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Wednesday, November 15, 2006

The Stock Exchanges Vs. The Internet: Free Quotes For All

Stocks: (NYX)(NDAQ)(TWX)(YHOO)

The large internet sites that deliver financial news object to the fees that Nasdaq and the New York Stock Exchange plan to charge for stock quotes. It would appear, at first glance, that the fight is purely economic. The internet sites don't want to pay much for quotes because it adds to the content cost structure and makes it more expensive to offer services to draw visitors. The exchanges have a more acute problem. Data fees make up so much income for them that a lost of the fees might wipe out much of their operating profits. A look at the 10-Q for the NYSE Group shows revenue of $603 million for the September quarter. Data fees were over $57 million of that. The company's operating profit was almost $68 million. Those data fees are important.

The finanacial internet sites have some many visitors that it could cost them millions of dollars to offer real-time quotes to their users, and now the exchanges want to up the cost of that data.

But, the fights goes beyond revenue and profit.

The banks that pay huge transaction fees to the exchanges and the companies that also shell out huge sums for their listings may not be entirely happy with a system that makes quotes more expensive and, perhaps, less available to investors due to cost. Do Apple and GM really want the barrier to getting quotes on their stocks raised? Or, would they rather have as many investors as possible with access to the data? Not a difficult question to answer.

One can see listed companies putting pressure on exchanges to distribute live quotes for a little as possible, if not for free.

Another difficult matter is the question of monopoly. When the exchanges were non-profits is was more palatable for them to charge for quotes that were not available elsewhere. But, they are not "for profit" institutions and they have bought up all of the electronic trading platforms that could offer quotes outside the exchange system. There is now, in essence, only one game in town. In general, the government has not supported "for profit" monopolies, at least not for any extended period of time.

There is another important set of players in this game: the investment banks who pay transaction fees to the exchanges. In Europe, seven investment banks including Citigroup, Morgan Stanley, Goldman Sachs, and UBS, have said they are considering setting up their own trading platform to take volume away from the London Stock Exchange. Why? The banks believe that the fees that they pay to the exhange are too high. It may be more efficient to simply set up a competing system.

The internet war with the stock exchanges is likely to become much more complex. If listed companies and investment banks begin to assert their own interests, the exchanges could have more problems than those created by petitions from Yahoo! and AOL.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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