The Dow Jones industrial average (DJIA) is the world's favorite barometer of the U.S. stock market. It's also basically free. But if Dow Jones & Co. has its way, traders, brokers, and Web-surfing investors using terminals that display the DJIA will soon be paying a lot more for quotations of the 101-year-old index: $1 per month per terminal for real-time quotes, 25 cents for delayed display. The reason, says Dow Jones corporate communications head Karen Pensiero, is to assure the integrity of the market for DJIA futures, which began trading on the Chicago Board of Trade exchange on Oct. 6. Standard & Poor's Corp., which owns the S&P 500-stock index, doesn't charge for the use of its index. They do get revenues from futures contracts based on their indexes.
The Dow index of 30 large-cap U.S. stocks is currently calculated by several vendors, including Reuters, Bloomberg, and ILX Systems, as well as cable networks such as CNBC and CNN. Occasionally, though, there are small discrepancies. "Now that there are tradable products in Chicago, it's not just an annoyance that calculations can differ. People could make money off the differences," says Pensiero. To remedy the problem, Dow Jones is planning to terminate the licenses of vendors who calculate the index. Instead, it will perform the calculation itself. It will then distribute the index through the Chicago Board of Trade's feed system.
NOT PLEASED. However reasonable that sounds, vendors and users, especially large brokerage firms, were not happy when they received a letter from Dow Jones last month detailing the plan. "People don't mind paying for added value, but they do mind paying for something they have always had [for free] in the past," says Tom Jordan, executive director of the Financial Information Forum, an organization backed by brokerages and market information distributors. While the official tab is $1 per month, the cost to end users may be more in the range of $2 or $2.50--given the burden of tracking, billing, and collecting the new fee.
The issue came to the fore only weeks after Dow Jones announced it would take a large charge for the coming fourth quarter for losses related to its Dow Jones Markets division. The estimated 600,000 terminals not owned by Dow Jones worldwide that carry a live feed of the DJIA would generate about $7 million in new revenue for the company, says Jordan. Web sites that offer a delayed quote--usually 20 minutes old--would pay a 25 cents fee for every visit to the site. With more and more investors using the Web to get financial information, that could become a big source of income. Some users, however, feel they are paying for the company's financial problems. "The perception is that this is something in the public domain that they suddenly want to profiteer from," says Bernard A. Weinstein, chief executive of ILX Systems, a major vendor of market information. He is furious and says his big clients, the major brokerages, are too.
DAMAGED GOODS? The move by Dow Jones is also attracting the attention of regulators, who use the DJIA as a circuit breaker for the stock market. Rules established by the Securities & Exchange Commission and the New York Stock Exchange halt trading whenever the DJIA drops by 350 points or--in the second instance that day--by 550 points. If firms decide not to pay the fee to get real-time DJIA quotes, then other market participants might have an edge, particularly in volatile situations. Jordan has written a letter to SEC Chairman Arthur Levitt Jr., as well as to the assistant directors of regulation, asking them to get involved. They have yet to comment on the issue. "I don't see how they can stand for it. They would be supporting a commercial venture," says Jordan.
Dow Jones may have found an easy way to leverage a valuable asset, but it could also damage the franchise. Many market observers have long felt that the Dow is not a particularly good reflection of the U.S. stock market. With only 30 stocks in the index, issues such as IBM have an exaggerated impact on the average. Other indexes such as the Standard & Poor's 500 or the Russell 2000 offer a broader view of the market. Russell, which doesn't charge for quotes, hopes to gain market share. Mark Hanson, director of sales for Russell Analytical Services, says the new user fees could "shift focus away" from the Dow.
Dow Jones hoped to institute the new charges by Jan. 1, but the outcry from the investment community has put the plan on hold. Still, the free Dow has been a stand-in for the U.S. market for more than a century, and Dow Jones will probably get investors to pony up in the end. On Wall Street these days, very little is free.