Advent of Computerized Online Trading and Alternative Trading Systems
In 1998, the SEC rolled out Reg ATS, which allowed off-exchange venues to operate as an exchange while exempt from registering as one. This brought about intense competition from the various Alternative Trading Systems (ATSs), as they are not subject to the same stringent requirements as the registered exchanges.
Reg ATS addressed concerns brought about by trading on these types of venues, however, by legalizing this type of trading the SEC also fiercely increased competition by providing many more options to investors. Reg ATS contributed to a fragmented marketplace, as once dominant stock exchanges drastically lost valuable liquidity.
The SEC responded to the rise in trades occurring in the various off-exchange venues with Reg NMS. The National Market System (NMS) sought to improve fairness by displaying the best price, regardless of where the order originated.
All participants in the market have the same access to the Securities Information Processor (SIP), which consolidates all market data for securities. All trading venues including Alternative Trading Systems (ATSs) and dark pools, are required to provide securities data in real time to the SIP, and are not allowed to provide this information to customers prior to the SIP, providing transparency to the market. Reg NMS further obligates venues to conduct transactions at the NBBO, or National Best Bid Offer.
The role that the SIP plays in the market is an important factor in the rise in fees for direct data fees. If everyone received the SIP information at the same time, it wouldn’t be necessary for proprietary data feeds costing tens of thousands of dollars monthly simply to access “Premium Data” resting on exchanges servers. As long as this data is ‘distributed’ at the same time, exchanges are in compliance with Reg NMS. When the recipient receives that information is out of their control (although it is painfully obvious that a direct feed will receive data faster than information first routed through the SIP).
The SIP is necessary for consolidating market data, although there is a latency problem due to this requirement, it takes time to consolidate each venue’s data. Even though it is only a matter of microseconds, the difference in time compared to direct data feeds is significant. Direct data feeds co-located to the exchanges servers provide instant market data considerably faster than the SIP. This difference in latency opens up a window for computerized algorithms to dominate the activity by snatching up securities at an advantageous price, sometimes even causing a shift to the NBBO then using that to their advantage. This is why market makers are at the mercy of exchanges, they have no choice but to purchase the direct feeds.
The SIP along with Direct Data Feeds represent a two-tiered market, although revenues from proprietary data products go directly to the exchanges selling them. The information from the SIP is always a little ‘late’, requiring a direct data feed to conduct competitive trading for clients, thus providing the best value to investors.
Great Point Capital, LLC is headquartered in Chicago with offices in Austin. We strive to provide our traders with the necessary tools and support to fully maximize their trading potential. We are one of the few firms authorized to utilize the Takion software trading platform, giving full access and support for successful trading.
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