Opening Cross: Will Nasdaq’s SIP Snarl-up Kill Consolidated Tapes?

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Anyone who doubts the importance of market data need only be reminded of Thursday’s Nasdaq outage, when the exchange was forced to halt trading for part of the day, after experiencing problems with the Securities Information Processor that processes and distributes data on Nasdaq-listed securities under the UTP Plan consolidated tape.

In some respects, the incident reminds me of the May 6, 2010 Flash Crash, and other similar events, such as “fat-finger” errors that cause wild price fluctuations. Though Nasdaq didn’t hiccup in the same way as the Flash Crash, the exchange confirmed Thursday evening that the problem arose from “a connectivity issue between an exchange participant and the SIP,” which resulted in “a degredation in the ability of the SIP to disseminate consolidated quotes and trades.”

At press time Nasdaq officials decline to provide specifics of the problem, the identity of the firm that caused it (or the firm’s area of business—i.e. whether it was a high-frequency trader or a long-only asset manager), what activity caused the connectivity issue, and how it was resolved. So let’s do what the media does in the absence of facts: speculate.

It’s possible that problems with an application at the offending firm may have caused it to drop chunks of data, generating an endless stream of re-requests to the SIP. But these should be handled via a separate retransmission feed, which would not impact the main feed. So to support that hypothesis, we also have to assume that the firm had somehow connected to the wrong port at the SIP and tried to route inbound messages through an exit-only gateway. A less appealing alternative is that a firm found a way to avoid Nasdaq’s and other firms’ monitoring of on-exchange quote-stuffing by disrupting data distribution, knowing it would cause a market shutdown—though Nasdaq denies any malicious or suspicious activity, and I’m hard-pressed to understand how this would give someone an advantage (and how they could ensure that disrupting the SIP would have the desired effect at the desired time).

Whatever the case, a problem caused by one firm should not be able to deny data to others and disrupt the smooth operations of Nasdaq and also of other equity exchanges that trade Nasdaq-listed securities and of derivatives exchanges that list options on Nasdaq underlyings.

In fact, Nasdaq’s decision to halt trading as soon as it identified the problem probably prevented a more serious incident. And while some are already warning of further damage to the exchange’s reputation following the botched Facebook IPO, there would have been even more objections had Nasdaq not halted trading, and continued operating without a market-wide supply of accurate and timely data. In addition, Nasdaq’s own systems and feeds were not affected by the SIP failure, and could have continued operating, although the lack of a supporting consolidated tape would have left others at a disadvantage.

A broader question is what impact this incident will have on consolidated tapes in general. On one hand, the Consolidated Tape Association and UTP feeds—operated by the New York Stock Exchange and Nasdaq, respectively—provide a definitive record of trading activity on US markets; on the other hand, exchanges now have proprietary feeds to distribute their data, which some might argue renders the consolidated feeds redundant, as well as being outdated mechanisms in comparison, with antiquated governance structures. With exchanges already releasing budget-level “Basic” data products, could an incident like this be the final nail in consolidated feeds’ coffin, or will it serve as a reminder of their importance? And what (if any) effect will it have on markets further afield, such as industry efforts to create a consolidated tape in Europe, where the pan-European trading landscape enabled by the MiFID regulation is yet to be supported by a definitive tape of pan-European data?

Answers/comments welcome—just please don’t overwhelm us!

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