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Stop the BS & Promote Real Transparency!

Traders Magazine Online News, December 12, 2017

David Weisberger

The Wall Street Journal published a good article recently on market data fees.  At its core, it was about a reasonable letter sent to the SEC by a broad coalition of market participants.   To be frank, I find it astounding that the exchanges can argue against such a request for transparency, but I suppose that I am naïve.  You see, I also find it astounding that neither investment professionals nor the investing public has any consistent data to evaluate broker order routing.  Of course, in that case, many of the same firms that wrote so eloquently to request transparency on market data say they support transparency, while working diligently (behind the scenes) to derail or postpone such requirements.

I have an idea:  let’s call BS on all of them, and demand transparency!

For market data, there is no excuse for the hollow statement of the exchanges that (as the Journal reports) “no trader is obligated to purchase faster and more comprehensive order data.”

Sorry, but the reality is that traders do need to purchase such data to avoid being fined for violating “Best Execution” obligations.  You see, it’s not that the SIP lacks data, or even that it’s too slow (although arguably it is), but rather that there is only ONE SIP for each stock.  Unfortunately, that means that from wherever a broker’s router resides, that the speed of light renders the SIP unacceptable for transactions that took place locally, whenever the SIP is in a different location.    Consider, for example, a quote update on one of Cboe’s exchanges in Secaucus.  If a Smart Order Router (SOR) is located in the same complex, then if the SOR consumes the direct feed, the quote they receive only needs to travel a few hundred feet.  If, however, the SOR were to receive the quote update from the SIP, located in either Carteret or Mahwah, that quote would need to traverse 80 miles or so.  (180 microseconds of latency each way, give or take a few)   The result, unless the exchanges have invented a wormhole to bypass the speed of light, is that a SOR relying on the SIP will experience latency that could significantly impact its ability to assess routing opportunities.   Clearly, therefore, the exchanges are wrong when claiming their direct feeds are not required.

Before the industry takes a victory lap, however, consider the irony. The reason they “need” direct feeds is for routing, but they have actively blocked improved transparency of routing outcomes.  I have found it mystifying that SIFMA & ICI proposed a “template” for reporting on order routing, but excluded the provision of any meaningful statistics of routing quality from that template.

Sadly, the ICI/SIFMA template was used as the centerpiece for the SEC’s first attempt at reforming routing disclosure.  As a result, that proposal did not even require publication of fill rates or effective spreads associated with routing choices.  To be clear, without clearly comparable statistics that show both the likelihood of execution for different routing choices, along with quality of that execution, investors can be misled about both venues and brokers.

This issue will likely be brought to the forefront by FINRA’s impending sweep, which I discussed in my recent piece.  FINRA is specifically asking brokers to justify why and how they route to receive rebates, minimize explicit costs and manage conflicts of interest.  That is a laudable goal, but it would be better for all concerned if the industry produced basic statistics on these choices as a starting point.

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