Published December 16, 2013
The market plumbing in question, the securities information processor, or SIP, is operated by the exchanges and used by retail investors for stock quotes. High-frequency traders use sophisticated data feeds sold by exchanges that give them a huge speed advantage.
The disclosure in The Wall Street Journal about the antiquated operating system used by the SIP is likely to raise concerns about the structure and fairness of the highly fragmented stock market.
“High-frequency traders are collocating their computers and using microwave signals to obtain market data at unfathomable speed. The investing public is stuck relying on a quote consolidation system operated by exchanges that runs on the outrageously obsolete Windows 2003 software,” said Joe Saluzzi, a partner at Themis Trading and author of Broken Markets.
“This is another blow to trust in our capital markets infrastructure, and the need for an immediate and long-term fix is overdue,” said Saluzzi.
According to the Journal, U.S. exchanges are nearing a deal to establish faster backups for SIPs in the wake of the August Flash Freeze, which was caused by a software problem on one SIP that stopped trading in all $5.65 trillion of Nasdaq-listed stocks.
That Nasdaq-operated SIP runs on Microsoft’s (MSFT) Windows 2003, the Journal reported, citing four sources familiar with the technical specifications. Nasdaq is in the process of upgrading its SIP operating system to a more recent version, the paper reported, noting that the operating system isn’t believed to have been the cause of the outage.
The Windows news highlights concerns that the two SIPs have been underfunded by exchanges, which were projected to make $400 million from SIPs in 2013. The other SIP is operated by NYSE Euronext, which was recently acquired by IntercontinentalExchange (ICE).
NYSE did not respond to a request for comment and a spokesperson for Nasdaq declined to comment.
“SIP is a critical piece of infrastructure in the market. August exposed miserably that the infrastructure has not kept up to the times,” said Saluzzi. “You need to spend money to take care of the mom and pop investors because obviously you’re taking care of the other side.”
The Securities Industry and Financial Markets Association also complained about a lack of funding in a comment letter to the Securities and Exchange Commission filed earlier this month.
“In today’s markets, the current system suffers from a lack of transparency and competition, questions of underfunding, and insulated governance. We believe the time is ripe for reconsidering how the SIPs are governed, controlled, and operate under the Commission’s oversight,” SIFMA, the Wall Street trade association, wrote in the SEC letter.
Saluzzi said the SIP issue highlights a lack of “transparency” and raises questions about whether exchanges should still be for-profit organizations.
“We think a non-exchange company should be running this thing. There seems to be a conflict of interest here. Do I want my own system to be faster than the SIP? Of course, because if mine is faster I can sell more data. I’m incented to keep the SIP slow,” said Saluzzi.