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Nasdaq OMX Won Over SIP Committee With Latency Reductions & Tech Upgrades

Nasdaq OMX's plan to move the SIP to the INET technology platform, coupled with ongoing reductions in latency and plans for hot/hot disaster recovery, influenced the committee's final decision.

Nasdaq OMX won the bid to manage the securities information processor (SIP) for thousands of stocks, pledging to further reduce the latency and upgrade technology for the key market data feed.

Much has changed since the SIP outage on Aug. 22, 2013, that brought trading in thousands of stocks to a three-hour standstill. Nasdaq, the incumbent processor, demonstrated a number of improvements in latency, resiliency, and availability to the committee.

Nasdaq has already reduced latency by approximately 58% since the SIP malfunction, according to a press release from the UTP Operating Committee announcing the selection.

As part of its new remit, Nasdaq OMX will migrate the current SIP to INET technology, which it uses to run its exchanges and sells to other global markets. "It's a very strong platform," says Tom Jordan, president and CEO of Jordan and Jordan, the consulting firm hired by the UTP Operating Committee to conduct the RFP process.

As a result of upgrading the platform, Nasdaq will reduce latency to 50 microseconds within the initial introduction of INET in early 2016. It expects to attain 25 microseconds after one year of introducing INET.

In addition, Nasdaq will establish a subsidiary to manage all the Nasdaq UTP responsibilities, and it will register as an exclusive SIP with the Securities and Exchange Commission. A limited liability company will be formed called Consolidated Tape C (CTC) LLC.

To protect the SIP from future disruption, Nasdaq will implement a hot/hot primary and backup system to improve the UTP SIP's ability to recover from system problems, and it will provide service-level agreements (SLAs) committing to 99.98% uptime.

"We had strong competition during the RFP process, which resulted in our ability to contract for both improved technology and a more attractive commercial solution," Tom Knorring, chairman of the UTP Operating Committee, said in the release. "We feel that the UTP SIP is now well positioned for future success."

The job of the SIP processor is to collect, consolidate, and disseminate quotation and transaction reports in securities from the 11 public exchanges. The SIP run by Nasdaq is one of three SIPs: units of NYSE run the other two SIPs for Tape A (NYSE-listed) and Tape B (formerly Amex-listed) securities.

The RFP process
The long bidding process began in March and drew interest from 23 firms, 11 of which submitted "Intent to Bid documentation." The list was narrowed to four finalists: CenturyLink, MIAX Technologies, Nasdaq, and Thesys Technology.

In the end, the vote was between Nasdaq and Tethys, the technology division of the hedge fund and high-frequency trading firm Tradeworx. Tradworx has experience, since it designed the Midas computerized surveillance system to help the SEC monitor every bid and offer to buy or sell stocks across 13 public exchanges.

"Thesys has done a good job for the SEC, of course, and they had good number in terms of latency and capacity and things like that," Jordan told us. "Thesys is a great company, and we're going to hear more from them."

Reportedly, the voting process reached a stalemate at one point. New rules require a two-thirds majority to pick a winner, and Nasdaq didn't have the two-thirds. To get to the next step, the committee consulted with its members and voted again.

When asked why the decision was made to go with Nasdaq, Jordan said: "People were really comfortable with Nasdaq. We wind up getting better latency numbers and improved capacity and availability. At the end of the day, the exchange members were comfortable going with the incumbent."

On top of this, senior managers from Nasdaq were interested. Specifically, Jordan said, Nasdaq president Adina Friedman got involved, which helped committee members become comfortable with its solutions.

"A world-class caliber SIP benefits all market participants, and importantly, equity investors," Friedman said in the release. "We look forward to working in partnership with the Committee and are pleased that our technology continues to be viewed as an important part of managing this critical component of market infrastructure."

Change in direction
Last fall, Nasdaq told the UTP Operating Committee that it wouldn't renew its contract unless certain technology upgrades were approved, including the formation of the LLC.

Nasdaq's decision to stop operating the SIP, first reported in The Wall Street Journal on Jan. 14, was based on the slow pace of talks with the UTP committee to improve the SIP's technology.

After the August 2013 SIP malfunction, some critics cited the use of antiquated technology, such as an old version of the Microsoft Windows operating system. Since November 2013, six of the 12 enhancements proposed by Nasdaq have been completed, including improved latency by 58%, the release said. In addition, the front-end processor operating system (OS) was upgraded to Windows Server OS.

Some have argued that exchange members had less interest in investing in the SIP infrastructure, because they generate substantial revenue from their faster proprietary feeds, whose subscribers include high-frequency trading firms and automated market makers.

But Nasdaq has sped up the SIP. As Bloomberg News reported this week, the average latency for the data feed improved to 590 microseconds for quotes and 720 microseconds for trades in the second quarter, according to the latest US Consolidated Tape Data report. That compares with 1,160 microseconds and 1,310 microseconds, respectively, in the first quarter. There are 1 million microseconds in a second.

"The important part of is there is a continued improvement in latency and on capacity," Jordan said, emphasizing the importance of the SLAs.

At the recent Baruch College Financial Markets conference, panelists said that a latency difference between the SIP and direct feeds would always exist. Some questioned the process of selecting a single SIP for Nasdaq stocks; they suggested a system of competing aggregators that would be based at each data center. However, others at the conference said it would be confusing for investors to have more than one national best bid and offer.

Jordan said those proposing multiple SIPs are not thinking it through. "The beauty of the United States is that we have a SIP, and we can say where the best bid and offer is coming from. If you have multiple SIPs, where is the best bid and offer, and where's the best price?"

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

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