Statement on Proposed Rule on Market Data Infrastructure
Feb. 14, 2020
I am pleased to support today’s proposed rule which represents an important step by the Commission in its ongoing efforts to ensure that the public has timely access to essential trading information. I’m grateful to the staff, Director Redfearn, and Chairman Clayton for their commitment to this effort.
Today’s proposal considers much needed improvements to the basic infrastructure of public market data providers known as the Securities Information Processors or “SIPs”.[1] Under our current regulations and National Market System there are two exclusive SIPs.[2] Each has an exclusive contract to consolidate and distribute certain consolidated market data (“SIP data”).[3] The SIPs are run by for-profit exchange groups that also offer their own competing proprietary data products.[4]
The SIPs have not kept pace with these proprietary data products, either in terms of content or speed. Thus, many market participants find that they must pay for the more expensive proprietary data feeds in order to ensure they can operate effectively and competitively in our equity markets.[5]
Today’s proposed rule addresses this issue on three important fronts – content, speed and competition. First, the proposed rule would add depth-of-book, odd-lot, and auction information to what would be defined as “core data” required to be provided in the SIP.[6] This information is essential to the operations of trading firms who, under the current framework, must obtain it by purchasing the proprietary data feeds.
Second, SIP data is also slower than proprietary data. In a trading world where the race to trade on market information can be won by a margin of milliseconds or even microseconds, slower SIP data is often too stale. Those relying on the SIP to trade are therefore unable to compete in today’s fast-moving markets.[7] Consequently, many market participants find that they must buy the faster, more expensive proprietary data streams. The proposed rule would address the speed or “latency” difference between SIP and proprietary data. It would require core data and proprietary data sold by an exchange to be transmitted from that exchange using the same format, hardware, and method of transmission. Basically, it seeks to reduce latency by requiring both core data and proprietary data to leave the starting gate at the same time and on the same track.
Lastly, the SIPs currently have an exclusive right to consolidate and distribute SIP data. Under the proposed rule, this exclusive SIP model would give way to a “competing consolidator” model where multiple firms could register with the Commission to consolidate and distribute core data. The entry of multiple competing consolidators into the market could create effective competition on speed, price and efficiency, and thus may represent a key component to ensuring the success of these proposed changes.
As I have previously stated, it is the Commission’s role to ensure that the public has timely access to essential trading information. In that regard, I look forward to reviewing public comments related to all aspects of today’s proposal, including how we might improve it, possible alternatives we might consider, and any other data or information submitted by commenters.
[1] In 1975, Congress directed the Commission “to facilitate the establishment of a national market system for securities,” and gave the Commission authority to order self-regulatory organizations (or SROs)—including the exchanges—to act jointly in pursuit of that goal. See Pub. L. 94-29, 89 Stat. 97 (1975). In 2005, the Commission issued Regulation NMS which, among other things, defined requirements for the collection, consolidation, and dissemination of the data by SIPs. See Final Rule: Regulation NMS, Securities Exchange Act Release No. 34-51808 at 29-34 (Aug. 29, 2005).
[2] See Proposed Rule: Market Data Infrastructure, Securities Exchange Act Release No. 88216 (February 14, 2020) (“Proposing Release”), at 20-22.
[3] Id.
[4] Id.
[5] See Proposing Release, note 54 and accompanying text, Sections III.C.1(c), III.C.2(c), and III.C.3(b).
[6] See Id. at 40-49. “Core data” is a newly defined term in the Proposing Release. Currently, the information provided to traders through SIP data is: (1) the price, size, and exchange of the last sale; (2) each exchange’s current highest bid and lowest offer, and the shares available at those prices; and (3) the national best bid and offer (i.e., the highest bid and lowest offer currently available on any exchange). While this information is important and useful to many market participants, for active traders who are concerned with execution, this limited information may provide an inadequate picture of the market. Depth of book information allows participants to see what quotes are available on an exchange that are more expensive than the current best offer or cheaper than the best bid to sell a stock—providing a more granular picture of the overall market. Similarly, adding quotes for odd lots will provide more granular data. An odd lot is typically an order for a stock that is less than 100 shares. Odd-lot price quotes are not currently captured in SIP data streams, therefore participants relying only on SIP data would miss prices quoted for odd lots. As many stocks have gotten more expensive, more and more trading occurs in odd lots. Including more odd-lot quotes in core data would provide greater price transparency to traders. Finally, auctions play a key role in determining prices for exchange-traded stocks. Even as the proportion of trades executing in auctions has risen, little auction information is currently included in today’s SIP data. The Proposing Release would require auction information to be included within core data, again enhancing price transparency and giving traders a more granular picture of the market.
[7] See, e.g., Matteo Aquilina, et al., Quantifying the High-Frequency Trading “Arms Race”: A Simple New Methodology and Estimates, Financial Conduct Authority (Jan. 2020), available at https://www.fca.org.uk/publication/occasional-papers/occasional-paper-50.pdf?mod=article_inline.