Anyone Want A SIP?
NASDAQ Wants to Abdicate Running the SIP
Yesterday afternoon, news leaked out that NASDAQ announced its intention to the SEC to cease running the Securities Information Processor (SIP), whose robustness was at the root of a very high profile NASDAQ shutdown last August.
(In a nutshell, the SIP is the central consolidation of public quotes that the public sees, and is a single source-of-failure-weakness in a labyrinth of competeing technologies and trading venues, and it is the benchmark for enforcement of REG NMS – which “protects” the NBBO in thousands of securities from being traded through.)
SIP Outdated and Poorly Run?
Of course, as with all systems, the SIP needs maintenance, and is somewhat of a burden to operate for NASDAQ and NYSE. The industry trade group FINRA, with knowledge that the NASDAQ SIP is still run on Windows 2003 software, recently commented to the SEC that the SIP system “suffers from a lack of transparency and competition, questions of underfunding and insulated governance.” Suffice it to say, as we have written to you about many times, the SIP has issues, and fixing those issues is a hassle!
Larry Tabb is quoted in the WSJ article linked to above as stating that:
“Operating the SIPs doesn’t bring a lot of revenue, but you get yelled at when it breaks down,” said Larry Tabb, chief executive officer of the market-research firm Tabb Group LLC. “There isn’t a lot of value in putting your best and brightest into a business that isn’t at the center of your company anymore.”
Isn’t A Bigger SIP Issue its Acknowledgement of a Two-tiered Market?
While outdated SIP architecture is a big issue, so is the conflict of interest and hypocracy of running it. While approximately $400 million in SIP related fees are collected annually and divided up among the stock exchanges, in the cut-throat, declining-margin, and for-profit exchange business, there is no incentive to modernize the SIP. To the contrary, it is in the exchanges’ interests to always insure that the SIP operates at a slower speed and performance level than the speed-advantage they sell to their high-volume customers in the form of colocation and direct feeds. That is the hypocracy that is the foundation of our modern fragmented markets.
Of course you recall the August 2013 SIP outage, where NASDAQ halted trading for a period of hours because its SIP was experiencing large delays relative to its available-for-purchase direct data feeds. You also likely recall NASDAQ’s Bob Greifield’s reasoning as to why he shut down trading, which he old CNBC on the air:
“We knew professional traders had access to individual data feeds, but the traditional long investor, retail investor now didn’t have the same information, because of that, we halted the market”.
“The high frequency firms would have access to proprietary feeds from individual exchanges. The consolidated feed which we operate had a problem, wasn’t giving quotes out. We had to halt the market because of that. We didn’t want to have a situation where there is information asymmetry, as you say.”
Ponder the irony of his last statement. Recall a note we sent out to you at the time, titled “NASDAQ Should Halt Trading All Of The Time.” The modern stock exchanges’ business models are based on the very information asymmetry that Bob claims NADSAQ shut down the SIP for. And the SEC gives its blessing to that asymmetry. In fact, the SEC acknowledges the unfairness in its 2010 Equity Market Structure Concept Release:
“The fact that trading center data feeds do not need to go through the extra step of consolidation at a plan processor, however, means that such data feeds can reach end-users faster than the consolidated data feeds. The average latencies of the consolidation function at plan processors (from the time the processor receives information from the SROs to the time it distributes consolidated information to the public) are as follows: (1) Network A and Network B – less than 5 milliseconds for quotation data and less than 10 milliseconds for trade data; and (2) Network C – 5.892 milliseconds for quotation data and 6.680 milliseconds for trade data.”
Back in the aftermath of the SIP outage, we think what Bob Griefield meant to say was that a little asymmetry is acceptable, but a lot of asymmetry is less so. The problem is, as latencies approach the speed of light, that an “acceptable asymmetry” target is vague and is always moving. And with respect to the sanctity of the NBBO, as traders you all know that sanctity is a farce. With the arms race in today’s technologies – which include even microwave transmission – the concept of the best bid and offer at any moment in time depends on where you are situated.
“Holistic Review” Talk Time Again?
With NASDAQ threatening to abdicate the SIP, we all will likely hear more talk about a “holisitc review” of our market structure. Even the SEC understands that while we have a structure where Fred and Ethel can buy 500 shares of BAC with a sub penny spread and $8 commission, that same structure has all sorts of other issues coming back to bite them in the rear.
Will NASDAQ really abdicate the SIP, and put its operation out to bid? Is NASDAQ, a self-proclaimed technology company, really not capable enough to modernize and improve the robustness of the SIP? We doubt that; it is more likely that their move was a political one intended to jump start the bureaucratic process that is holding up their recommendations for SIP modernization. By the way, they are contracted to run the SIP for another couple of years anyway.
However, make no mistake. The firestorm of market structure debate that we started back with our Data Theft on Wall Street paper, our SEC comment letters, and even our book Broken Markets, is reaching a boil – one that the exchanges themselves are bringing it to.