TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
Millions of retail investors rely on Security Information Processors (SIPs) to collect and distribute consolidated, real-time market data to help inform trading decisions. Since their inception nearly 50 years ago, the SIPs remain an important pillar of a transparent trading environment. Over that time, the SIPs have become more technologically capable with more resilience and higher capacity. However, the evolution of efficient SIP data distribution and streamlined SIP administration has stalled in recent years.
To help advance SIPs, the U.S. Securities and Exchange Commission (SEC) three years ago issued its Market Data Infrastructure Rule (MDIR), radically changing the national market system for the collection, consolidation, and dissemination of information via a decentralized consolidation model with competing consolidators. But this framework is still years away from being implemented, and the way forward remains unclear. As the administrator and technology provider for the UTP Plan, we at Nasdaq have charted out a pragmatic path forward to improve the efficiency of SIP data distribution and streamline SIP administration:
- Consolidate the SIPs into one tape. Currently, the SIPs operate on an outdated three-tape structure. The three tapes should be consolidated into one, making the entire price information system more efficient.
- Distribute the consolidated SIP from multiple locations. The geographic locations of the SIPs, coupled with unprecedented improvements in processing speeds, have made geographic latency more noticeable. A unified SIP transmitting data from different locations would better facilitate its distribution to the industry, benefiting all stakeholders.
- Solicit proposals for a single technology provider. Many changes will be needed in the shift to a unified SIP. Having one qualified technology provider will make the transition easier, reducing the administrative burden inherent in managing and reporting usage with multiple providers. To find the right firm, a request for proposal (RFP) should be issued to identify providers that can handle building, monitoring, and maintaining the unified SIP.
- Solicit proposals for a single administrator. The transition to a unified SIP should be accompanied by efforts to streamline SIP administration. To reduce perceived conflicts of interest, an RFP should go out to find a single, non-exchange, and non-conflicted provider that can implement one set of SIP policies, agreements, and reporting requirements.
- Incentivize transparency and accountability. The firms selected to provide administrative and technology functions for the SIP should operate on and be measured against clearly defined goals and metrics that reward transparency and accountability.
- Align professional and non-professional definitions with global standards. The fees SIP users pay today don’t always align with their actual use cases. The SIPs should update their definitions of professional and non-professional users to reflect their data usage more accurately, which will be easier for the industry to administer and will lower costs for certain retail investors.
- Revise the allocation formula. The current formula that compensates exchanges for quote information doesn’t always encourage healthy market behavior. It should be changed to reward quotes that lead to executed trades.
It is the industry’s shared responsibility to ensure the SIP continues to serve as a global source for quality, reliable market data. That’s why we are engaging with clients and other industry stakeholders on this roadmap that we collectively hope will serve as the beginning of a productive future for the SIPs. We look forward to working with regulators, industry participants, and other exchanges to ensure the SIPS are prepared to meet future challenges in the next 50 years and beyond. To learn more about a pragmatic path forward for the SIPS, please visit here.
Jeff Kimsey is Vice President and Head of Data Regulation and Compliance for Investment Intelligence at Nasdaq.
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