We have long been concerned about the information that is leaked through proprietary exchange data feeds. One suggestion that we have made to fix this problem is to limit the amount of information that these data feeds are allowed to distribute. This can be accomplished by requiring exchanges to obtain an “opt-in” from their customers before they include sensitive information (such as information on individual order cancellations and revisions) in their data feeds. Another way to limit information leakage is to aggregate orders by price level rather than distribute order by order information. This is exactly what IEX has just proposed. In a February 28th filing, IEX proposed:
“The Exchange proposes to amend Rule 11.330(a)(3) to describe a new market data product to be known as DEEP. Currently, the Exchange offers TOPS, an uncompressed data feed that provides aggregated top of book quotations for all displayed orders resting on the Order Book and execution information (i.e., last sale information) for executions on the Exchange…As proposed, DEEP will disseminate, on a real-time basis, aggregated depth of book quotations for all displayed orders resting on the Order Book at each price level for securities traded on IEX (i.e., displayed top of book and full depth of book quotations) and execution information (i.e., last sale information) for executions on the Exchange. DEEP will be provided free of charge.”
The IEX depth of book feed is different from other exchange data feeds in two significant ways:
1) No information about individual orders is disseminated through the IEX feed. Only aggregated quantities for ten price levels will be distributed. An aggregated view provides information about displayed supply and demand but does not sacrifice individual order information. Other exchanges that provide individual order feeds are distributing information that could be gamed. In addition to blatant leakage examples like the Retail Attribution identifier, other data feeds provide constantly changing quotes and queue position on their depth of book feeds. These flickering quotes are often representative of HFT and electronic market maker quotes. And by deduction, orders that do not have retail attribution or are not flickering must be institutional.
2) There is no charge for the IEX data feed. This differs dramatically from the other major exchanges that have turned data feeds into substantial profit centers.
IEX continues to innovate and provide the market with investor friendly tools as opposed to the other exchanges that only seem to care about their own bottom line. While other exchanges try to appease their HFT clients with new order types and more favorable rebate schedules, IEX continues to focus on the traditional investor. While other exchanges try to sneak proposals past the SEC like Nasdaq’s failed Retail Post-Only order, IEX continues to try to level the playing field. While other exchanges try tricks like an inverted fee schedule, IEX maintains a conflict-free flat take/take fee schedule.
Other exchanges are trying to copy IEX with speed bumps of their own but they don’t seem to understand that copying a speed bump alone doesn’t make you an investor-friendly and trustworthy stock exchange. To gain this status, they would need to rid themselves of all their other conflicted products such as colocation and individual order data feeds. And we just don’t see them giving away that type of revenue.
This is a guest post by Sal Arnuk and Joe Saluzzi of Themis Trading LLC. It is published here with their permission. All emphasis is by original authors.
I can’t think of two guys who have been more at forefront of fairness in trading. This effects everyone who trades now and who will trade going forward. Along with their partner Paul, Joe and Sal have been relentless in their campaign to fight HFTs and charlatanism in trade execution.
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My own take is that the exchanges have become cable companies: they distribute entertainment. You subscribe to the exchange data feed like you would for HBO or Showtime, but you still have exchange clearing fees and execution fees to pay on top of that. That’s like subscribing to a premium channel such as HBO and still having to pay a Pay-Per-View fee on top for each show you watch on HBO.
Decimalization was supposed to cut the cost of trading by eliminating pricing in 1/8ths and fractions that had been the mechanism since forever and thereby decreasing the bid-ask spread. But technology and capitalism have evolved in step with decimalization.
If the exchanges want to continue to colocate servers and provide an edge to the HFTs on execution, then they ought to give away real-time quotes to trader/subscribers since they will undoubtably lose a great deal of capital due to slippage and skid caused by the very traders who have been sold the trading edge by being allowed to colocate their server.
Given these changes, it’s time for the exchanges to stop double-dipping and significantly lower or cut the “live” exchange data fees.