February 02, 2014

A decision by Nasdaq OMX to stop running the securities information processor (SIP), which had an outage last summer, has raised the need to find a new vendor, and sources say the UTP SIP committee is now obligated, according to rules and contract, to put it out for bid as a result of the termination.

Though there has been no announcement, a source familiar with the situation said the committee is now required to seek other bidders through a request-for-quote process. The move will open the bidding process to vendors and exchanges that want to bid on the contract to operate the consolidated market data feed for Nasdaq-listed securities, known as Tape C.

In addition to one run by Nasdaq, units of NYSE Euronext run the other two SIPs for NYSE and American Stock Exchange-listed stocks. The SIPs are considered critical market infrastructure since they provide transparency into prices and last sale trade information from all market centers. The UTP SIP Plan is administered by all the US equity exchanges, and FINRA, which determine policy matters and oversee system operations. The SEC attends the meetings as well.

Many sources say the idea of putting the SIP vendor job up for bid is the right way to go. “I think the outcome is good. “Then you get a chance to see other alternatives. People sharpen their pencils when there is competition involved. They get creative,” added the source familiar with the SIP committee’s plans.

Others have accused the committee of having a conflict to interest, since each of the exchanges on the committee operates faster proprietary data feeds sold for higher fees, which sources say gives the committee less incentive to improve the SIP. For example, the SIP runs on Windows 2003, a ten-year old operating system, reported the Wall Street Journal.

Joseph Saluzzi, partner at Themis Trading, who has been critical of the exchanges having a conflict of interest, said “It would make sense that an independent company like Google or Amazon could do whatever it costs, then those revenues [from sales of the feed] can come to the vendor and get split by the exchanges.”

Meanwhile, the NYSE’s outgoing CEO Duncan Niederauer offered to operate the SIP while appearing on CNBC. However, sources point out that the Options Price Reporting Authority (OPRA) has said it’s conducting an RFP to find a replacement for the NYSE. This is the first time that OPRA has asked for an RFP since 2007, according to a source, with knowledge of the issue. xOPRA regularly reviews the contract with the NYSE every two years, and renews the agreement with "at cost" terms, according to the source. This past summer, NYSE under ICE management asked for different terms and OPRA has begun an RFQ process, said the source. By opening the bidding to third parties, the OPRA SIP committee can seek competitive bids.

According to Anshuman Jaswal, senior analyst, Global Securities, Securities & Investments at Celent, choosing a third party would avoid any conflict of interest. “It might be optimal having a third -party technology firm running this because they are accountable for just the SIP and technology aspect, and if anything goes wrong, it is in their interest to keep it up-to -date and to use the latest technology for that. The point it that third party vendors wouldn’t have those kind of issues in terms of a competing product.”

Why is Nasdaq Backing Away?

Nasdaq’s decision to no longer operate the SIP, first reported in the Wall Street Journal on Jan. 14th, was based on the slow pace of talks with the UTP SIP committee to improve the SIP’s technology.

After a software glitch occurred on Aug. 22nd, causing Nasdaq to halt trading for three-hours, exchange operators met on Sept. 12 with the SEC to discuss ways to prevent outages and back-up the systems.

Documents obtained by Wall Street & Technology show that Nasdaq came up with a list of 10 recommendations to upgrade the technology and prevent future outages. Nasdaq has been waiting for five months for the proposed changes to be decided on by the committee, noted a source familiar with the situation.