Back in the old days of multiple independent Exchanges across the United States, markets traded on trading floors and access was restricted to members, those who paid a certain amount to enter the club of trading stocks. Before markets were linked electronically to each other in the 1970’s through a clumsy at best system called the Intermarket Trading System (ITS), it was possible to trade the same stock at different prices because of the supply and demand dynamics of each individual market.
Three significant technological advancements changed the availability of trading information forever. First, in 1867, Edward A. Calahan invented the ticker tape, providing the first electronic way of disseminating trading information from one place to another quickly (or at least quicker than had previously been the case). The innovation was so high tech that ticker tapes were installed in every brokerage office and even on cross-Atlantic Ocean liners in the following years. This was a great leap forward from carrier pigeons once used by those reporting on the Napoleonic wars in Europe back in the day.
By the mid-1970s, the “display terminal” emerged and US regulators finally recognized the advances of technology and the need for all brokers, and through them investors, to have accurate and up-to-date prices. And thus, the first market data plans were introduced: The Consolidated Quote System and the Consolidated Trade System under the management of the Consolidated Tape Association (CTA), an association of the U.S. equity exchanges that contributed the prices. The system required that prices be transmitted to the central processor for collection, collation, and sequencing before being distributed to vendors to be made available on display terminals all around the world. Three Consolidated Tape Associations emerged; Tape A for NYSE-listed securities, Tape B for Amex-listed securities, and Tape C for Nasdaq and other regional exchange-listed securities. Three Associations essentially performing the same function. Further, U.S. regulators made two other important decisions. First that these new consolidated pricing feeds would serve as the basis for “best execution” analysis, and second that the exchanges comprising the Consolidated Tape Associations could charge for access to real-time displays, and that the revenue collected would be divided among them based on their market share.
In the days of auction-based floor trading, the real information was on the trading floors in the pockets of brokers’ trading smocks, because that was where the buy and sell tickets were kept. It was an old joke that the only person who knew what direction the market was headed was the dry cleaner! But those orders represented the original dark market, because brokers were not obligated to represent the orders in the open market until it was an opportune time. Today we readily talk about mid-point priced orders, orders with electronic discretion and reserve, orders managed by algorithms. All those things were once in the minds and pockets of humans. But a human and a machine consume data at very different rates of speed.
By the mid 1990s, when Nasdaq came along and began the long arch of systemizing all markets with the help of Alternative Trading Systems, the world began to move away from trading floors and humans. At the same time, the internet began to mature, and for the first-time individual investors were not reliant on brokers to access real-time information. Discount brokers effectively disintermediated the role of the traditional broker and provided real-time information and order entry capabilities directly to investors. And they thrived. This was followed quickly by high speed computer-to-computer interfaces between brokers and exchanges, and then ultra-low-latency interfaces. Where it took 100 years to move far beyond Edward Calahan’s ticker tape machine, the technological advances in the last 25 years have been stunning.
However, the structures, models and definitions governing market data lagged behind. Terms like “real-time” and “professional user vs non-professional user” became completely blurred and in some sense obsolete. And the performance of the trade and quote consolidators managed by Systems Information Processors (SIPs) like CTA and Nasdaq were now under competitive pressure from feeds provided directly from Exchanges and consolidated by the brokers, hedge funds, and any other entity with the technological prowess to do so. Technology has changed the game: it has significantly reduced the cost of collecting and consolidating information while dramatically lowering the time to process the data and react by sending orders to markets, most of which disbanded their trading floors in favor of high-speed, electronic order execution. The real-time consolidated feeds live on and are still required to be produced and consumed. They are a vestige of the past, providing significant revenue for Exchanges and significant administrative overhead for brokers and other market participants. Unfortunately, like an addict, once addicted it’s hard to give up the old ways that have served the markets so well for so long, even if they are characterized by cost and administrative overhead. And, bolstered by regulatory and judicial rulings, why would anyone?
But today’s world is very different than the world in which market data was first addressed. Data feeds can be cheaply and easily consumed and aggregated by many. Data is so ubiquitous, and available through so many different outlets for free, that one wonders why anyone pays for it at all? As long as everyone can get it for the same fee at the same time doesn’t that self-correct any inequalities? And why should there be different Consolidated Tape Associations doing the same job? Doesn’t it make sense to combine them into one system, with one set of up-to-date governance rules? Wouldn’t that even further lower the cost of production? Of course, it’s easy to talk about someone else’s revenue stream so easily. But how about the folks who resell the data? Why do they get to mark-up the fees for resale? Who is telling them that their fees are too high? I guess that will come too. In the meantime, it certainly makes sense to rethink the whole process through the lens of not just today’s world but tomorrow’s as well, because we all know that technology will continue to move forward, replacing humans, eliminating interference, and equalizing everything while at the same time creating a whole new set of unintended consequences and new inequalities. The world of the carrier pigeons and the glass-domed ticker tape machine was much simpler; perhaps it is time to come full circle and return to simplicity.
Lou Pastina is a Managing Member of Global Markets Advisory Group, a boutique consulting firm focusing on compliance, regulation, operations and technology issues in the equity markets. This article is the result of contributions from the GMAG partners and other associated colleagues in the industry.