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SIFMA Criticizes SIP Selection Process for Lack of Transparency

Citing conflicts of interest in the voting process for a key market data feed, SIFMA letter presses for answers and for brokers and asset managers to get a seat at the table.

Concerns have flared up once again about the process for selecting a data processor for a key consolidated US equities market data feed, with an industry group citing conflicts of interest. The Securities and Financial Markets Association (SIFMA), a body representing banks, brokers, and asset managers, wrote a letter on Tuesday to the Nasdaq/UTP Operating Committee, complaining about the lack of transparency in the process for selecting an operator of the Securities Information Processor (SIP).

“SIFMA continues to believe that the current SIP governance structure suffers from a lack of transparency and insulated governance,” stated the letter, addressed to Tom Knorring, chairman of the UTP Operating Committee. The issue of the SIPs governance has come up multiple times, most notably after the Nadsaq SIP had an outage on Aug. 22, 2013, when trading had to be halted for three hours in thousands of Nasdaq-listed stocks, including Apple, Microsoft, and Google.

“Simply put, the existing governance structure for the SIPs is ineffective and must be reformed,” stated SIFMA. In addition, SIFMA asked that the analysis report by consulting firm Jordan & Jordan be made public.

Nasdaq and Thesys Technologies LLC, the tech arm of Tradeworx, a proprietary high-frequency trading firm, are the finalists to run the SIPs, reported Bloomberg News on Wednesday. Bloomberg reported that Nasdaq leads the vote with nine of the fifteen possible votes, while Tethys has six votes. A total of ten votes are needed to declare a winner, wrote Bloomberg.

In its letter, SIFMA criticized the voting process, controlled by exchange operators also known as self-regulatory organizations (SROs). Pointing to published articles about the voting process, SIFMA wrote that Nasdaq had full voting rights in the selection process despite its obvious conflict of interest in seeking to succeed itself as the processor for the Nasdaq/UTP Plan.

According to Bloomberg’s story, Nasdaq cast three votes for itself, based on the number of trading platforms it operates. It also got three votes from Intercontinental Exchange’s NYSE Group and one from Chicago Board Options Exchange, the Financial Industry Regulatory Authority, and the National Stock Exchange. BATS Global Markets cast four votes -- since it operates four platforms -- for Thesys, while the Chicago Stock Exchange and the International Securities Exchange each cast one vote for Thesys, reported Bloomberg.

However, SIFMA questioned why exchanges that didn’t trade equities or were not in business were allowed to vote. The National Stock Exchange has ceased operations, while the Chicago Board of Trade and the International Securities Exchange (ISE) “appear to be participating even though they no longer conduct equities businesses,” stated SIFMA. “It seems self-evident that participation in this vital selection process should not include organizations that do not engage in an equities business or are not even in operation,” wrote SIFMA in its letter.

SIFMA wants brokers, asset managers, and the public to have independent representatives with voting power on the operating committees of the SIP National Market System (NMS) Plans. They currently have participation through an advisory committee, but they have no voting power.

Meanwhile, SIFMA in its letter has asked the UTP Operating committee to address these issues before a new processor is chosen for the Nasdaq SIP. A vote was scheduled for October 15. It’s unclear if the meeting was held or was delayed to give the committee time to address SIFMA’s concerns.

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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