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Trading Technology

01:13 PM
Cristina McEachern
Cristina McEachern
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The Buzz Around Cicada

To avoid a conflict of interests, Cicada has been selected as the technology provider to the Nasdaq/UTP Securities Information Processor.

Cicada has been selected as the technology provider to the Nasdaq/UTP Securities Information Processor.

As SuperMontage gets underway, concerns over Nasdaq acting as the Securities Information Processor (SIP) - which collects, consolidates and disseminates trading information on Nasdaq-listed stocks - have come to light.

Some participants in the Nasdaq Unlisted Trading Privileges (UTP) plan, which would then utilize this data, point out that Nasdaq acting as the SIP, while also being a competitor of the other exchanges participating in the UTP plan, could present a conflict of interest, explains Jeffrey Brown, general counsel of the Cincinnati Stock Exchange and chairman of the Nasdaq UTP committee.

The solution? To build an independent SIP with the help of a third-party provider. The concept of an independent SIP became reality with the approval of Nasdaq's SuperMontage and its registration to become a national securities exchange.

At that time, the Securities and Exchange Commission made the suggestion that the operating committee of the Nasdaq UTP Plan select an independent SIP to alleviate the concerns of other UTP participants, which include the American Stock Exchange, Boston Stock Exchange, Chicago Stock Exchange, Cincinnati Stock Exchange, NASD, Nasdaq, Pacific Exchange/Archipelago and the Philadelphia Stock Exchange.

After narrowing down the field to three prospective SIP providers - Cicada, ILX and SIAC - the committee has settled on Cicada for exclusive negotiations to build the SIP.

When it came down to ultimately choosing the SIP, Brown says that it was the overall cost of the project, the potential of a fast implementation and the innovative ideas for the future that made Cicada the most attractive provider. Cicada has already implemented a similar technology project at the Deutsche Borse to collect, consolidate and distribute its data, so there was less technology work to be done.

The Nasdaq UTP SIP will be built on Cicada's Composer technology, which aggregates data from the UTP over-the-counter stock markets, integrates it and then provides it back out to the market-data-distribution vendors.

"The technology takes in multiple feeds of different types of data - market data, reference data, regulatory data - then does validation checks, normalizes it to our standard so we can populate the database, and it also does any value added work," explains Hubert Holmes, executive vice president of Cicada.

"It's a small market niche for people who provide SIP functions," explains someone close to the committee, who did not want to be identified. "Cicada has done it in Germany, they have experience building a market-data-collection facility for exchanges. Therefore the Composer is cost effective because they've already built it, they don't have to reinvent the wheel."

Cicada has partnered with Sprint and will run the Composer software from a Sprint data center, with each of the exchanges running a T1 line into the center. The data will then be output from the center either in the Nasdaq format or possibly, in the future, in Cicada's own format.

"So the software takes a picture of your market and shoots that over to the SIP," says the person close to the committee. "But part of the preview in getting this business is if Cicada can make things more efficient, then great. (For example), if they say we took a look at the Nasdaq formats and we think the messages are too fat and there's a way to skinny them down."

This person also explains that Cicada could look for ways to change the Nasdaq formats in a more usable, cost effective way going forward. He says that Cicada could cut the cost of the SIP by 70 percent, versus the Nasdaq SIP today, which moves the cost off the participants balance sheets, who can then make it cheaper for clients. Overall he says that if the SIP costs are reduced, the entire cost of producing a trade and quote is improved.

The committee had asked the potential SIP providers to be ready for launch in April, but this might be a bit too aggressive, says the person close to the committee. Instead, he says, late summer may be more realistic for the SIP launch.

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