March 31, 2000

Public Interest Comment on the SEC's Concept Release on the Regulation of Market Information, Fees and Revenues

  • Jerry Ellig

    Research Professor, George Washington University Regulatory Studies Center
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The SEC is seeking comment on their concept to regulate guidelines for stock quotations and "market data." 

Summary 

The Securities and Exchange Commission (SEC) has proposed establishing cost-based guidelines that financial networks must use to set their fees for stock quotations and transaction prices or "market data." Unfortunately, this approach has failed in the past. In many industries traditionally regulated as utilities, legislators and regulators have spent the past 20 years attempting to promote competition and reduce or eliminate price regulation. These efforts have had substantial benefits for consumers. Experience demonstrates that competition is a more effective regulator than administrative decisionmaking. The Commission initiated this proceeding over concern that monopolistic pricing of information could diminish access for, or discriminate against, retail investors. However, the SEC offers no evidence that current pricing of data is, in fact, monopolistic nor does it demonstrate how its proposal will improve investor welfare. Indeed, the Commission's proposal may actually make investors worse off for the following reasons:

  • Networks already face natural constraints on their ability to exercise market power, so the guidelines would likely increase costs while offering few offsetting benefits.
  • Even if the networks can exercise some market power, cost-of-service regulation could easily produce worse results than the current system.
  • The true source of any market power the networks might possess is the Commission's policy of creating an information cartel instead of relying on competition in the provision of market data.

Since price regulation is a poor substitute for competition, the Commission should focus on promoting competition in the provision of information instead of regulating a government-created information cartel. The proposed rule is unnecessary because several factors constrain network market power:

  • User-owners govern the current networks that consolidate and sell market data. Therefore, networks have strong incentives to operate economically and charge prices that are no higher than necessary.
  • The Commission's policy of seeking a uniform and centralized stream of information may be unnecessary at best, and possibly harmful since it attenuates market forces that would lead SROs to provide the desired level and price of information for the customers they serve.
  • A move to for-profit exchanges may strengthen exchange incentives to make market data widely available so that trade volume and investor participation are maximized.
  • Even if market power exists, the SEC does not demonstrate that a move to cost-based regulation would necessarily improve prices on market data.

The Commission could better serve investors by eliminating the government-created cartel in market data and promoting competition.