Dear SEC: Show Us The Data
Compare The Time-stamps Already!
For the first time, the SEC's new multi-million dollar market data analysis tool, "Midas", allows the regulator to measure a stock exchange's compliance with a core rule that lies at the heart of regulations governing how our stock markets work. We are referring to rule 603(a)(2), which basically states that exchanges cannot send stock quotes faster to special groups than to the public quote (consolidated feed, more here). This is the same rule the NYSE broke and was fined $5 million for in September 2012. It was a data-feed delay analysis from Nanex, sent to the SEC on July 22, 2010, which tipped off the regulator and showed conclusively that a persistent delay existed in the NYSE public quote relative to the direct feed quote and this delay was not from the consolidation process.
Now that Midas gives the SEC the same ability Nanex had in 2010, we strongly urge them to use it to perform the same data-feed delay analysis on recent trading days (these 10 select days of 2013). This is an urgent matter as there is ample evidence that public quote delays continue to exist from several exchanges. These delays not only violate regulations, but they significantly disadvantage the 2.5 million subscribers who collectively pay almost $500 million annually for "real-time" public quotes.
Our method for detecting a data-feed delay is simple, straightforward, and will put Midas to good use. A good programmer with a few years experience should have no trouble coding the necessary logic in one or two days.
Data-Feed Delay Analysis
In the first and only step, every quote and trade in the consolidated feed, over an entire trading day, is matched to its direct feed counterpart, with the results written to an ASCII text file where each line consists of data for one trade or quote with the following fields: the direct feed time stamp, the consolidated time-stamp, reporting exchange (which direct feed), symbol, price, and size. This output file should be made freely available to the public and universities for statistical analysis.
The regulator may also wish to perform their own statistical analysis to determine when, where, and to what extent the public quote is delayed relative to the direct feed quote. This analysis will determine the level of compliance with a key rule that lies at the heart of Regulation NMS. Its importance cannot be over-emphasized.
Recent speeches from the SEC indicate they plan to use Midas to look at the details behind quote stuffing, excessive order cancellations, the cause of mini flash crashes, and other nefarious activities. While these are all good uses for a market analysis tool (Midas), they pale in comparison to a data-feed delay analysis, because the former are governed by blanket, hard-to-prove manipulation laws, while the latter can be tied directly to a core rule that lies at the heart of Regulation NMS. An improper data-feed delay was the reason for the $5 million fine against an exchange in September 2012. Furthermore, millions of people are directly affected and disadvantaged by illegal data-feed delays. Therefore, it would be a great waste of public resources to not immediately pursue a data-feed delay analysis, because there exists ample evidence that an illegal speed advantage exists in direct feeds over the public quote.
Given all that we know about market data analysis and the state of the industry, we can think of only 2 reasons the SEC would avoid a data-feed delay analysis.
- Midas is not capable of performing this simple task. If this is the case, then it was a tremendous waste of public resources paying for this tool.
- The SEC wanted Midas not to detect fraud and abuse by certain participants, but rather to protect special interest groups and bamboozle the public into believing that markets are fair and transparent.
Although reason 2 is difficult for us to accept, we can think of no other explanation. Therefore, we look forward to seeing the results of the SEC's data-feed delay analysis and are ready to offer our years of experience should they need any assistance. If, however, such analysis does not occur in a timely manner, we will have to conclude that either Midas isn't up to the task, or the regulator is unfit to regulate.
To learn how we uncovered the delay in the NYSE public quote, continue reading.
Nanex Discovers the NYSE Public Quote Delay
More that 3 years ago, while analyzing the May 6, 2010 flash crash in detail, we discovered one of the prime causes for the crash, and a serious violation of a regulation that governs how stocks are traded in the United States (Reg. NMS). Specifically, we found that stock quotes from the NYSE were delayed by more than 30 seconds to the public quotation feed (chart 1), relative to Open Book, which is NYSE's expensive direct feed product used mostly by High Frequency Traders (HFT). A crucial sub-ruling in the regulations prohibits exchanges from giving stock quotes to special groups faster than to the public. This sub-rule is of such importance, that without it, the rest of the rules essentially become meaningless.
After we pointed out the severe delay in the NYSE public quote, the exchange immediately denied there was a problem: in spite of probing phone calls from major news media such as The Wall Street Journal (Tom Lauricella and Scott Patterson), The New York Times (Graham Bowley), Reuters (Herb Lash) , Bloomberg (Kambiz Foroohar), and Risk Magazine (Duncan Wood).
To satisfy a curiosity of whether the NYSE public quote delay was unique to May 6, 2010, we ran another quote-by-quote comparison of time-stamps from the public quote and Open Book for a 30 minute trading period in General Electric stock (GE) on July 21, 2010 (see chart 2). We chose this period because there was a noticeable lag in the public quote from the NYSE versus quotes from other exchanges, which rules out the consolidation process as a source of the delay.
Once again, we detected sizeable delays between time-stamps in the public quote and Open Book. These delays ranged in the hundreds of milliseconds. Though the delay magnitude was far lower than the 10's of seconds discovered during the flash crash, it was still hundreds of times higher than expected.
Our first attempt at finding a cause for the delay involved comparing the trading activity in GE stock with the magnitude of the delay. Chart 2 shows the price of GE stock in red, along with the public quote delay in blue. The left price scale shows the delay in milliseconds (thousandths of a second). We couldn't find a correlation between the price and magnitude of the delay, and one does not present itself on the chart.
Next, we looked for a correlation between the number of quotes per second in GE stock and the delay, and again, found none.
We noticed that NYSE's quote was involved in crossed NBBOs (National Best Bid/Offer where bid price is greater than ask price, which is caused by a delayed quote from one exchange), in a large number of stocks. That led us to see if the number of quotes from the NYSE for all stocks in CQS (the public data-feed that transmits GE), was correlated with the delay
It was! More on that in a moment.
First, we had to rule out the possibility of the delay being caused by the consolidation process (which people often erroneously point out). To do this, we looked for examples of the NYSE quote lagging quotes from other exhanges in the public data-feed. This tells us that the delay had to exist before NYSE quotes were processed by the consolidated feed.
The chart on the right is one such example. It shows the quote spread and trades from 2 exchanges in GE. The NYSE quote spread is shown in light blue, and the Nasdaq quote spread in gray. When the two quote spreads overlap, the color is dark blue.
The red area is where the NBBO was crossed - a condition caused by the NYSE quote lagging far behind Nasdaq's, which resulted in NYSE's bid price remaining higher than Nasdaq's ask price. Note where the light gray shade shifts to 14.78 x 14.79 on the left side of the chart (14:13:13.650). The blue shade shifts to this same price almost 450 milliseconds later - which corresponds with the time-stamp difference between Open Book and the public quote.
Note the NYSE trades (blue circles) appearing before the NYSE quote - another indication of a quote delay from the NYSE and not the consolidation process. We coined this phenomenon fantaseconds and published many examples over the years.
Now, back to the correlation we found which shows up nicely on the two charts below which detail one minute of time on July 21, 2010. The top chart shows the delay in milliseconds between time-stamps on GE quotes in the public data-feed and corresponding quotes in Open Book. The bottom chart shows the number of quotes per millisecond (over 10ms intervals) from the NYSE into CQS (the public data-feed that carries all NYSE, AMEX, and ARCA listed stocks. GE is listed on the NYSE).
Note that whenever the total number of quotes from the NYSE into the public data-feed exceeds about 20 per millisecond (red line on bottom chart), a delay appears in the top chart at the same time. That is, when the stack of blue crosses above the horizontal red line in the bottom chart, a corresponding stack of red appears in the top chart. The longer and further the blue crossed above, the higher the delay.
In other words, a high quote rate from any NYSE stock will cause a corresponding delay in all NYSE public quotes! Anyone with this knowledge can easily cause latency on demand.