[Editors Note: This is my first daily blog post, which will largely replace my LinkedIn updates, since those often get missed, are hard to find after the fact, and yet, many people have told me that they enjoy them. From now on, I will post my quick-hit thoughts and reactions to news and posted articles here, and will post longer thought pieces on the ViableMkts Library (My first article “If EVERY Trader Gets a TROPHY, Did ANY of them Achieve Best Execution?”, will be published next week) If you want to be alerted when I publish, hit the “follow” button at the bottom of the page.]
Market Data Rhetoric
While I certainly agree with those who argue that exchange direct feed costs need to be reigned in, this article (by Andy Nybo referencing a report that cites $5.4 billion in market and index data) does overstate the problem. Unfortunately, it conflates aggregation (such as Nasdaq’s UltraBook and Bats One Feed) and data cleaning services (such as IDC’s reference data) with the provision of raw data. It also includes non equity data such as ICE’s (formerly IDC) fixed income data, and is not limited to equities, nor the U.S. It is likely that a version of the report limited to U.S. direct feed data would lead to a similar conclusion (that providing raw top-of-book data should be regulated in some way OR there should be SIPs in each data center in the US), but such a study would stand firmer against exchange objections…
On the topic of combating “speed” there are two recent news stories that form an interesting juxtaposition. First, Bloomberg’s coverage of the NYSE’s announcement that their new “speed bump” exchange, NYSE American, referred to IEX (again) as a “speed fighting” exchange. Second, the SEC approved the Nasdaq Extended Life Order (ELO) for retail investors. This is interesting because neither IEX’s nor NYSE-American’s speed bump does ANYTHING to help displayed limit orders on their exchanges. (It is only useful to “protect” dark, pegged orders from being priced on a stale quote). Displayed quotes, however, gain nothing from the speed bumps, and lose a bit, since those quotes become slightly less reliable to liquidity takers due to the delay. The Nasdaq ELO, however, complements their PSX price/size priority product, that offers institutions willing to display large size an ability to gain priority over high-speed traders. The ELO, for retail investors who are willing to leave 99% of their trades active for a full 1 second, also prioritizes their orders ahead of speed traders. Thus, while I make no comment here on the importance (or non-importance) of combating speed, there is a massive difference between IEX, that does NOTHING, and Nasdaq that does SOMETHING for the displayed orders on their respective exchanges. I wonder when media outlets like Bloomberg will finally “wise up” to the marketing game IEX still plays, and start focusing on displayed orders, which are what exchanges are supposed to be about. Since the majority of their readers are retail investors, who only send market or displayable limit orders to exchanges, their coverage of IEX as “speed-fighting” is extremely misleading. (Plus, the Limit Order Display Rule, mandates that retail orders under 10,000 shares be displayed if not fully executed)
An article this morning from Markets Media on the need for “Trading Color” also deserves comment. It makes a valid point, that sell side execution consultants can provide a valuable service to buy side traders IF they can provide insights into how a security normally trades AND how it is trading today. That said, the notion that a human being, not augmented by analytic systems which track all exchanges and dark pools historically and in real time, is absurd. This goes way beyond how an order is doing vs VWAP, as the best tools will show displayed spreads, available dark liquidity, price improvement and volatility, sensitive to time-of-day historically. The best execution consultants will be able to use this data to recommend the most appropriate trading strategy or change in strategy. They will also be able to monitor algorithms, as well as detect anomalous trading events. Even better will be those that combine those skills with “high touch” abilities to source liquidity or access the brokers own liquidity when appropriate.