Commentary: I'm Not Gonna Pay A Lot For This Stock Quote

You can get them on your PC, your cell phone, or your pager. You can watch them stream across the screen on your favorite cable-TV channel. Stock quotes seem to be everywhere, free for the taking. But they're not--and therein lies a tale of how Wall Street still hasn't caught up with the Internet Age.

E-investors expect a rich flow of information to help them make smart buy-and-sell decisions. But that data can be bought only from the three main stock markets--the New York Stock Exchange, American Stock Exchange, and Nasdaq. Together, they reap more than $400 million a year from their monopoly on selling price and trading data--far more, critics say, than the cost of gathering and distributing the data. The three have erected a confusing set of fees that jack up expenses--especially for online investors.

"EATING QUOTES." In 1975, Congress told the Securities & Exchange Commission to make sure investors get market data at a "fair and reasonable" price. But the SEC cops have been asleep on the beat--until now. On Dec. 8, the SEC pointed the way toward a clearer system where exchanges will have to link their market-data fees to actual expenses. If the SEC follows through, it will take a major step toward cutting costs and empowering investors with better information.

Online investors are voracious consumers of stock quotes. "You go to the computer for an update on your portfolio, you watch the bid or ask while you place an order--and you're eating up quotes," says Carrie E. Dwyer, general counsel of Charles Schwab & Co. For each real-time quote, the broker pays about 1/2 cents to 1 cents. When Schwab's customers mostly placed telephone orders, the firm bought 10 quotes for every trade. With online trading, Schwab buys 75 quotes per trade. From 1994 to 1998, the share of tape revenues coming from online customers rose from 1.6% to 9.9% at the NYSE and from 2.1% to 14% at Nasdaq.

To control costs, online brokers used to steer customers toward delayed quotes. But in today's markets, quotes delayed 15 or 20 minutes are worth just about what the markets charge for them--nothing. So competition has forced most brokers to swallow the costs and provide real-time quotes as part of their service. The result: Customers hit the "update quote" button even more often.

Online brokers have two gripes. First, they pay either by the quote or by the customer, while traditional brokers pay a flat monthly fee for unlimited quotes. E-brokers say that that costs them more, although recent fee cuts by Nasdaq and the NYSE have helped to close that gap.

More important, the markets have never proved that their data fees are based on actual costs. Market-data fees provide 15% of revenues at the NYSE, 20% at Nasdaq, and 35% at Amex. "The NYSE is spending quote revenues to run ads saying what a great market it is," says Michael Hogan, general counsel of online broker DLJdirect Inc.

The markets say they're not gouging. The NYSE, for example, claims tape revenue covers only half of its data costs--assuming the Big Board's computers do nothing but collect data. In fact, they route, execute, and clear trades as well. Nasdaq argues that its tape revenue is needed to pay for market oversight.

But the markets' own actions undercut their claims. The NYSE and Nasdaq ratchet data fees up and down without changing their regulatory budgets. Nasdaq plans to rebate tape revenue to reward brokers who bring more trades in NYSE stocks to Nasdaq's "third market." And plans for spinning off Nasdaq as a for-profit exchange--expected to be approved on Dec. 9--project that regulators soon won't depend on tape revenue for funding.

The SEC outline suggests that data fees should cover only two items: direct costs of gathering data and the cost of market surveillance to ensure the data are honest. That may not be strict enough. Market surveillance benefits all players--including companies whose shares are traded and the markets' owners--so there's no reason why investors should bear all that expense alone. But the SEC is still taking welcome steps toward lower costs, better information--and smarter investing.

Before it's here, it's on the Bloomberg Terminal.