Are Proprietary Data Feeds Unfair?

Terry Flanagan

One of the flash points in the ongoing debate about high-frequency trading and the integrity of the markets has to do with how quickly market participants obtain trading data.

Specifically, the point of contention is whether proprietary data feeds offer an unfair speed advantage over the more generic and widely available securities information processor (SIP).

Speaking at the Sandler O’Neill Global Exchange and Brokerage Conference in New York, ConvergEx Group Chief Executive Eric Noll said some market participants do access data faster than others, due to data feeds or co-location arrangements. But that’s not necessarily unfair, and the broader question is whether there should be a difference between the SIP and prop feeds.

Joe Ratterman, chief executive of Bats Global Markets, noted the perception that proprietary feeds are the purview of a select and elite segment of market participants. But 97% of equity volume transacted on Bats’ exchanges is from market participants who utilize direct feeds, and 90% of volume is from traders who have co-location arrangements.

Many buy-side institutions do not have direct access to proprietary data feeds, but the broker-dealers that execute their buy and sell orders do. Gregg Berman of the U.S. Securities and Exchange Commission said that only a small percentage of market participants have access to prop feeds, but by volume the percentage is high.

Co-location is another auxiliary to trading that some see as an unfair advantage, but Berman noted that even if this were the case, regulators’ options are limited. If placing a trading cabinet next to an exchanges matching engine were banned, market participants would just go to the building next door, and regulators would have to ban next-door buildings.

The value of co-location is declining as it has become more ubiquitous, Noll said.

More broadly, Noll noted that manipulative market behavior has existed as long as markets have. It’s the tools and technology underpinning the manipulative behavior that has changed.

Featured image via Dollar Stock Photo

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