In a Nov. 6 letter to the UTP SIP committee, Nasdaq cited the need for expanding disaster recovery capacity, upgrading load balancers, adding tools for operational monitoring, developing a rigorous test environment, improving participant message handling and enhancing information security, among other issues. In addition, Nasdaq said they should “revisit the question of hot-hot recovery.”
In that same letter, Nasdaq also asked the committee to set up an LLC or limited liability company, and a detailed services agreement to improve the governance of the SIP, noting that this approach had already been implemented by the Options Price Reporting Authority (OPRA).
Frustrated by the committee’s lack of responsiveness to its recommendations, Nasdaq sent a second letter, reminding the UTP committee of its recommendations. In a Nov. 25 letter, Nasdaq reiterated its position on the 10 technical modifications and governance changes. Then it said that the letter would serve as a notice of termination of its contracts, which are due to renew on Jan. 1, 2014. But Nasdaq is required to operate the SIP for two more years.
The delay in the committee’s response put the exchange “in an awkward situation” since if anything happens with the SIP, Nasdaq “will be hung up to dry, said another source familiar with the situation.
In the second letter, Nasdaq wrote that it intends to continue to negotiate in good faith the services agreement and the LLC agreement along with critical enhancements. “Nasdaq OMX is committed to moving forward with the enhancements,” the letter stated.
However, several observers said that Nasdaq’s intent is unclear. “You don’t know if it’s putting pressure (on the SIP UTP Committee) to make a decision, or whether it’s trying to point out to the SEC, that we’re trying to do what we can and we’re not getting support here,” said the source familiar with the SIP committee.
Another source said this could be a negotiating tactic. “What has clearly happened when they made recommendations to the SIP Committee they expected those to be taken up and they expected the work to be taken up as well,” comments Jaswal at Celent. “And that didn’t happen, and now the SIP Committee is taking its time in reviewing the recommendations,” he said.
As the vendor operating the SIP, Nasdaq may feel “liable for the processor and has the most to lose if things get delayed, so “they are trying to push the matter,” suggests Jaswal. “It’s not just about them getting away from running the SIP, it’s about trying the force the hand by trying to raise the issue in the media as well,” he said.
Jaswal said that Nasdaq is the party that has the most to lose. If there is one outage, it might not be so damaging, but if something similar happens again, it might be more damaging,” he said.
What do the Upgrades Cost?
One theory for the delayed response is that the UTP SIP Committee doesn’t want to spend the money that is required to upgrade the technology. “That’s an outrageous statement,” said the source familiar with the SIP Committee. “The truth of the matter is that nobody is going to wait two years to give more improvements to the system. There are things that have to be done,” said the source that is familiar with the SIP Committee’s views.
“I think some political positioning is going on here,” continued the source familiar with the SIP committee’s views. “I don’t think that Nasdaq wants to get out of the SIP business; they want to be in it at the right price,” the source said. In fact the source noted, that it wouldn’t be surprising if Nasdaq bid on the RFP.
“It’s not a bad business to be in,” added the source. “You’re at the center of the national market system. So you have outages. You just do a better job of doing it. Reasonable people would not shy away from wanting to be in a business that is risky,” he said. “If it’s done right, it’s cool marketing.”
It remains to be seen how the technology fixes will be resolved. Regardless of what happens, the SIP feed is not going away. “The consolidated tape national best-bid-and-offer is like motherhood and apple pie,” said the source. “You need it,” said the source, adding that firms rely on the consolidated tape to measure how their firm did in terms of best execution. There’s no doubt that it has significant value to the market."