By Kelvin To, Founder and President, Data Boiler Technologies

The Securities and Exchange Commission (SEC) has the best intentions to overhaul market data infrastructure, however what they said versus what they did may contain more myths than truths. Some constituents are aggressively pursuing their own short-sighted agendas. For the sake of the overall goodness of our industry, let’s decipher these myths and add necessary knowledge to discern essential truths in improving our National Market System (NMS).

 Competing Decentralized Consolidation Model (DCM) is impractical 

As a quick recap, the SEC tried to solicit buy-in to DCM since February 2020. The proposal is merely based on 10G speed, while NYSE is allowed to implement 100G connections for their proprietary feed since April 2020. This makes the SEC’s proposal fundamentally flawed in its assumptions. The proposal of “same manner and methods” is merely a standard price list offered by Exchanges. It is not the equivalent to Latency Equalization, nor can it achieve the same results as Market data available Securely in Synchronized time. “Same format” hurts average investors and gives High Frequency Trading firms (HFTs) a permanent advantage where one can only attempt to match faster connectivity by altering data format and compression methods. DCM, transaction cost analyzers and other BestEx tools are indeed added layers of costs and/or barriers for average market participants.

 Betrayal of public’s interest in favor of a ‘predetermined’ competition among elites 

We are perturbed by the SEC’s views on the NYSE’s proposals to establish a Wireless Fee Schedule. Per our December 2019 comments to the SEC, and again pointing to the empirical research ” by Giovani Cespa and Thierry Foucault, “Exchanges optimally restrict access to price information by charging a high fee so that only a fraction of speculators buy their proprietary products”. Would that constitute as unreasonable, unfair and/or discriminatory? 

While acknowledging that the Exchanges have made certain changes to the original proposal, such as withdrawing Partial Amendment No. 2 and replacing it in its entirety with Partial Amendment No. 3, there are still significant gaps. 

Co-location ≠ Latency equalization ≠ Market data available Securely in Synchronized Time

Selective listening to only the elite firms and the low latency data vendors is a huge disrespect and disregard of public voices.  It is naïve to blindly believe in competition to level the playing field.  Using microwave, laser, or quantum technologies, the resulting effect only exacerbates the gap between the “haves” and “haves not”. As long as NMS remains a “drag race”, the rich will access connectivity that is not reasonably affordable to the average investor. It is unsound that as the SEC states “the Commission believes the Exchanges have demonstrated that they are subject to significant competitive forces …” when both empirical research and available technology suggest otherwise! The fight to break up the Exchanges’ alleged monopoly power over market data must continue.

 Incomplete and/or misleading fixes to market data infrastructure  

Some advocated for “Service Indirection”, suggesting that “the services could wrap different levels of functionality, such as existing SIP and depth, including future functionality such as distributed SIP, snapshots and conflation.” While we also echo the desire for faster evolution and less client impact we are uncertain if the path as prescribed achieves the needed cure. We do understand “indirection” or “dereferencing” as way to multi-task in computing. That being said, real-time market data should still be referenced to an atomic clock (e.g. NIST) in order to make market data available securely in synchronized time. Regardless of wireless connections or ports for different proprietary feeds, or SIPs, they should all use time-lock encryption to make sure there is no premature decryption of data. Forsaking a synchronized start-line is indeed unreasonable and against public interests.

Besides, “wrap” may merely mean adding a header or trailer to SROs’ data feeds to state which Exchange this feed is originally sourced from, before passing downstream to a subscriber or SIP user. That is one of the easiest and cheapest ways for an aggregator to pass a message from one hand to another. However, message processors would incur substantial costs before they can actually use these data. These costs include but not limited to: (1) convert the varieties of different SROs’ feeds into a unify data format before sequencing of trade activities; (2) subscribers would need to re-program whenever a new exchange open up using its own proprietary data formats, versus quick adoption to a SIP unified format; and ultimately, (3) the format of the unifying messages including the new data will need to be designed, agreed to, programed, tested, and implemented. 

We care about end-users’ experience. Why would the SEC attempt to protect these low latency data vendors’ profits with a multiple CCs proposal? These telecom industry leaning middlemen do not necessarily have the best interest for our capital market. They add little value to the new NMS 2.0 in terms of resolving the “who owns the data” issue, hence it should not be included.

 CT Plan LLC if approved ‘as-is’ is nothing but bureaucracy that is doomed to fail

In August, the SEC ordered FINRA and other Self-Regulatory Organizations (SROs) to come up with a new single NMS plan governing the public dissemination of real-time consolidated equity market data, commonly referred as the “CT Plan”. Given the role and purpose of the CT Plan, why should it be organized as a For-Profit LLC, and not a Non-Profit Entity?! 

We believe the role of the Operating Committee (OC) as prescribed in proposed CT Plan is impractical. We envision the OC, with diversified representation, should be similar to the ‘Legislative Branch’ of the government. The OC would shape the boundaries for which the ‘Executive Branch’ or management is to carry out the SIP’s public purpose. As proposed in the CT Plan, having the diversified OC running daily operation functions may cause the company to run astray. Having SROs dominating the Legislative branch and assigning an “observer” to scrutinize everything the OC may try to do, would indeed tie the hands of Executive branch. When the OC is unable to deal with “administrative” nuances, the proposal suggests the OC to “delegate” that responsibilities back to SROs’ controlled old SIP management team or so-called “sub-committees”. Mercy to the old SIP management team, they do  the work while top “bosses” from both SROs and Non-SRO Representatives continue to have polarized arguments.

More importantly, NMS 2.0 should be a full-fledged exercise like the Music Modernization Act governing digital streaming and related copyrights and royalties issues. The SROs have given the industry a drafted “article of incorporation” for the CT Plan LLC. It deems the bare minimal rather than resolving the long standing ‘Animal Farm’ issue about market data. We should look and learn from the music industry. Take the opportunity to revisit our industry’s smile curve value chain! Timeliness and breadth of data may serve different values to different market players. We are all about fit-for-purposes, understanding how different users using market data for trading versus non-trading, and processing versus viewing. All the above would help assign appropriate values between contributing and consuming data flows.

 We are closer than ever towards seeing the Truths

We will discuss further the smile curve and how to increase value proposition in our next article. Meanwhile, the point we want to illustrate is: there is a viable option to bring the polarized industry and large exchange groups together. Stay tuned. 

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