The SIP – Yogi Berra: Nobody Goes There Anymore…



Yogi Berra, when asked about a hot restaurant spot, remarked that “nobody goes there – it’s too crowded.”

Nobody uses the SIP anymore. Just ask all of Panel III at Rep. Scott Garret’s 3rd July 28th 2014 Campaign Donation Appeal Annual Market Structure Conference. Only, here’s the thing. The SIP creates the snapshot of what all the best bids and offers are among the many fragmented public markets, consolidates them, and is what is supposed to be used to measure Reg NMS compliance (with that lovely 1 second exception – which in all likelihood will be updated at some point):



However, should you read the stock exchange SEC filings, you see terms like “protected bid and offer” (PBBO), “compliant BBO, in addition to “national best bid and offer” (NBBO). It’s almost as if lawyers at the exchanges use the NBBO, or not, in terms of how they define their duty to comply with Reg NMS. For example, NASDAQ a few years back filed with the SEC that they use direct feeds from their own book to “view the market.” In contrast, Direct Edge uses the slower SIP, despite the faster feeds they provide high speed clients.

Hunsader at Nanex has pieced together a great chart, reference, and article that we would like to use in this morning’s note.



Hunsader’s article also provides links to each exchange SEC filing that details the above:

A list of links to the SEC filings used to construct the matrix:



Chicago Stock Exchange










Nice work Eric!

Ok… what’s the point?

All of the filings Eric linked to above have a comment period that closes in a little over two weeks!

This is an opportunity to ask questions, and to make sure that the SEC and the exchanges are considering all the ramifications and loopholes in our market structure. There are many questions that need to be asked! Themis friend and thought leader, R. T. Leuchtkafer, has a few questions about the stock exchanges SIP vs Direct Feed issue:

–          Shouldn’t the exchanges disclose latency differences between their own direct feeds and the SIP?  Shouldn’t they disclose latency differences between the direct feeds they’re using and the SIP? Shouldn’t they regularly conduct surveillance on those differences?

 –          When an exchange calculates a BBO for another exchange using its direct feed data, does it create an audit trail of those calculated BBOs?  Does it compare its calculated BBOs against the actual SIP reported BBO?  When there are differences between the SIP and the direct data feeds, how do the exchanges handle it?

 –          What quality control measures have the exchanges performed, and what ongoing quality control measures do they use, for any BBO they calculate from other exchange data feeds?  When exchanges conduct surveillance, which BBO are they using – the SIP or the one they calculated?

 –          When exchanges failover to use SIP data, do they announce this change in data source to anyone?  Do they make sure the correct BBO source is always used for their market surveillance efforts?

 –          Do the exchanges disclose exactly how they calculate BBOs from external direct feeds?  Are there any differences in these methodologies among the exchanges?  Is it possible that exchange X could calculate one BBO for exchange Z and for exchange Y to calculate a different BBO for exchange Z?  Who audits and reconciles these differences (if any)?

We would like to add to this our own questions and perspective on how dark pools fit into this:

–          How are the dark pools and ATSs “viewing” the best bids and offers in the market place? Some use the SIP, some use direct feeds and have to process those feeds themselves (unique latency), and all of their views are different, as their individual technologies are different.

–          Do they have an audit trail? Do they monitor differences?

–          What quality control measure do they employ, and are the robust and appropriate?

You can all see how the issue is quite complex. The industry will not solve it on its own – it has no incentive to. The SEC needs to clarify once and for all what is the NBBO, and what is the only acceptable way to judge best execution in our fragmented marketplace.

Why? Simple.

While some intermediation in capital markets is desirable and necessary, some intermediation is not. Intermediation that is created to game plumbing is unnecessary and even harmful to your costs, no matter “the spread”. It is forced intermediation. It is unwanted touching. Mitigating and reducing that intermediation will better all of our execution costs.

Nearly every industry professional, from HFT shop, to exchange, to buy-side trader, all cite fragmentation as an unintended consequence that is a problem for our modern markets. We’d be willing to wager that reducing the unwanted and needless intermediation will reduce that fragmentation.

The SEC clarifying and mandating the usage of a single compliant view of best bids and offers will achieve this. An appropriate and mandatory NBBO will make Yogi comfortable enough to come back. I don’t know about you, but I would really like it if Yogi came to our restaurant.