June, 2001

Competing Models for Market Data Dissemination: A Comparison of Stock and Futures Markets

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While transaction and price information are vitally important to both the efficiency and functioning of financial markets, the regulatory treatment of that data in the securities and futures markets are markedly different. Securities regulation treats stock quotations and transaction prices as a common-pool resource, controlled jointly by the self-regulatory organizations (SROs) that govern stock trading, and requires dissemination and pricing to be centrally controlled. Futures regulation, on the other hand, treats market data as a proprietary asset owned by the trading venue that produces the information. These different regulatory approaches define different competitive models for information provision, and suggest divergent theories regarding the role and the value of information to financial market operation. More importantly, these different competitive models appear to affect the distribution and pricing of market data, which in turn affects market quality and innovation.

This paper examines the futures' market-based framework as a counterpoint to the securities regulatory framework, and provides a context for future regulatory decisions regarding market data reporting. It begins by tracing the development of the treatment of trade and quote information generated in the futures and equities markets historically, and reviews the propagation of current regulation and rules governing the dissemination of market data. It then examines the effect of different regulatory structures on the quality of the information available, as well as the costs and revenues associated with different market microstructures. The analysis focuses on the U.S. markets, specifically U.S. futures exchanges and U.S. stock markets. In the historical review, the analysis focuses exclusively on the New York Stock Exchange as the earliest stock exchange and exemplary of the securities markets, and the Chicago Board of Trade, the earliest example of a U.S. futures exchange.