The Securities and Exchange Commission blocked the New York Stock Exchange from launching Liquidity Quote last week citing the negative impact it would have on market-data vendor Bloomberg L.P. and its customers. Liquidity Quote is a new NYSE data product that will show aggregated trading interest away from the best bid and offer.
On May 20 - the night before the Liquidity Quote data service was to go live --- the SEC issued an order granting an interim stay with regard to Bloomberg's application.
In granting the stay, the SEC noted Bloomberg's dependence on the NYSE for quotation data and the alleged intrusiveness of the vendor restrictions.
The NYSE's proposal would prohibit data vendors, such as Bloomberg, from integrating the NYSE's liquidity quote data with the display of quotation data from other markets.
Sam Lek, chief executive officer of Lek Securities, a direct-access brokerage firm, received the notice while his staff was testing the feed late at night. He told everyone to go home, he says.
In commenting on the NYSE's restrictions, "I think they're on the wrong path there. I just don't think it's the right thing," says Lek.
"Obviously what is behind this, if you're looking at their data, they don't want you to look at somebody else's data. That gives preference to the dominant player, they're kind of keeping the little guys out," says Lek.
Lek adds, as a regulator, the SEC has the duty to protect the public and ensure their competition on a level playing field."
This could also be designed to prevent upstairs traders from displaying the NYSE's bids and offers on a single quote montage with Nasdaq market makers and electronic-communications networks (ECNs). "They've had to deal with the Cincinnati and the Boston and the Philly for years. What scares the living (day lights) out of them are the ECNs," says Lek.
Lek says the NYSE placed similar restrictions on OpenBook data services, which is the NYSE's display of data from the specialists limit order book. (Liquidity Quote is part of the Open Book data service.) "If you show Open Book you cannot show anything in the same window with it," says Lek. "I think the NYSE wanted to do the same thing with Liquidity Quote, but I believe they gave this up in the negotiations," he says. Bloomberg appealed to the SEC for action after the NYSE agreed to remove the prohibitions from its vendor agreements, but instead revised the agreements to include similar restrictions.
In its application, Bloomberg complained about a multitude of restrictions written into the NYSE's vendor agreement, including one requiring it to place footnotes next to every data element attributing Liquidity Quote data to the NYSE. Another requires the data vendor to obtain prior approval for each manner in which the vendor displays Liquidity Quote data as well as to obtain prior approval for all changes, "whether trivial or otherwise," to the displays.
Bloomberg says these restrictions will be "extremely onerous" and "would stymie the vendor's efforts to innovate and compete in providing data and analytics to investors."
The document from Bloomberg asserted that such restrictions would make the display screens difficult to read and understand. Regarding its customers, the vendor also says that vendor restrictions will "severely disadvantage and cripple" the ability of small to middle-market broker/dealers and institutional investors to compete because such firms rely on vendors such as Bloomberg to perform complex data manipulation involved in this case, which reside on Bloomberg's servers. Bloomberg contrasts this with larger investment firms that have the computer resources to aggregate the data on their own desktops by purchasing the software from vendors that have "a different computer architecture than Bloomberg."
On April 2, the SEC had conditionally approved the NYSE's Liquidity Quote Proposal, based on the exchange agreeing to remove from its vendor agreements prohibitions on data-feed recipients, including vendors, from integrating Liquidity Quote data with other market's data.
The NYSE agreed to remove the prohibitions as long as vendors provide the NYSE attribution in any display that includes Liquidity Quote, and also required vendors that purchase Liquidity Quote product, to make it available to their customers as a separate branded package.
But after the April 2 approval, the NYSE revised its vendor contract, Bloomberg contends, it kept the restrictions in tact that the SEC had "expressly prohibited."
Explaining its decision in a document, the SEC says it was "troubled by the potential anti-competitive impact of the NYSE's actions."
The implementation of the Liquidity Quote service is blocked until June 6, 2003. This will give the SEC time to review the NYSE's opposition to Bloomberg's stay motion, which is expected.
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