As the controversy over selecting a plan processor for a key US equities market data feed ignited this week, Wall Street professionals at the Baruch College Financial Markets Conference discussed the latest developments surrounding the SIP and ways to strengthen the infrastructure.
“There is some concern about the lack of transparency going on in the selection process and the governance of the SIPs themselves,” commented Brett Redfearn, managing director at JP Morgan Securities, who runs market structure for the Americas. He spoke at the Baruch equity trading conference on a panel called "Strengthening the Infrastructure," held on October 14, the same day that SIFMA wrote a letter to the Nasdaq UTP Operating Committee on the selection of a processor for the Nasdaq SIP.
For more information, read: SIFMA Criticizes SIP Selection Process for Lack of Transparency.
Since the SIP is slower than proprietary data feeds that firms can obtain directly from exchanges, critics have said that the SIP enables “latency arbitrage” between high-speed traders using fast data and those trading off of stale quotes from the consolidated feed.
“Some have questioned what is the value of the SIP overall today. Still a lot of the exchanges use some of the SIP data for pricing their own order books, and dark pools use the SIP for pricing their order books,” said Redfearn.
When asked if it was possible to speed up the SIP and make it as fast as the direct feeds, Eric Swanson, General Counsel of BATS Global Markets, said the SIP is never going to get as fast as direct feeds since there is a time buffer required to consolidate multiple exchange feeds. But Swanson added, that the SIP “has continued to get faster and faster.”
Bill Harts, CEO of Modern Markets Initiative, a trade association for high frequency traders, said, “As long as there is any SIP, it’s going to be slower than direct feeds.” His organization supports equal access to direct data feeds, “as long as market data feeds are offered to folks on fair terms to all participants in the market.”
But not everyone thinks the SIP can be improved that much. “Making the SIP better is making the SIP less bad,” said Eric Noll, CEO of ConvergEx. Noll was previously an executive in Nasdaq Transaction Services who dealt with managing the SIP outage. He noted that the direct feeds have a lot of order book data that market participants require. Rather than speeding up the SIP, Noll said the focus should be, “How do we measure best execution?”
Another puzzle was why the selection process revolves around selecting a single SIP processor. One sell-side conference attendee asked why not have multiple competing SIP processors?
In equity market structure recommendations, SIFMA had previously urged the SEC to create competing market aggregators “so you would have competition coming in,” noted Redfearn.
“We’re talking about a system of competing market data aggregators at each datacenter. You would have the fastest possible quote at each datacenter,” he added.
Panelists debated the consequences of operating multiple SIPs for Nasdaq listed-stocks and the impact that would have on the national best bid and offer (NBBO).
“It would be confusing to have two SIPs showing different prices,” argued Boris Ilesky, managing director at ISE Holdings, who runs the ISE's options exchanges. “For a discount broker or someone using a wholesale market maker, it’s not clear to me that a model that would create two official sets of NBBO would make sense,” said Ilesky.
With firms taking direct feeds into ticker plants, “It’s a myth that there is one NBBO in the market,” suggested another panelist. “Most of the dark pools are creating synthetic NBBOs today,” noted Redfearn.
With no immediate solution in sight, attention seems to be focused on improving the selection process. “As long as the SIP is important, a lot of folks believe more transparency over the selection process of these SIPs and a change in the governance process is needed.”Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio