Interdealer Brokers And Vendors At Impasse Over Digital Feed Fees

Efforts to install digital information feeds from interdealer government securities brokers are being slowed by certification fees and qualification procedures imposed by the brokers.

Persistent reports that RMJ Securities Corp is asking systems integrators to pony up a $50,000 "certification fee" to handle their new record-based digital feed were confirmed by RMJ president Richard Jackson.

The fee is described by Jackson as a "good faith down payment" against "time and materials" expended by RMJ during installation of a digital feed.

Yet the most recent revision of RMJ's contract with its data vendors says nothing about the eventual refund of part or all of the fee. The contract does provide for RMJ's compensation for installation-related services at a rate of $150/hour, but establishes no linkage between these payments and the $50,000 fee.

Moreover RMJ's data license agreement with users of the digital feed provides for reimbursement of all equipment and transmission costs plus 10% for expenses. The same agreement includes a clause reserving RMJ's right to start charging or increase charges for the data.

RMJ says it is simply trying to recover its costs for services and materials rendered, but the terms of its contracts with data licensees and vendors suggest that RMJ's expenses will be covered exclusive of the $50,000 fee.

Other interdealer brokers want to be paid for their digital feeds. Fundamental Brokers Institutional Associates is circulating a draft contract for its data service indicating a fee that works out to about $35,000 according to one source. The draft contract also reserves the right to institute charges for the data.

Although FBI's digital feed is ready for roll out, it hasn't been released because no vendor has satisfied Fundamental's stringent certification requirements.

The provisions cover look and feel of the screen display, timing of information delivery and technical support, and security precautions relating to redistribution, and unauthorized analysis.

None of the brokers now authorize dealers to use their data in anything but paged form.

"We see nothing but headaches with digital distribution systems attempting to replace our trading screens," says Ross Klinger, president, Fundamental Information Systems Inc. "Vendors do not appreciate the difference between information for trading and information for information's sake," he claims. "If the Quotron screen running through a switch goes down, Quotron doesn't lose any money. If our screen goes down, we're out of business," says Klinger.

Historically reluctant to turn over their data to switch vendors, interdealer brokers are being drawn into another uncomfortably close encounter with systems integrators.

Vendors planning to work with RMJ's digital feed have run into problems at a number of sites, according to sources. About three weeks before the new government securities desk at Chase Manhattan was due to cut over, systems integrator CP Technology found that their deal with RMJ called for a $50,000 payment.

CP reportedly passed on the charge to the bank. The room went live as scheduled but so far no one has written a check for the $50,000 certification fee.

According to Jackson, interdealer brokers are being victimized by vendors. "What usually happens is we go back to Rich or Micrognosis and say we spent 30 hours this week trying to get this thing up and we're giving you the bill. They pass the charge on to the customer," says Jackson, "and the customer says, don't we do enough business with you? We get the run-around."

So far none of the vendors has paid the fee, and attempts to pass certification charges along to the dealers have been unavailing.

Dealers have also balked at signing new data supply contracts that reserve the broker's right to charge for it's data.

Until now, information services have been provided by interdealer brokers free of charge under an implicit soft dollar agreement. IDBs are accustomed to functioning as a vertically integrated industry, providing both brokerage services and information systems to the dealers that are their customers.

The brokers have never attempted to recover their systems deployment costs before. Why start now?

The ongoing squabble over access to broker data for analysis and retail distribution has heightened the brokers' awareness of the value of their data. At the same time lower volume and tighter margins have caused brokers to look to their information services units as potential profit centers.

The IDBs recognize the move to digital distribution as an opportunity to renegotiate the terms for delivery of their data. A global migration to digital feeds could allow IDBs to get paid for what they once provided gratis.

But why are digital feeds so popular with dealers? They're cleaner, slightly cheaper, and more compact. But these factors are small potatoes compared to the potential benefits of storage, analysis, and redistribution of Treasury trading data.

The benefits of unrestricted exploitation of digital delivery of broker data will not belong to brokers, though. Composite pages and automated arbitrage are among the value-added applications that would be enabled by digital delivery.

"We've opened up Pandora's Box," says Richard Jackson. "The composite page is potentially suicidal for our industry because if you take it to the Nth level, you start to eliminate competition."

Brokers seeking to avoid elimination may do so by substituting information revenues for brokerage revenues, but Jackson insists that RMJ doesn't want to go into the information business.

Henry Wattson's TGB Corp., meanwhile, is starting an IDB that will broker for drastically reduced fees, but seek more revenue from information sales. "I think all the brokers have to sit back and see if the dealers allow him to do that," says Jackson. "If the dealers allow him to sell the information, that's giving a signal to the industry."