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September 1, 2010

Tale of the Tape

Traders Question a Slower Tape's Effectiveness

By John D'antona Jr.

Slow and steady might be fine attributes for success in some industries, but when it comes to trading, the quicker traders can get their information, the better they are positioned to profit.

Patrick Fay, D.A. Davidson & Co.

And ever since it was launched in the bicentennial year of 1976, the Consolidated Tape System, CTS, has been the timely delivery mechanism of quote and trade information for Wall Street. But 35 years later, with the advent of high-frequency trading, supercomputers and the need to trade faster, the CTS has found that its data comes in second place to direct data feeds. Today, the CTS is too slow for these speed-based traders and strategies.

The upshot? Direct data feed users get their market information before everyone else. Those who can afford direct feeds have a distinct trading advantage. This discrepancy has some investment professionals decrying what they consider an uneven playing field.

"The current system of data delivery needs improvement," said Pat Fay, director of equity trading at Great Falls, Mont.-based D.A. Davidson & Co. "We see quotes that don't respond when bids are being hit or offers being taken, especially on busy days. The days when you need the tape the most are the days when it is the slowest."

The issue is that for the CTS to publish its data, it needs to format, correct and consolidate the information for mass distribution. This step, as one would expect, takes time and creates a lag for traditional market-data consumers. In contrast, unprocessed direct feeds from the exchanges and ECNs reach HFTs faster and allow them to pounce on opportunities before other investors.

And that is what concerns firms like D.A. Davidson: They feel they are at a competitive disadvantage.

The Investment Company Institute, which represents mutual fund companies, also takes issue with the current setup. ICI said HFTs exploit their market data advantage. The market data issue is as important as any other that involves fairness and HFTs, according to one person familiar with the ICI's thinking.

However, HFTs are quick to defend themselves by pointing out that data transmission from a system designed and implemented some 34 years ago cannot meet the needs of the 21st-century trader. The tape is the vehicle by which market participants get their quote and trade data. It is run by the Consolidated Tape Association. Members are the U.S. stock and options exchanges, plus the Financial Industry Regulatory Authority.

The Securities Industry Automation Corporation--SIAC, under the aegis of the CTA--collects and disseminates all quote and trade data in NYSE- and Amex-listed securities.

Nasdaq, under the authority of the Over the Counter/Unlisted Trading Plan system, collects and disseminates all quote and trade data in Nasdaq-listed securities from the exchanges and FINRA.

SIAC is the official Securities Information Processor--SIP--for NYSE- and Amex-listed securities, and the Nasdaq SIP is for Nasdaq-listed securities.