|CSI Technical Journal
Volume XXI, Number 11
CSI will be closed for voice communication on Thursday, November 27th for the Thanksgiving Holiday. The CSI host computer will be accessible as usual, and data from world exchanges that are open on this day will be available at normal posting times.
SEC Grants Nasdaq Undue Rule Change —
Investor Access to Data Threatened
On August 1, 2003, the U.S. Securities and Exchange Commission (SEC) issued an order granting approval of a Rule Change allowing Nasdaq to charge a fee for receipt of mutual fund quotation service data by distributors. Although we were not made aware of this proposed change until after its approval, CSI is now vigorously protesting and seeking repeal of the change. We encourage you to also speak out against this decision, because such a precedent could easily promote far reaching potential hardships and expenses for all investors.
Here are excerpts from CSI’s Petition of September 30 to the SEC:
“Dear Mr. Katz:
By this petition, Commodity Systems Inc. (CSI) requests the Securities and Exchange Commission ("the Commission") to repeal the rule change 34-48272, a change which allowed the National Association of Securities Dealers, through its subsidiary, The Nasdaq Stock Market, Inc., (SR-NASD-2003-52) to establish a fee for receipt of Mutual Fund Quotation Service Data by distributors.
The Securities Act of 1933
The Securities Act of 1933 has among its two basic objectives the requirement that investors receive financial and other significant information concerning securities being offered for public sale. CSI, through our data vending service, aids both the exchange in fulfilling the requirement to supply the information and the investor by compiling, correcting, supplementing and distributing securities information in usable form.
The recent rule change permits Nasdaq to charge a fee for the mutual fund data that CSI receives from a third-party vendor. That fee has been set at $1,000 per month, payable by all recipients who redistribute Nasdaq mutual fund data. Because we perform the service of enhancing the mutual fund data and distributing it in computer-readable form to investors, we are now in a class of business that may be charged exorbitantly for that which the exchange provides for free to all others. Although the exchange incurs no extra expense in providing this data to us through our supplier, they are now permitted to collect $1,000 per month from our company.
This fee imposes significant competitive constraints on data vending companies such as ours, who service investors at reasonable, modest fees and who serve as intermediaries between the exchange and other redistributors, and ultimately, between the exchange and the investor.
We believe that by limiting redistribution of mutual fund data to firms that can afford a $1,000 monthly fee, Nasdaq is discriminating against smaller companies such as CSI and our customers. The end user of all Nasdaq mutual fund data is always the investor. This fee specifically penalizes those investors who acquire their data from data banking firms such as ours.
Hindrance to Communication of Securities Information
Evidence of the chilling effect of this fee is the high rate of mutual fund data distributors who dropped the Nasdaq Mutual Fund data feed rather than pay the fee. We do not have industry figures, but a representative from our supplier told us that of the 32% of their users who had been polled at the time of our call, 71% had declined to continue receiving and redistributing Nasdaq mutual fund data when they learned that an extra $1,000 fee would be collected and paid to Nasdaq each month. This fee has already impacted the free flow of financial information to investors.”
Excerpts from the October 6th Addendum to our Petition
’The Commission’s Order states, ‘the Commission finds specifically that the proposed change is consistent with Section 15A(b) (5) of the act because the fee will be assessed against all firms that receive the Nasdaq MFQS data and distribute to third parties.’ The Commission also states, ‘Section 15A(b) (6) of the Act requires that the rules of an association not be designed to permit unfair discrimination between customers, issuers, brokers or dealers.’
“We wish to inform you that, in practice, Nasdaq is expanding the scope of fee collection far beyond those who receive data directly from the exchange and deliver it to parties who are one degree of separation from the exchange. The “third parties” who receive this data might be investors, to whom the exchange itself has an obligation to make data available, or they might be distributors such as [the one] from [which] CSI receives data, or they may be redistributors like CSI, who service both individual investors and other redistributors that work to widely disseminate market data to the ultimate recipients (investors). The chain of redistributors can be lengthy, with each new link increasing the spread of data to investors.
Nasdaq has taken the Commission’s Order that allows collection of $1,000 monthly from redistributors to mean that they may collect $1,000 from every company that processes Nasdaq mutual fund data en route between the exchange and the ultimate investor. As both a third-party recipient and distributor, CSI has been assessed the $1,000 Nasdaq fee by or through our supplier, who, as we understand the rule, must also pay this fee, which it seems likely that our customers who are also redistributors will be asked to pay. While we acknowledge that Nasdaq incurs expense in compiling their mutual fund data set for which they should be reimbursed, we do not believe that the Commission’s Order appropriately distributes the burden of reimbursement, nor does it appropriately limit the scope of Nasdaq’s income from redistribution of the data they compile.
We refute the finding that the rule change is consistent with Section 15A(b) (6) of the Act because redistributors who receive data farther down the supply chain and their clients are unfairly affected, as the higher cost of data is compounded when the data is passed from distributor to redistributors(s) and finally, to investors. Mid-level redistributors such as CSI are adversely affected, as we are forced to raise our prices, absorb the higher expense or drop the mutual fund data feed. Our supplier and some of our customers now face the same dilemma.
The Commission’s order of rule change does not specify how much money Nasdaq needs to overcome the ‘very substantial deficit’ it claims in delivering mutual fund data, nor does it limit the income from the fee to Nasdaq’s actual expenses. This fee implementation is certainly an unreasonable burden on our company, and one which could result in a very inequitable windfall for Nasdaq. We believe that by setting a uniform fee of $1,000 per distributor who receives Nasdaq data, small companies such as CSI, who may receive substantially less than $1,000 in monthly revenue from the Nasdaq mutual fund data subset of our database, are unfairly discriminated against.
Section 15A(b) (5) of the Act requires that the rules of national securities associations provide for the equitable allocation of reasonable dues, fees and other charges among members, and issuers and other persons using any facility or system which the association operates or controls. The Commission’s Order acknowledges this by stating, ’In addition, Nasdaq represents that the amount of the fee is sufficient to compensate Nasdaq for services it provides to distributors and their subscribers by collecting and processing the mutual fund data feed, producing the data feed, and providing data quality services.’
As the revised rule now stands, each link in the supply chain increases Nasdaq’s income without increasing Nasdaq’s expenses in any way. As data vendors ourselves, specializing in compiling data from exchanges around the world, supplementing, checking, correcting and distributing data, we very much doubt that Nasdaq’s expense in compiling the mutual fund data is anywhere near the lofty potential monthly income from this fee.
We also question whether $1,000 per month is a reasonable fee for the service provided. The Nasdaq mutual fund data we receive is so incomplete that it serves as the nucleus, but not the whole substance of our data set. We invest a great deal of time and money in building a complete mutual fund data set around what Nasdaq supplies. The Nasdaq mutual fund data requires very substantial supplementation before release to our customers.
All data at some point in time fall into the public domain. As soon as factual data is posted somewhere on a web site, released to the press, or broadcasted to any type of print source before or at the very same moment of actual publication, the data rights of the exchange are seriously compromised and lost. CSI is an end-of-day data vendor, and as such, our service to investors is to compile, enhance and distribute public domain data. By granting Nasdaq the unlimited right to charge royalties on redistribution of mutual fund data, the Commission is ignoring the concept of public domain and failing to protect investors who are meant to be served by this principle.
We respectfully reiterate that no other U.S. exchange imposes exorbitant fees on end-of-day data such as this on redistributors who perform the service to investors of providing enhanced market data in a useful format. Should the SEC grant such a precedent to Nasdaq, very dangerous consequences could result. Other exchanges may see this as an opportunity to impose fees on end-of-day closing price data that clearly belongs in the public domain. Given the negative impact of this rule change as it affects the flow of information to investors, a required element of the Securities Act of 1933 and as it affects fair treatment of all parties required by the Securities and Exchange Act of 1934, there is no justification for allowing it to remain in force. The Nasdaq’s new fee to redistributors is clearly not in the best interests of investors. The far-reaching impact of this precedent — that of allowing an exchange to restrict distribution of its market data by imposing excessive fees for dissemination, should not go unnoticed or unchecked by the Commission.”
Exchange vs. Database Service Copyright
At first glance, there may seem to be a conflict between CSI’s right to sell and copyright market data and our insistence that the exchanges have no such right. The distinction is clear and important. The exchanges publish factual information concerning past events such as an intermediate closing price of a futures contract, actual stock price trading information or, in this case, mutual fund net asset values. In addition to the exchanges’ legal obligation to make this data available (mentioned above), U.S. copyright laws also prohibit corporate retention of market events. They are not copyrightable because the information supplied is considered within the ambit of the public domain.
However, the totality of these events as expressed in a unique manner such as provided by CSI is eligible for a copyright claim. CSI compiles data from nearly 100 world exchanges and disseminates verified and corrected prices in various formats as required by our customers. Copyrighted materials run the gamut of artistic, dramatic and scientific works. Such published works are eligible for copyright protection in the United States if the conditions are such that there are multiple sources, and there is perhaps artistic content, a unique “manner of expression,” such that copies may satisfy the reasonable requirements of the public. CSI takes the view that the compiled database, with its depth of universal content and a unique structure or manner of expression over many decades, is a copyrightable product. According to published information and court case rulings having to do with the manner of collection and the artistic nature of the information itself, CSI data is copyrightable based upon court tested conditions.
What’s it to you?
The impact of exchanges limiting and controlling the free flow of market information can be far reaching. For starters, if they muscle out all data vendors, investors will lose the oversight that third-party vendors provide with regard to data accuracy. We can’t begin to count the errors we have found in exchange-reported data – errors that could well have gone uncorrected in the historical record had our database staff not questioned the data and requested corrections. We absolutely believe that third-party data firms help keep the exchanges honest in their reporting.
We don’t have to tell CSI customers how convenient it is to receive all data from all exchanges through one download that generates all necessary formats. You already know. Imagine a world where the only source for any market quote was the issuing exchange. It appears that the Securities and Exchange Commission failed to consider the valuable services that third-party data vendors provide to investors in allowing this rule change. We hope that you will help make the case for repealing the rule change by contacting them at the address shown below.
Read our complete Petitions and send your comments through the SEC website: www.sec.gov. Click “more” under "Regulatory Actions," and then click "Public petition for rule making," See File Number 4-487.
Please consider writing to the SEC's Secretary, Mr. Katz to offer your views on this rule change. You might remind him that Nasdaq already receives a portion of the commission fee whenever a mutual fund adds, deletes or changes the mix of shares in any given fund.
Jonathan G. Katz,
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
CSI’s position on data ownership and distribution of our data is founded on the principles set forth in various works and U.S. court cases. Those available online include: www.copyright.gov/circs/circ1.html, www.wipo.int/clea/docs/en/wo/wo001en.html, www.copyright.gov/title17/92chap1.html. See also the Digital Millennium Copyright Act of 1998 and the U.S. Copyright Office at the Library of Congress Copyright Office.
Dow Jones Turning Point Chart
My good friend and CSI data proponent, Welles Wilder wants to share with all of us a remarkable chart of what he predicts the DJIA will do for the next few years. Download it at: http://www.deltasociety.com/turningpoints/. Several hundred CSI customers find his service quite beneficial. I encourage you to call for information.
Each month in this column, the CSI technical support staff addresses issues that may be of interest to many subscribers through this question-and-answer forum. This month they discuss better Internet Security features, importing Rina Systems files into TSPE and a new method for capturing “external” intraday data.
Q. I just installed Unfair Advantage ® (UA) on a new computer, and it seems to download perfectly even though I haven’t disabled the Internet security system. Disabling was required for every download with my old computer. Is there a problem I can’t see, or has the security conflict been resolved?
A. We haven’t changed UA in this area, but the makers of Internet security systems have made their software smarter. Newer programs allow the user to specify which programs should have access to the Internet and which should be blocked. This is often accomplished through a message box asking whether any specific program, such as Unfair Advantage, should be allowed access.
To simplify the procedure, Norton Internet Security comes with a database listing the executable files for common programs, such as “excel.exe” for Microsoft Excel. The Norton Internet Security database lists “ua.exe” (Unfair Advantage’s executable file) for Microsoft Urban Assault. (Please note the similar use of the UA abbreviation.) Norton Internet Security defaults to "Permit," for ua.exe., so you should confirm the choice by checking "Always use this action." Be aware that by enabling access for Unfair Advantage, you will also be enabling Microsoft’s Urban Assault.
If your downloads appear to be going through without problems, even if you have not specifically allowed access with Unfair Advantage, it is likely that your new security software has automatically allowed access.
Q. My version of Unfair Advantage’s Trading System Performance Evaluator (TSPE) includes the ability to import “Rina” files. Why the change?
A. Trading System Performance Evaluator takes the trading records (profits and losses) derived from actual trading performance or from the results of simulated paper-trading. TSPE originally evaluated manually created reports or input generated by UA and Tradestation.® We added support for Rina Systems products so TSPE users who also use Rina Systems software can certify Rina output before risking investment capital.
Q. I would like to see current market quotes before launching a trade. Can CSI help me with that?
A. UA’s Position Manager very nearly accomplishes this, but we’re working on another method that will be even easier to use. Starting with UA version 2.7.6, UA can, at the push of a button, collect intraday open, high, low, last, and volume data for the current day. Like Position Manager’s intraday quotes, these prices are typically 20-minute-delay data or ECN only and come from third-party websites. We call it capturing "external" data, because this data does not pass through our systems.
CSI makes no claims about the accuracy, timeliness or completeness of this data. These intraday prices are incorporated into UA as estimated current-day values. When you retrieve a normal daily update from CSI, our high-quality, meticulously checked data replaces the estimated values.
We’ll be adding a “SnapQuote” button to the UA toolbar so every user can decide whether or not to pick up intraday quotes. An “intraday” choice that is being added to the portfolio manager will also allow you to decide which markets, if any, will be updated. This free service will be offered on a trial basis. Future availability is not guaranteed.