Slow and steady might be fine attributes for success in most industries, but when it comes to trading, the quicker traders can get their information, the better they are positioned to profit.
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 get 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 high-frequency traders 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 in a comment letter to the Securities and Exchange Commission that high-frequency traders exploit advantages that arise from today’s structure of trading-center data feeds and market-data distribution. While high-frequency traders enjoy many advantages in market structure, such as using co-location, ICI said it’s equally concerned that these firms are using individual data feeds to avoid the latency between consolidated data feeds and direct data feeds.
However, high-frequency firms 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, despite periodic upgrades.
How It Works
The tape is the vehicle by which market participants get their quote and trade information, run by the Consolidated Tape Association. The CTA’s membership is composed of 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, regardless of which exchange the data comes from.
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. The Nasdaq SIP is for Nasdaq-listed securities.
The two SIPs receive raw quote and price data from the exchanges and venues. They standardize it into readable formats, normalizing and consolidating all of it into a single data stream. They then supply the data to the CTA for distribution to market-data vendors such as Bloomberg or Thomson Reuters. The vendors then disseminate data to brokers, money managers and other consumers.
According to SIAC, it takes about five milliseconds for data to get processed. And it is this delay in processing the raw data that makes the consolidated tape slower than direct feeds.
Direct data feeds are much like the consolidated system. Raw data goes from the exchanges and trading venues to data feed handlers, who also take in the data, process it and normalize it into a readable format for trading applications. However, they do not consolidate the various data feeds into a single pipe like the SIPs. Rather, the feed handlers send data through separate feeds to the end users’ trading applications.
Feed handlers say they can receive, format, manage and integrate real-time market data sourced directly from exchange feeds and ECNs in as little as 18 microseconds. In comparison, they said vendors who consolidate data do it in less than a millisecond-which is hundreds of times slower.
What do HFTs think? "It simply wasn’t designed to get data and information processing done in a low-latency manner," said Chris Bartlett, director at HFT Nobilis Capital, referring to the consolidated tape.
Many speed-sensitive traders like Bartlett employ direct data feeds. These feeds come straight from the exchanges, and go through the handlers and then to him.
But ICI isn’t sold. It says the playing field in market-data distribution should be level and all market participants should get market data from the same source to eliminate any time advantage. It recommended that the SEC consider eliminating the two-tiered distribution of consolidated quote and tape information.
The SEC has taken notice of this time discrepancy. In its January Concept Release, the SEC estimated the average latency difference between the CTS and direct feeds is less than 10 milliseconds. But while 10 milliseconds might seem small, ICI said it is still a valuable advantage to firms using direct feeds, as it still allows firms to detect pricing changes and act upon them before the rest of the marketplace.
This has also gotten some prop traders upset. They argue that the usage of direct feeds by high-frequency traders or hedge funds only increases the time-place advantage they believe HFTs enjoy by co-locating at the exchanges.
"[The] CTS system is definitely too slow," said Dennis Dick, prop trader at Bright Trading. "A lot of high-frequency trading firms have a business model built around jumping the queue due to its slowness. It definitely needs upgrading. We have enough trouble with internalizers jumping the queue. We don’t need HFTs doing it as well."
And traders weren’t alone in their complaints. Brokers weighed in also. Bank of America Merrill Lynch wrote in a letter to the SEC that the problem with the CTS lies with the parties that own and operate the consolidated tape feed from which the market-data vendors get their raw data. The firm said that a lack of investment by the members has caused the tape to lag behind other data products. BofA Merrill argues that the SEC should "encourage, if not require" an upgrading of the tape.
The CTA and SIAC officials countered in email responses to Traders Magazine that the consolidated tape system is working fine, despite it slowness versus direct feeds. They said that any delays between it and direct feeds are the result of the increased amount of time it takes to receive information and process it from all of the exchanges and FINRA. The information is then sorted, consolidated, and then sometimes corrected to reflect calculations of participant/consolidated open, high, low and last prices.
The SEC, aware that some parties get data faster than others, has been mum on the issue so far. When contacted, a spokesman for the Commission said it hasn’t made any public comments or statements regarding upgrading data feeds, mandating more investment in them or limiting their speed.
And that’s OK with NYSE Euronext executive Joe Mecane, who said the tape feed is working fine. He told Traders Magazine the CTS currently broadcasts data in the five- to 10-millisecond range, which is adequate for most traders. Direct data feeds broadcast their data in the one- to three-millisecond range.
"Historically, there were issues with the consolidated tape feed system not being as invested in as it should," Mecane said. "And the time spread wasn’t always as narrow as it should have been." However, he added, that is not the case anymore. The CTA has continuously been making investments and improvements to the feed, he said.
The CTA said the processed exchange data that comes through the consolidated tape offers value and that the speed issue is a complex one to solve. Even if proprietary data exchange feeds were delayed to compensate for the five milliseconds it takes for data to get through the SIPs-as some have suggested be done-there is the still the issue of data traveling over distance.
Nobilis’ Bartlett said that by using his own data feeds, co-locating his handlers and processing it himself, he avoids distance delays and saves between one and three milliseconds. This allows him plenty of time to execute a trade and beat the competition-a perfectly fair strategy in his book.
Tradeworx, another HFT, does the same. In a letter to the SEC, it wrote that using publicly available data "more intelligently than your competitors" is a fair practice. What is unfair, the firm said, was jumping ahead of an order that was placed earlier at the same price by another trader, as it undermines the market tenet of price-time priority.
