We have found numerous instances over the past few years where information is leaked from exchange proprietary data feeds.  For example, we recently highlighted how Nasdaq data feeds were leaking information when post-only orders interacted with hidden orders.  Also, a few years back we wrote a paper titled “Data Theft on Wall Street” which revealed that some exchanges were displaying an indicator in their data feed that identified hidden orders.  While the speed of data feeds is often debated, there is not much talk about the enriched content that these feeds provide and how this could be hurting traditional investors.  Is this enhanced content really necessary for markets to function efficiently?  What information is actually required for data vendors to accurately reflect quotes and trades?

We think the SEC may have provided us an answer to this question in the amicus brief that they published last week.  The SEC talked about what was required in a data feed:

 Proprietary data feeds

“As noted above, a consolidated feed of core market data—all transaction reports and the best bid and offer for each security on each exchange—must be collected and distributed by the exchanges pursuant to Regulation NMS plans approved by the Commission. See 17 C.F.R. 242.601-603. But many of the exchanges separately sell their own “proprietary” data feeds as a product of interest to certain customers. Such feeds include the information in the consolidated feed as well as a variety of additional information about trading at prices inferior to the best bid and offer. Exchanges are prohibited by Commission rules from releasing data in these proprietary feeds any sooner than they release the data in the consolidated feed. See Regulation NMS Release, 70 Fed. Reg. 37496, 37567 (June 29, 2005); Lanier, 838 F.3d at 152-53.

But because the data in the consolidated feed must go through the extra step of aggregation by a plan processor, proprietary feeds generally reach market participants faster than do consolidated feeds. See id. Proprietary feeds are another product that has become especially attractive to high-frequency traders, both to save time and to gain access to a richer array of trading data. See Concept Release on Equity Market Structure, 75 Fed. Reg. at 3611.” 

The SEC states that a data feed must collect and distribute information for trades and top of book quotes only.  They do not require the distribution of order by order information and they do not require distribution of order identification numbers. In fact, they do not require anything beyond trades and best bids and offers.  However, years ago, exchanges realized that they were sitting on a treasure trove of information and figured out that they could monetize this data by selling it to high frequency traders. As the SEC stated in their amicus brief, data feeds are “especially attractive to high-frequency traders, both to save time and to gain access to a richer array of trading data.”  This rich array of data is your content that is being packaged and sold so that it can be re-engineered to find trading patterns.

Our research indicates that regulators may not be properly reviewing the content in these data feeds.  While they often approve new order type requests from the exchanges, it doesn’t appear that the SEC fully understands the leakage that might occur, for example, when two order types interact.  This was proven when Nasdaq admitted leaking information about hidden orders for seven years before finally fixing how they interact with post-only orders.  Nasdaq admitted what they were doing was “inefficient and detrimental to investors, to members, and to the market.”  Do you feel confident that regulators can guarantee that there aren’t any other leaks?

IEX, the newest stock exchange, only provides trades and top of book data which proves that markets can work efficiently with just this core data.  We think the time has come for the SEC to do a comprehensive review of the content that exchanges provide to their paying customers.  The SEC should justify why exchanges are allowed to sell your content. Their own rules say that the enriched content is not necessary yet they have allowed this to go on for years.