NASD Files With Sec To Charge $50.75/Month For NQDS Level II Market Data

The National Association of Securities Dealers stands to harvest a multimillion-dollar windfall in retroactive data fees if the SEC approves its latest request. NASD has asked for permission to charge $50.75/month for each vendor terminal displaying its NQDS (Level II) data, and to collect the fee retroactively -- as far back as 1984 in some cases.

NQDS -- National Quotation Data Service -- is the wholesale version of NASDAQ's Level II service, which provides the complete list of all market maker bids and offers in NASDAQ securities. Two vendors, Bridge Information Systems and the Instinet Corp. unit of Reuters, account for nearly all of the terminals displaying NQDS data. Most other vendors display only Level I quotes, the best bid and offer in each security.

Besides Bridge, with almost 3,000 NQDS terminals, and Instinet, with about 900, the only other vendors now carrying NQDS data are Track Data Corp. and Wang Financial Information Services. Others, including Quotron, have announced their intention to do so.

The $50.75 charge "seems pretty outlandish to me," says Steve Williams, a Bridge vice president. Instinet, although it led the original charge against the fee, won't comment. Barry Hertz, president of Track Data, says the proposed fee is too much. "I know they're giving us more data than Level I so they have to charge more than $8.75, but $25 would be a better price," he says.

Vendors also object to the proposal that the data fee be applied retroactively. "I would think that they'd have a great deal of difficulty collecting that," says Williams at Bridge. Says Track's Hertz: "I don't see how the SEC will allow them to back bill customers. It's not the subscriber's fault that the NASD has dragged its feet."

NASD doesn't have a formal estimate of how much a retroactive charge would yield. One source there informally estimates a figure of about $3 million. Long-standing Instinet customers could be socked for more than $2,000 per terminal if the retroactive charge is applied.

The latest filing (SR-NASD-88-35) is NASD's third trip to the well on this issue. Until 1983, when the SEC directed it to make full quote information available to other vendors, the only way to get Level II data was through a NASDAQ-supplied Level II terminal, which cost $150/month plus $.02/query. Today it is also available through NASD on the NASDAQ Workstation, which costs $300/month.

When Instinet proposed to begin offering Level II data in 1983, NASD proposed also charging Instinet users $150/terminal. Instinet petitioned the SEC to throw out the fee proposal, which it did. The SEC told NASD it could charge the Level I fee -- $8.75/terminal/ month -- on an interim basis until a cost-based plan could be filed.

The dispute went as high as the U.S. Court of Appeals, which affirmed the SEC's insistence that the fee be cost-based. NASD came back in mid-1985 with a Coopers & Lybrand study and a proposal for a $79/terminal/month fee, which the SEC also rejected as not being sufficiently cost-based.

The new filing, which was reviewed by Ernst & Whinney, NASD's auditors, claims to be cost-based in that "the costs allocated to the NQDS service have been carefully limited to those cost items related to the collection, validation, and preparation of quotation information for dissemination to a vendor." Interested parties will be able to comment on the proposal once it's published in the Federal Register, which an SEC official says probably won't happen before mid-September.

Some suggest that the bottom line is that NASD would still prefer to be the exclusive distributor of Level II data. NASD's plans to make the NQDS database available directly to users via a proprietary server (see related story, this issue) lends credence to that view.