SEC Preps Shakeup of US Consolidated Tapes

The Securities and Exchange Commission (SEC) has proposed drastic changes to how the US consolidated tapes of market data from equities exchanges will be operated and governed, in a bid to simplify their decades-old structure and keep pace with the technology used by direct exchange feeds to ensure those using the tapes are not at a competitive disadvantage.

The SEC—concerned over the inability of these data plans to keep pace with the exchanges’ premium proprietary datafeeds—wants to do away with three separate market data plans and replace them with a single market data plan that will be operated by an independent third-party with no proprietary data conflicts, and governed by an operating committee comprised of by self-regulating organizations (SROs) such as exchanges, and consumers, including institutional investors, broker-dealers, and retail investors.

“There should be one new consolidated data plan to promote the application of consistent policies, procedures, terms, fees, and conditions that would be more transparent and easily understood across all data products offered,” the SEC said in its proposal, which was published on Wednesday, January 8. “Replacing the three existing equity data plans with a single new consolidated data plan… would simplify the process of making future enhancements to the equity data plans’ operations so that core data meets on a continuing basis the needs of market participants.”

Given that the current system already features identical operating committees who already hold joint meetings, it makes sense to streamline their operation with a single data plan to be operated by a plan processor selected and overseen by the SROs, the regulator said, with a voting structure that grants each exchange group a single vote, regardless of how many marketplaces they operate—though exchange groups would receive a second vote if their overall market share exceeds 15% (and hypothetically, a third vote if they exceed 30%)—to allow a fairer decision-making process.

Consolidated tapes were established in 1976 to provide real-time data on trading volumes and pricing. Currently, there are three equity data plans that consolidate securities information into tapes: the Consolidated Tape Association (CTA) plan, the Consolidated Quotation Plan, and the Unlisted Trading Privileges Basis (UTP). CTA collects and disseminates trade data for securities listed on the New York Stock Exchange (now owned by Intercontinental Exchange), and those not listed in either NYSE or Nasdaq while UTP does the same for Nasdaq-listed securities.  The CTA is run by NYSE, while UTP is run by Nasdaq.

The SEC believes this legacy model is inefficient and unduly costly—and others agree. “There are historical reasons why the tapes were separate, but since the introduction of Reg. NMS, and the fragmentation of trading across venues, those reasons no longer exist,” says one source familiar with the consolidated tapes. “Give me one good reason why there should be two SIPS [Securities Information Processors—the mechanisms that collect and distribute the data] doing the same thing.”

In addition, noted that since the rise of low-latency trading, proprietary data feeds have become more popular, which opens up conflicts of interest within an exchange. The regulator highlighted latency as one instance where the current equity data plans have not received the same level of investment as proprietary feeds, and hence lag the direct exchange feeds, making the consolidated tapes impractical for trading purposes.

Indeed, this dynamic both serves to increase demand for proprietary exchange data products, and create an inherent conflict of interest by incentivizing exchanges to maintain the disparity between the tapes and their own, premium datafeeds. For example, the regulator notes that since Reg NMS, exchanges continued to improve their proprietary feeds, reflecting the increased importance of depth-of-book data, without making similar improvements to the consolidated tapes

When contacted for comment on the SEC’s proposal, Nasdaq and ICE pointed to a statement from the Equity Markets Association (EMA) of which both are members.

“EMA members create and steward the delivery of a vast majority of US market data, and we welcome dialogue to improve the SIP, providing we do not disrupt the unparalleled fairness, depth and robust nature of these markets that provide extraordinary benefits to all investors and our economy,” the statement says.

The proposal will be open for public comment until the end of February, but it could take years to deliver a single consolidated tape, says the source familiar with the tapes. “Just look at how long the CAT (Consolidated Audit Trail) has taken,” he says, noting that the plan may receive push back not only from the exchanges that operate the current plans and stand to lose revenues, but also from the industry as a whole, since all those either contributing or receiving data will need to make coding changes to handle data in any new format. “There are costs involved in supporting a conversion like that,” he adds.