Is that free trade actually free? Part II

This is part 2 in our series on market data fees which will further dissect the effect of data sourcing and real-time vs. delayed stock quotes. If you haven’t already, check out Part 1, which broke down Payment for Order Flow and the hidden fees and broker revenue streams coming from Alternative Trading Systems and how this unwittingly affects investors.

Real-time vs. delayed

Today, investors demand and deserve real-time data in order to have the information they need to take action. With the change in the trading landscape, new players in the space (e.g., BATs, IEX), the emergence of “dark pools” or Alternative Trading Systems (ATS firms) and the advent of media portal licenses for market data on finance sites, information is available to most of us in a split second from multiple sources. But that information, that data, needs to be transparent and reliable. Investors need to know — and are entitled to know — the source of the information they’re basing their investment decisions on.

With new technology comes new regulation

In 2005, the SEC issued the Regulation National Market System (Reg NMS) because they saw a need to strengthen the trading regulations around changing technology. Reg NMS contains four parts but the most relevant one is the Order Protection Rule, or trade through provision, which guarantees investors get the best price at the execution.

Previously, with trade throughs, an order could be carried out at a suboptimal price, even though a better price was available on the same exchange or another exchange. Now with RegNMS, trades must be conducted at the best price, no matter where that lowest price is available.

The complaint around this was that it forced traders to do business on a venue that was the cheapest but perhaps, in their estimation, not the most reliable or the fastest, in essence removing their choice of where to conduct trades. There was also a concern this would result in worse outcomes for institutional orders.

Here’s why this matters. All of the images below were captured within a 90-second window. Almost all are time-stamped and all but one (which explicits states it’s delayed data) claim to be real time. However, the price varies for each one and the time stamping varies, potentially due to the source not in fact being real time. So, if you’re making trades based on what you think are real-time quotes, are you in fact getting the most accurate data?  

Real time with a full timestamp, down to the second…though those timestamps vary despite being captured within the same 90-second window.  

Screen Shot 2019-05-22 at 10.36.45 AM

With just the date and no timing, it’s a little suspect…

Screen Shot 2019-05-22 at 10.23.26 AM

A full timestamp and a reference that the quote is delayed.

Screen Shot 2019-05-22 at 10.23.36 AM

The more you know

To the retail investor, Reg NMS ensures National Best Bid and Offer (NBBO) when they place a trade, providing an unambiguous benchmark for assessing execution quality. US  brokers pay a fixed fee to the exchange per user to access this real-time pricing data. “The data are priced so that individual investors pay very little and the professional investors who value the data the most and profit from it the most, pay for it the most.” Redistributors of the data also pay the exchanges to display that data on websites and apps.  

Further, Reg NMS mandates Vendor Display Rules whereby publishers, portals, app developers, etc., must display the source of their data and its timeliness, as we showed above. Keep in mind that the SIP feed with the NBBO is only required where the data is actionable, though many publishers will still present the NBBO to their users.  

The key, however, is that the investors need to know what the source of the data is…is this CBOE’s feed? Is it Nasdaq?  

SIP on this

Similar to our post about screenscrapers, we’re talking about transparency to the end user. In this case where they get their data, rather than where their data is being used.  

The issue with this according to James J. Angel, Ph.D., CFA, Associate Professor of Finance, Georgetown University, “there is not a good counterfactual for what the current U.S. market would look like without the SIP data.” From his studies of transparency, he found that without good quote and trade information, transactions costs for all investors would increase significantly (emphasis added).

What’s the price of doing business?

For NYSE- and NASDAQ-provided market data, all pricing is mandated by the SEC.  The pricing is publicly available on their sites. These fees break down based on professional vs. non-professional users with lower cost options such as Nasdaq Basic, or Nasdaq’s NLS. Fees can range from $50,000 to upwards of $100,000 per month for SIP feeds; while real-time feeds can also be accessed for non-professionals for as low as $0.25 to $10 per user per month. As an example, the CBOE1 feed — distributed by the CBOE — is an alternative for non-professionals, as it gives publishers a lower cost option for displaying real time, without trading.  

Recently, the SEC rejected fee increases requested by the NYSE and Nasdaq. Not because they were too high, but because they didn’t demonstrate that “these fees are fair and reasonable and not unreasonably discriminatory.” The striking down of these increases was done “to more efficiently and effectively ensure that market data fees are set, reviewed and regulated in the best interest of our markets and our Main Street investors,” according to a statement by SEC Chairman, Jay Clayton.

It’s time to pull back the curtain

The simple fact that investors, perhaps, aren’t getting the most recent information, or know the exact source of that information, does affect their pocketbooks. It just might not be with fees. Publishers need to disclose where the information they provide is coming from and the timeliness of the data, allowing investors to make an informed decision. Access to this market data is essential to America’s world-leading capital markets because all participants need timely and complete data to make informed decisions for all customers.”

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