Data Deluge Strains Vendors' Delivery Infrastructures

Market data are proliferating at an astounding pace, as existing data sources increase their quote volume and deliver new types of data, and as new exchanges and electronic markets spring up around the world. Data vendors and data sources discussed this plethora of data at the Digital Market Data Feeds conference, sponsored by Waters Information Services Inc. in New York on March 7 and 8.

By 1992, Reuters Holdings PLC expects to increase the number of records it updates more than four fold, from 200,000 last year to 900,000, according to Buford Smith, Reuters senior vice president of marketing and development. The company will update 460 transactions every 10 seconds by 1992, compared with 179 in 1987. Smith says that today, 12 percent of the data Reuters broadcasts daily are not even retrieved.

Until recently, vendors have been wont to ship all available market data down a high-speed pipeline, letting users cope with the question of what to keep and what to discard. Now the pipelines are getting clogged, and vendors must exercise more discrimination in deciding which data to send to whom. Events such as the multiple listing of options and the blossoming of new European exchanges are calling into question the future of the consolidated data feed.

No longer assured of a hearty welcome and a clear channel of distribution from data vendors, some exchanges and other data sources are preparing to handle data distribution for themselves.

And customers, once secure in the knowledge that vendors were giving them every tick of every issue on every exchange, may have to re-think their approach to data procurement.

The in-house ticker plant, often derided as a misuse of resources, may emerge as a more enlightened data acquisition strategy. After all, if vendors can't be relied on to bring it all home, users will have to do their shopping for themselves.

Options exchanges are one source of increasing quote volume.

The Options Price Reporting Authority (OPRA), the central feed for options exchanges, is in the process of increasing its capacity from 80 messages per second to 150, according to Edward Davis, a member of OPRA's policy committee and vice president of market operations at the Chicago Board Options Exchange. Although OPRA currently uses 30 percent of its capacity, it expects to use the entire bandwidth in two or three years, Davis says.

Fueling the need for increased capacity is the rapid growth of options data, Davis says. For one thing, the options industry is offering new products to compete for the investor's dollar against alternative investments like equities and certificates of deposit. These new products generate more data.

Partly in response to customer demand, bid/ask quotes are getting narrower. Tighter spreads mean more frequent quote updates and more information going out on the lines. But tighter spreads also mean reduced profits for market makers, who try to make up for the loss by increasing the number of units sold, Davis says. That in turn creates more data.

The options industry is also under mounting pressure to keep quotes current. For example, in January at the CBOE, 326 options series representing nine stocks were handled by 10 or 12 competing market makers, all of whom were continually updating their prices. Davis says that in a 15-minute period the 326 options series theoretically generated 1,500 quotes, with each market maker putting out a quote every six seconds.

Finally, even greater volumes of options data are likely to be generated once options are listed on multiple exchanges.

Acknowledging that the options industry "can't continue to disseminate as much data as we can produce," Davis says the problem now is how to manage the data. He says the CBOE has already eliminated duplicate quotes. Now the exchange is looking at the possibility of giving priority to some quotes, first sending out those in the most active issues, for example. Another possibility is to require several ticks in the underlying security before sending out a quote.

With the launch of its automated limit order book, the Toronto Stock Exchange will also be sending out more information on its new Market-by-Price Data Feed, which will carry the five best bids and five best offers, with the aggregate size available at each price (MTR, Oct. 2, 1989). But the development is creating problems for Canadian vendors, says John Thornton, TSE vice president of markets and market development.

Part of the TSE's larger effort to attract greater order flow and keep Canadian stocks trading at home, the move to open the book was influenced by several factors, Thornton says. For one thing, upstairs traders have long complained that "floor traders have a significant advantage because they can see the depth of the market," he says. Now, upstairs traders have access to the same information as traders on the floor.

What's more, increasingly, "the business is dominated by large funds that can take their business anywhere," Thornton says. These funds deal in huge transactions, often need to execute orders for derivative products simultaneously with underlying instruments and increasingly look to diversify internationally.

Indeed, Thornton says, the Canadian government has just allowed pension funds to increase their foreign holdings from 10 percent of their portfolios to 27 percent over five years. He says that with this additional "pressure on money managers [they] will need more information and opportunities." He adds: "The TSE sees itself as having to aid in money managers' and traders' search for opportunity, and to provide as much high-yield information as possible."

To respond to these changes, the TSE has been doing several things: changing its rules to encourage traders to show size in the electronic book; automating its limit order book to distribute the information more widely; developing a liquid derivative market for hedging; and developing index products for large funds.

All of this will produce more information. Thornton says that institutional customers are the ones most likely to want to use and pay for the information and that the vendors will support those customers. But, he says: "The big problem for us is the channel. If you can't get the information into users' hands, then you have a major problem, and obviously the major vendors have a problem.

"They have massive investments in channels with somewhat limited capacity, and the way they're keeping up is to edit out the information they believe is not as valuable. What we see is that as time goes on, the kind of information put out [through the limit order book] is going to become increasingly valuable," he says.

As a result, the exchange is looking at "specialized" channels that "will focus on customized, flexible data delivery," depending on what the user needs. Only one Canadian vendor, Star Data, wants to "receive" the information, Thornton says. Because the others want only an inquiry-response service, that's what the TSE will give them. Thornton says the exchange hasn't found a customer for an inquiry-order update-response service but is working with U.S. vendors to take that feed. The exchange will also offer the feed directly to customers.

Vendors are reluctant to ship all the new data wholesale. For one thing, most leased voice-quality lines have an effective throughput limit of 9.6 kilobits/second. But it doesn't make sense to deliver data that won't be used. Rather, vendors must find ways to transmit only what the customer wants. The game is no longer delivering more data than your competitor, but making the delivery more efficient by automating the process of customer data procurement.