August 1978, the CQS commenced full operation with the Boston, Midwest, New York, Philadelphia and Pacific Stock Exchanges reporting quotations in NYSE-listed securities. As with last sale information, NYSE facilitated the start of consolidated reporting of quotation information by contributing its predecessor network for distributing bid-asked information to serve as the technical foundation and administrative framework and by overseeing the development of a high speed output. NASDAQ joined the CQ Plan at the end of 1978 and began to disseminate quotations over CQS in early 1979. In November 1979, the Cincinnati Stock Exchange became a CQ Plan Participant and commenced disseminating quotations in mid-1980.
The Network A rate structure at the beginning of the decade was comprised of three
categories of fees; access fees, computer program classification fees and display device
fees. Within each category, separate rates applied for each of last sale price information
and bid-asked quotation information. The structure provided for:
As the new century begins, this basic fee structure remains in place and continues
to account for the bulk of Network A revenue.
In summary, the professional segment of the market for market data is a mature and fully saturated market segment. The potential for more widespread dissemination of real-time data within this segment is modest and likely to track overall securities industry growth. The only major uncertainties regarding this market segment involve 1) how Internet developments play out longer term and whether the exchanges will be able to continue to rely on the vendor community to provide the delivery vehicles and the application of display services for this segment of the market, and 2) whether the growth in on-line services will negatively impact the overall demand for professional display devices.
2. The Market for Market Data – Individual Investors
At the beginning of the 1980’s, few, if any, individual investors had contracted to receive vendor services. An individual investor that wished to check the price of a security had to either call his/her broker for a price or check the stock tables in the newspaper. On a limited basis, several cable television systems displayed the delayed NYSE ticker.
4 Pilot authority represented the industry’s reaction to the fact that Commission rules under section 11A of the Exchange Act did not (and still do not) include a counterpart mechanism to Commission Rule 19b-4 (f) (6), which allows SROs (but not Network A) to submit on an effective-upon-filing basis proposed rule changes that neither affect the protection of investors nor burden competition.
However, the advent of the personal computer in the early 1980’s gave rise to several new vendors. As that era’s major vendors (e.g., Quotron, Bunker-Ramo and GTE) continued to focus on servicing higher-end professional clients, a number of the new vendors expressed interest in developing services directed at the individual investor and they sought Network A’s cooperation to help promote their efforts.
Network A’s first initiative came in 1984 with the introduction of a new and significantly lower set of fees that applied for vendor services provided to any person who qualified as a nonprofessional subscriber. The term nonprofessional was defined to be synonymous with individual investor. Network A’s intent was to carve-out individual investors and to offer a rate inducement to vendors in an effort to promote more widespread dissemination of real-time data to this segment of the investor community. Network A set its new rates for vendor services provided to nonprofessional subscribers at roughly 10 percent of the rates that then applied for display services provided to professional subscribers. Network A also developed new, streamlined administrative procedures to facilitate vendor record keeping and the registration of this new class of subscriber. The initial rates were set at $7.50 and $6.00 for each of last sale prices and bid-asked prices, respectively. Three years later, Network A combined these rates into a single rate, and reduced that rate to $4.00 per month. In 1992, a 6 percent increase changed this rate to $4.25, and it remained at this level until 1997.
Despite these efforts to elicit greater participation by individual investors, the number of nonprofessional subscribers remained below expectations. As Network A entered the 1990’s, a handful of vendors and broker-dealers were experimenting with offering real-time services, but the subscriber population had only grown to approximately 10,500 receiving real-time service. Technology advances, while significant, still were not at a level whereby services could be delivered on a wide scale on a cost-effective basis. It was also apparent that the availability of delayed data at no cost presented a barrier to achieving both the goal of more widespread dissemination of real-time data and the goal of fairly allocating a share of the market costs to vendors and broker-dealers delivering data to investors via interrogation services.
Many individual investors had personal computers and received nascent “dial-up” services from the likes of Prodigy, CompuServe and America On-line. Though those services were inexpensive, they offered only delayed market data, primarily because the markets impose no fees on vendors for delayed services and do not require subscribers to execute agreements.
In 1983, recognizing that the new data delivery techniques probably would not “fit” well within its historical framework of rates, policies and practices, Network A had obtained SEC approval for authority to experiment with alternative pricing models and streamlined administrative procedures on a pilot test basis.4 The pilot authority was designed to enable
the Network administrators to test new services on a limited basis before adding the new service to the official Network A rate schedule. If the pilot did not prove useful, the pilot structure provided an easy means to decommission it.
In the early 1990’s, Network A exercised this pilot test authority to permit pilot programs designed to try and overcome some of the barriers to wider dissemination of real-time data. Two broker-dealers and a vendor worked with Network A to experiment with three different “pay-for-use” metrics: an over-riding royalty (Mead Data’s Lexis-Nexis unit); a cents-per-minute-on-line service (Charles Schwab & Co., Inc.); and a cents-per-quote service (Fidelity Brokerage Services, Inc.). All three pilots required the service provider to offer only real-time data during market hours. That allowed Network A to pursue its objective of promoting real-time data distribution.
Of the three pilots, the per-quote model proved to be the most attractive. The per-minute pilot attracted only one other participant and only for a brief period. The royalty pilot attracted no additional participants. NYSE ended both of these pilots in 1997, by which time the vendors of those pilot services had switched, or were prepared to switch, to per-quote services.
The feedback from the pilot led Network A to abandon its efforts to incent conversions from delayed data to real-time data. The pilot service providers encouraged Network A to eliminate the prohibition against the delivery of delayed data during market hours and to apply the per-quote fee only during market hours. Those changes comported with the per- quote services that the NASD permitted at one cent per-quote, a program that NASD had filed with the Commission in 1995.
In August 1997, Network A reconfigured the format for the per-quote pilot along those lines. Whereas Network A charged one-half cent per quote for the predecessor 24 hour/7 day program, it proposed to follow the NASD in charging a rate of one cent per-quote for the reconfigured market-hours-only program. (At that time, OPRA had proposed, and the Commission had approved, a rate of two cents per-quote for a similar market-hours program.) In addition, Network A was satisfied that the per-quote model had proven its durability in the pilot competitions and thus filed the restructured program with the Commission as part of the Network A rate schedule on an effective-on-filing basis, anticipating that the precedents set by NASD and OPRA made the filing non controversial. At the same time, Network A proposed to increase its monthly fee for vendor services provided to nonprofessional subscribers from $4.25 to $5.25 per subscriber per month.
The Commission received one comment letter on the filing, from Schwab. Schwab objected to the proposed one cent rate. The Commission indicated that it wanted more time to consider Schwab’s comment letter. Rather than having the Commission abrogate the Network A filing, Network A withdrew its per-quote filing and simultaneously instituted a pilot on identical terms in order to prevent the discontinuation of per-quote services by Schwab and approximately 30 other organizations. (The proposed increase in the nonprofessional fee received no negative comments and was approved by the Commission.)
1998 and 1999 were characterized by unprecedented growth in investor demand for access to real-time data via on-line brokerage services as technology and the Internet came of age. Real-time prices became the standard and the industry approached Network A to help facilitate their response. Network A, accordingly, had extensive dialogue with its broker-dealer and vendor constituencies, during which many pricing concepts and models were considered and tested. As a result, effective October 1999, the Commission approved revised fees for services provided to individual investors and a cap on a broker-dealer’s aggregate exposure in respect of market data fees associated with such activity:
When Network filed with the commission in 1997 to formally establish the one-cent rate, Schwab claimed that Network A had doubled its rates. The reality is that the one-cent rate was effectively a rate cut. Costs to firms overall, and Schwab in particular, were reduced by 50 percent immediately. But there was an immediate doubling of the number of usage-based vendors and an immediate increase in the volume of market data disseminated to individual investors, but an immediate decline in Network A revenues from usage-based fees.
Another significant NYSE initiative of the 1990’s was the introduction of real-time ticker displays on cable and broadcast television. In 1996, Network A began to enter into pilot programs that permitted cable and broadcast television networks to replace their Network A delayed ticker displays with Network A real-time tickers. In this way, Network A has been able to “democratize” access to the real-time ticker for cable television viewers in much the same way as the development of the Internet has democratized access to real-time data for investors with personal computers. This pilot program has proven successful and remains active.
In summary and as indicated above, the more interesting story of the past two decades relates to the 18 percent of Network A’s 1999 revenues derived from broker-dealer and vendor services provided to individual investors. Over this period, Network A made substantial progress in achieving more widespread dissemination of real-time data within the individual investor segment of the market. Today, real-time data has become pervasively -- and inexpensively -- available through a variety of media and alternative sources. The Internet and other technologies have made it cost-effective for broker-dealers and other vendors to provide their on-line customers with access to real-time market data. Most of those retail customers pay their brokers nothing for that access, just as they pay nothing when they call their brokers for data over the telephone.
Access Fee Revenues
4. Subscriber Population
CTSCQSDirect Access $750 $700
Indirect Access $375 $350
Class B Compilation of stock tables $500 $500
Class C Operations control programs $500 $500
Class D Analysis programs $500 $500
Class E Market making programs $3000 $3000
Display Device Revenues Professional Subscribers
1st UnitEach Additional Unit
Ticker display $75.00 $3.50
Last Sale $41.00 $4.10
NYSE member $35.00 $3.50
CQ member $57.00 $5.70
Nonmember $57.00 $5.70
The current rates for display devices located on the premises of professional subscribers are:
Number of UnitsRate Per Unit
6 - 9 39.75
10 - 19 31.75
20 - 29 30.25
30 - 99 27.50
100 - 249 26.50
250 - 749 23.75
750 - 4,999 20.75
5,000 - 9,999 19.75
10,000 + 18.75
Fee History — Nonprofessional Subscribers
implemented bringing the rate to $5.25. In 1999, this rate was reduced by approximately 80 percent.
3. Current Rates
First 250,000 subscribers $1.00 each
In excess of 250,000 $0.50 each
Number of Non-Professional Subscribers
Demand for unlimited real-time data by non-professionals is a relatively new phenomenon
2. Current Rates
1 to 20 million quotes $.0075 ea.
20 to 40 million quotes .0050 ea.
Over 40 million quotes .0025 ea.
4. Subscriber Population