5 Proposed Market Structure Changes I Have My Eye On

The SEC, FINRA, and stock exchanges are proposing various market reforms that have significant implications to different constituents along the value chains. Let’s decipher any myths or short-sighted agendas, and add truthful knowledge in improving market fairness. 

1. The SEC’s market data infrastructure proposal is impractical

The SEC tried to solicit buy-in to their proposal since February 2020. The proposal is based on a speed that is 10 times slower than what NYSE is allowed to implement since April 2020 for 100G proprietary feed connections. This makes the SEC’s proposal fundamentally flawed in its assumptions. The proposal of “same manner and methods” is merely a standard price list offered by Exchanges. It is not the equivalent to Latency Equalization, nor can it achieve the same results as Market data available Securely in Synchronized time. “Same format” hurts average investors and gives high-frequency trading firms a permanent advantage where one can only attempt to match faster connectivity by altering data format and compression methods. Competing Consolidators, transaction cost analyzers and other BestEx tools are indeed added layers of costs and/or barriers for average market participants.

2. Betrayal of public’s interest in favor of a ‘predetermined’ competition among elites

We are perturbed by the SEC’s views on the NYSE’s proposals to establish a Wireless Fee Schedule. According to this empirical research, “Exchanges optimally restrict access to price information by charging a high fee so that only a fraction of speculators buy their proprietary products”. Would that constitute as unreasonable, unfair and/or discriminatory?

While acknowledging that the Exchanges have made certain changes to the original proposal, there are still significant gaps (Co-location ≠ Latency equalization ≠ Market data available Securely in Synchronized Time). The resulting effect of blindly believe in competition using microwave, laser, or quantum technologies, only exacerbates the gap between the “haves” and “haves not”. As long as the market remains a “drag race”, the rich will access connectivity that is not reasonably affordable to the average investor. It is unsound that as the SEC states “the Commission believes the Exchanges have demonstrated that they are subject to significant competitive forces …” when both empirical research and available technology suggest otherwise!

3. Incomplete and/or misleading fixes to market data infrastructure  

Some advocated for “Service Indirection”, suggesting that “the services could wrap different levels of functionality, such as existing SIP and depth, including future functionality such as distributed SIP, snapshots and conflation.” While we also echo the desire for faster evolution and less client impact we are uncertain if the path as prescribed achieves the needed cure. That being said, real-time market data should still be referenced to an atomic clock and use time-lock encryption to make sure there is no premature decryption of data. Forsaking a synchronized start-line is indeed unreasonable and against public interests.

Besides, “wrap” may merely mean adding a header or trailer to SROs’ data feeds to state which Exchange this feed is originally sourced from, before passing downstream to a subscriber or SIP user. That is one of the easiest and cheapest ways for an aggregator to pass a message from one hand to another. However, message processors would incur substantial costs before they can actually use these data (e.g. conversion, re-programing, testing, etc.).

We care about the end-users’ experience. Why would the SEC attempt to protect these low latency data vendors’ profits with a multiple Competing Consolidators proposal? These telecom industry leaning middlemen do not necessarily have the best interest for our capital market. They add little value to resolve the “who owns the data” issue.

4. CT Plan LLC if approved ‘as-is’ is nothing but bureaucracy that is doomed to fail

In August, the SEC ordered FINRA and stock exchange groups to come up with a new plan governing the public dissemination of real-time consolidated equity market data, commonly referred as the “CT Plan”. Given the role and purpose of the CT Plan, why should it be organized as a For-Profit LLC, and not a Non-Profit Entity?!

The Operating Committee (OC) with diversified representation from the industry supposed to run like the ‘Legislative branch’ of the government in shaping boundaries for which the ‘Executive Branch’ or management is to carry out the purpose of this public utility. However, the proposed CT Plan misplaces their role, having the diversified committee running daily operation functions may cause the company to run astray.

Next, having stock exchanges dominating the Legislative branch and assigning an “observer” to scrutinize everything the OC may try to do, would indeed tie the hands of the Executive branch. When the OC is unable to deal with “administrative” nuances, the proposal suggests the OC “delegate” those responsibilities back to Exchanges’ controlled old management team or so-called “sub-committees”. Mercy to the old management team, they do the work while top “bosses” from Exchanges and other constituents in OC continue to have polarized arguments.

5. We are closer than ever towards seeing the truths

CT Plan or a 2.0 version of the National Market System should be a full-fledged exercise like the Music Modernization Act governing digital streaming and related copyrights and royalties issues. The Exchanges and FINRA have given the industry a drafted “article of incorporation” for the CT Plan LLC. It deems the bare minimal rather than resolving the long standing ‘Animal Farm’ issue about market data. We should look and learn from the music industry. Take the opportunity to revisit our industry’s smile curve value chain, it would help assign appropriate values between contributing and consuming data flow. After all, we are all about fit-for-purposes and grow the overall pie. Stay tuned and until next time.