This week it was reported that Nasdaq gave their two-year notice on running the SIP.
What is the SIP? SIP stands for Securities Information Processor. The name itself doesn’t explain it well. The SIP was created to be the central, consolidated live stream and aggregator of every exchange’s best quotes (bids and offers) being offered and trades. The data comes from all the exchanges, is processed, and fed back out as one stream of data. Exchanges are prohibited by law from sending their quotes and trades to direct feeds before sending them to the SIP. In the highly fragmented world of U.S. equities, the SIP is a very easy way for people to get a quick view of the current state of the market. More importantly, the SIP acts as the benchmark used by regulators and others to determine the NBBO (National Best Bid and Offer).
The SIP has a long history. It was created by the 1975 amendments to the Exchange Act. At the time, there were several exchanges trading the same stocks at potentially different prices. So if your order went to the Boston Stock Exchange, their price might be better or worse than the price on the NYSE. And for investors, it was difficult to get any reliable price other than the prior day’s closing price from the newspaper. The idea behind the SIP was to create a National Market System where investors and professionals would have access to real time price information. This was when access to real time quote information was difficult to come by, unlike today’s markets. So, whether or not the SIP has outlived its usefulness is a question worth asking.
Surprisingly, the United States is pretty much the only country that has a SIP. For example, Europe, Japan and Australia – which have competing markets – do not have SIPs. Many financial tech providers offer aggregation based on direct feeds, both in the United States and abroad. So whether or not we need one is up for discussion.
However, if we keep the SIP it needs to get better. The market currently relies on it and it is outdated and slow. That is not a good combination. To be successful and useful, the SIP needs to be updated and made faster. Nasdaq has made recommendations on how to do this and is still waiting on approval from those who oversee the SIP.
It might be that Nasdaq is tired of waiting for sign off, and maybe this is ultimately a good thing. The SIP was originally put out for bid, why not do it again? In fact, why not open it up to competition and have a few SIPs? Redundancy would help with stability. Tech vendors already offer efficient, competing products that have probably surpassed the official feed in their capabilities. And if a tech vendor is making revenue, they will want to protect that revenue and grow it, so you can bet they would offer a solid, fast product.
And if the whole thing is run by tech vendors competing on service and price, we have to ask: do we need a mandated SIP? Or will a competitive market fill the need?
– MMI
Modern Markets Initiative 