News that the securities information processor that failed in August and caused a three-hour halt in trading of Nasdaq-stocks is running on Windows 2003, a decade’s old operating system, has triggered a firestorm of criticism from industry observers.
Although the Windows operating system was not blamed as the reason for the SIP outage, some Wall Street observers believe exchanges have underinvested in the critical market infrastructure that supplies market data vendors, brokers and media sites with access to consolidated trades and quotes.
The news has stoked concerns that the SIPs are running on antiquated technology, and that the exchanges have neglected to spend enough money to ensure their resiliency. There is also the view that exchanges prefer to spend their money on upgrading direct data feeds, which are sold to high frequency trading firms.
“The question is are they spending enough money on it and [what is] the transparency of the CTA and of everyone that runs it,” said Joseph Saluzzi, partner at institutional agency brokerage Themis Trading, referring to the Consolidated Tape Association, a committee that oversees SIPs. “Maybe if the SIP is critical infrastructure, we should be spending more money on it,” said Saluzzi.
Regarding the lack of transparency into the committee, Saluzzi compared it to a "secret mob" organization. “No one seems to know what’s going on there except the exchange executives.” Saluzzi points to the conflicts of for-profit exchanges selling direct-data feeds to high-speed traders who are co-located and receiving data in microseconds via microwave signals, while the SIPs are providing a slower feed possibly because their technology.
“It’s not a debatable point that one is slower than the other and the faster one has a higher price tag,” he adds. “Every day exchanges are coming out with faster feeds and raising the prices,” he said.
“The buy side is never going to be as fast as these guys zipping microwaves across from New York to Chicago.” Though the buy side may not care about extreme speed, they use dark pools, which subscribe to the SIP as their main source of market data.
Because exchanges are in the business of selling direct feeds, sources contend they have little incentive to improve the SIP technology. “If I were selling something that had a value being faster than something else,” there is little incentive to make the SIPs operate faster. For the SIPs there is an incentive to be slower than the others,” said Saluzzi.
“Meanwhile, the investing public is stuck relying on a quote consolidation system operated by exchanges that runs on the outrageously obsolete Windows 2003 software,” wrote Saluzzi in an email prior to the interview.
Buyers of the SIP feed include brokers, media outlets and trading venues (i.e, dark pools) that rely on the consolidated trades and quotes. Yet the SIPs are earning a ton of money for the exchanges. Estimates are that the two SIPs run by NYSE and Nasdaq will earn $400 million in market data feeds for 2013, but have only spent $15 to $18 million on upgrades, noted Saluzzi, citing a Bloomberg article. On Jan. 1, subscriber fees are going up 15% and Nasdaq fees and CME is also raising rates, said Saluzzi. “Where does the money go?” he asks. According to the WSJ article, the fees from subscribers go into a market data pot and are divided up by the exchanges, based on a formula that weighs the volume of quotes and trades.
Even the Securities Industry and Financial Markets Association (SIFMA), the main industry association representing brokers, wrote a comment letter to the SEC on Dec. 5th calling for “a broad review of SIPs to address concerns with transparency and governance.” Noting that the current system for distributing market data was developed 30 years ago, SIFMA wrote, “the Aug. 22nd SIP outage is a symptom of the outdated system by which critical market data is controlled and distributed.” SIFMA wants there to be more collaboration between the SROs(self regulatory organizations, aka exchanges) and the broker-dealer and investment communities to play a more active role as the SIP enhancement process moves forward.
However, some market participants think it’s time for a more radical change. “An exchange shouldn’t be running this thing,” said Saluzzi. An independent technology company like Google “that has no interest in running it slow,” and would apply the right technology, should be operating the SIPs, contends Saluzzi.
In the meantime, the WSJ reported that all 13 US exchanges are close to agreement on a new plan to implement much stronger back-up systems so that markets will be restored within 10-to-15 minutes of technical error. However, this is an immediate response to the SEC's review of the SIPs following a Sept. 12 meeting with exchange heads following the technical disruptions in August. A more thorough review of the SIPs is underway under the prodding of the SEC.
Perhaps the bigger question is whether the stock market’s key market data system should be running to Windows 2003. “Maybe it’s good for running a home computer where you are doing video editing. But is it good enough to run the most critical piece of infrastructure in the stock market?” asks Saluzzi.
Let us know what you think. Is Windows 2003 up to the task of running the nation’s consolidated market data feed that investors rely upon?