ISE Preps for Reg SCI & New Trading Platform

On November 3, 2015, the industry will have to be in compliance with a new rule called Regulation Systems Compliance and Integrity, or more simply, Reg SCI.

The aim of the US Securities and Exchange Commission (SEC) initiative is to improve the securities markets' testing capabilities and strengthen systems throughout the industry to prevent trading outages.

Gary Katz, president and CEO of the International Securities Exchange (ISE), tells Sell-Side Technology that the operator is on pace to be compliant with the new mandate when it lands later this year.

"As we've looked back at all of our ARP [Automation Review Policy] reviews, which are kind of an indication from the SEC as to how close you are to the model that they're looking for, we have work to do across the entire company, but it's not a big reach to get to where we need to get to," he says.

For exchange operators and clearinghouses, Reg SCI is forcing firms to examine policies and procedures around outages and bug reports, as well as defining what is a Reg SCI-covered system, both internal to the firm and external.

As to that last part, Katz says that further clarity will still need to be handed down by the SEC because it's not quite clear as to how much leeway there is in defining what is and is not a Reg SCI system. There are obvious systems for an exchange ─ its matching engine or market data distribution system ─ but what about third-party-provided systems for market data, connectivity and support of the company's website?

Process Formalization

Exchanges will also have to provide quarterly reports to the SEC on outages and formal reports on new systems that are being implemented.

"Today we inform the SEC of these things, but now they want more formal documents on that," Katz says. "We also have to assign the people in the company who are going to actually do this work, so that's the process that we're going through right now. It's easy to say, ‘We'll do it,' it's another thing to say that you're the person that's going to do it. And you have to do it right, every time.

"These aren't heavy lifts, they're just identifying all these different things," he continues. "So we have a massive project underway that identifies all of this, and by the time that we get to November 3, we're not just turning it on ─ we'd like to be live with it earlier than that so we can conduct some practice runs."

While new regulations can meet staunch resistance in the capital markets, Katz is very supportive of the initiative.

"We're very supportive of what the SEC is doing because it creates a level playing field," he says. "We've always been afraid of somebody who comes in and is not quite as strong, does not look at the testing process quite the way that we do."

[For more on industry challenges relating to Reg SCI, click here.]

From Gemini to Mercury

While managing regulatory-related projects, the ISE is also preparing to launch its third exchange, ISE Mercury, to go alongside the ISE and ISE Gemini markets.

Boris Ilyevsky, managing director of ISE Options, tells Sell-Side Technology the operator is currently waiting for the publication of the ISE Mercury application by the SEC.

"Once that's done, and we hope it happens soon, we'll have a better idea of launch; we're definitely just waiting for regulatory movement," he says, adding that they're tentatively looking at a Q3 launch.

The plan for the Mercury trading platform is to reuse most of the same technologies used on the ISE Gemini platform, but Mercury will provide a different fee structure.

Katz says that the ISE market uses what they call "modified maker-take pricing", with no payment for order flow, lower taker fees, medium-sized rebates, while Gemini is more traditional with "very aggressive" maker-rebates for resting orders and "appropriately-high" taker fees to compete with BATS, the Nasdaq Options Market (NOM) and NYSE Arca.

"The one area that we don't really compete in right now is the aggressive payment-for-flow rebate-style pricing, which is in place at CBOE, Philadelphia [Stock Exchange], AMEX [American Stock Excahnge] and now MIAX [Options] and BOX [Options Exchange]," Ilyevsky says. "We have all of that available on ISE and ISE Gemini, but the pricing is not geared toward that segment at this point. With Mercury we plan to fill out the offering."

Linear Development

From the tech side, ISE will use its existing T7 platform technology for Mercury, add "a little bit more hardware, but basically reuse everything from the same data center, the same code tracking," he says. "What's most efficient for us and our members is to make sure we don't change anything that doesn't need to be changed."

Future development will be linear across the platforms, rather than adding updates on a staggered basis, so that the exchange can simply flip a switch on the various exchanges, if necessary.

"As we develop new functionalities, whether or not they're priced to be used more on one exchange or the other, we plan to introduce them into both platforms even if we don't turn them on, on each exchange," Ilyevsky says.