The fairness and transparency of the U.S. equity markets depends in
part on three "securities information processors" (SIPs) that
provide investors with the same stock quotes and last sale prices,
One SIP is run by Nasdaq and two by units of
IntercontinentalExchange Inc's NYSE Euronext. Each SIP is controlled
by a committee that decides on finances and upgrades, and members
from all of the other exchanges sit on those committees. The costs
of running a SIP come out of the revenues from the sale of its data.
A software glitch crippled Nasdaq's SIP in August, forcing the
exchange to halt trading on stocks it lists. Soon after, U.S.
Securities and Exchange Commission Chair Mary Jo White ordered the
exchanges to come up with new protocols to improve the resiliency of
But letters between Nasdaq and the committee that oversees its SIP
and interviews with people familiar with the situation reveal that
little progress has been made nearly five months after the outage.
One source familiar with Nasdaq's thinking said the exchange would
be happy to get rid of its SIP responsibilities, which it sees as
having far more risk than reward, as it makes very little money from
operating the system.
Nasdaq declined to comment.
It is not clear who would take over running the SIP if Nasdaq was to
walk away. One of the NYSE-related SIPs, for options trading, was
recently put up for tender and it is not yet clear if there are any
The slow pace of talks suggest that it could still take months — or
even years — for exchanges to implement long-term fixes to the SIP
system. It also highlights how automation and fragmentation have
made markets increasingly complex, leaving them vulnerable to
glitches that have caused hundreds of millions of dollars of losses
Software bugs, for example, botched Facebook Inc's 2012 IPO and cost
brokerage Knight Capital Group, now a part of KCG Holdings, more
than $440 million in trading losses.
Information security, resilience and reliability of the SIP systems
came into sharp focus only after the August outage. The Nasdaq SIP
committee earlier focused on making sure the speed of the
consolidated data feed was adequate, after NYSE was fined in 2012
because some of its customers got a head start on trading
information from its proprietary feed, one source said.
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In November, Nasdaq presented its SIP committee with a list of 10
recommendations, including expanding the SIP's capacity, upgrading
the testing environment for the system, and enhancing information
security, the letters show.
It also asked that the SIP be registered as a limited liability
company (LLC) — similar to one of the NYSE-run SIPs — and that a
formal contract be signed regarding Nasdaq's operational duties. Two
sources said a deal for the LLC is close, which would limit the
exchange's liability for losses arising from any future issues.
The enhancements would take around two years to complete, but so far
the committee has not given the go-ahead on any of the
recommendations, the sources said.
A person familiar with the SIP committee's thinking said the group
will meet on February 13 in Florida, where it expects more clarity
on whether it would need to look for a new entity to run the SIP or
stick with Nasdaq. The source added that the group has formed
subcommittees to look into various demands made by Nasdaq and
expects their reports at the meeting as well.
Without an agreement on all 10 enhancements and the creation of the
LLC, Nasdaq said it would not sign a service agreement. To inject a
sense of urgency in the talks, Nasdaq gave a notice of its intention
to stop operating the SIP, according to one of the letters.
The termination notice would take effect two years from January 1,
two people familiar with the matter said.
"Without these recommendations being implemented it is impossible
for us to represent to the SEC, the ... committee or the public that
the SIP technology is world class in resiliency and performance,"
Nasdaq said in one letter.
Two people with knowledge of the NYSE-run SIP's plans said those
committees have action plans in place that are being implemented.
NYSE declined to comment.
(Reporting by John McCrank; editing by
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