A debate on equity market data and misconceptions
Q: Why is market data so critical in today’s equity markets?
A: The U.S. equity markets are the envy of the world. To put this in context, more capital has been raised by U.S. listed companies so far this year than the GDP of some members of the European Union. Advances in technology and adoption of regulatory policies that increased competition among execution venues have enabled retail investors to buy and sell stock more cheaply than ever. Unlike the futures markets, U.S. equity markets are now incredibly fragmented as a by-product of this competition. Policy decisions — specifically, Regulation National Market System (Reg NMS) and Regulation Alternative Trading System (Reg ATS) — have contributed to the fragmentation of the U.S. equity markets, where there are now 13 licensed exchanges and more than 50 alternate trading systems and dark pools where listed securities can trade.
Today, in order to transact a share of ICE stock, an intermediary (i.e., a broker) may connect to dozens of venues in order to give its customer the best price. This also means participants are often consuming data from multiple equity trading venues in order to get a full picture of the market. This is very different from the futures markets where liquidity will tend to coalesce on a single venue.
Q: What are the different types of market data products that equities exchanges like the New York Stock Exchange provide?
A: Distinct from futures markets where there is typically only one feed provided by the exchange, in U.S. equity markets, there are essentially two categories of market data offered by exchanges. The Securities Information Processor, or “SIP,” disseminates the best displayed bids and offers from each market, and the last-sale information from the entire marketplace. The second type of market data is offered by each individual exchange and is called proprietary market data.
SIP data is the most basic, essential market data, offering almost 4 million investors a single consolidated source for price discovery. This data feed comes at little to no cost for retail investors. Brokers pay no more than roughly $3 per month per user to provide unlimited real-time displayed market data from the SIP feed to their retail clients. This data also fulfills the regulatory requirement that brokers provide their customers with a consolidated market data display when trading, or when order-routing decisions can be effected.
The rates brokers pay for this data have remained stable for many years, despite significant technical improvements to the SIP feed. In fact, industry spend on trade and quote data provided by the SIP has declined at least 6% from 2008 to 2017.
Proprietary data feeds offered by equity exchanges are designed for traders looking for a content-rich view of the entire order book of an exchange. Typically, proprietary data customers are Wall Street professionals looking to utilize technology-driven strategies or to trade very large orders. These products contain more information than is required for retail investors, though we support reducing the difference between the feeds by adding additional information to the SIP, such as odd-lot quotations.
The more complex proprietary data feeds are sometimes misunderstood to be produced faster than the SIP feed, but in reality exchanges do not publish data to their proprietary data feeds any sooner than they publish the data to the SIP feed. In fact, Securities and Exchange Commission regulations explicitly prohibit exchanges from making professionally-oriented market data products available any sooner than SIP data.
Q: How is U.S. equity exchange data regulated?
A: U.S. equities exchanges operate and set market data fees in a competitive and highly regulated market. Unlike the third-party data vendors and data from dark pools — both of which face significantly lighter regulatory scrutiny — public exchanges must file any proposed changes to their pricing schedules with the SEC. In certain instances, exchanges have modified or cancelled planned fee changes at the SEC staff’s direction.
Q: What impact did Reg NMS have on our markets and the demand for data?
A: When the SEC introduced Reg NMS in 2005, the stated objective was to foster greater competition among exchanges and other trading venues in order to satisfy investors’ desire for lower trading costs.
As mentioned earlier, the result was the creation of a much more competitive, complex, and fragmented equity market structure. As Columbia Business School Professor Charles Jones recently pointed out in a study of equity market data pricing, not only do public exchanges now compete in a market of over 13 equities exchanges for the best data products, they also compete with third-party data vendors, and with data provided by over 50 alternative trading systems and dark pools. These dark pools now handle 40% of all equity trading, are operated by large financial institutions, and are subject to significantly lighter regulation.
Reg NMS also helped promote the rise of automated trading systems over manual outcry trading floors, which required exchanges to evolve and modernize. This change coincided with exchanges becoming listed entities themselves which enabled them to access the capital necessary to make the technology investments to deliver the services demanded by the post-Reg NMS exchange marketplace.
When one considers that, for example, the messages disseminated by the consolidated equity options feed (also known as OPRA) has grown by more than 450% in the last five years, with peak message rates approaching 20 million messages per 100 milliseconds, one can start to understand the magnitude of investment that exchanges have had to make to the architecture to seamlessly handle the increased message rates.
Q: How have exchanges innovated and improved the quality and speed of market data?
A: For both U.S. futures and equity markets, price discovery and trade execution are more efficient today than ever before. That is a direct result of exchanges’ enormous investments in technology to improve the quality and speed of market data as well as trading and connectivity. Market data quality as measured by latency associated with processing and disseminating trades and quotes has seen exponential improvement in the past eight years alone.
Additionally, the introduction of order-by-order level feeds has democratized access and improved transparency for investors. Historically only a privileged few had access to exchange order book information. Now all investors have the choice.
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