Trading Venue Perimeter: related Market Data issue and a Viable Alternative


Economically, an Alternative Trading System (ATS) may not afford to subscribe to every Exchange’s proprietary feed. ATSs use a mix of SIP feed, selected choice of proprietary feed(s), and vendor solutions to navigate the market in finding suitable liquidity for their clients. Instead of mandating ATSs to source market data other than the published data provided by the SROs, the SEC should consider extending the market data infrastructure rule - latency neutralization concept across Exchanges, ATSs, and Self-Aggregators. To achieve this and the protected-quote requirements we advocate for the use of time-lock encryption to make market data available securely in synchronized time. Be assured this is not another speed bump; time-lock would ensure no premature decryption of data.

We attribute the phenomenon of proliferation in “communication protocol systems” (CPS) to the fact that competition is intense to find natural liquidity in the fragmented markets. If a pond is overcrowded with fishing boats and it costs almost nothing to throw bait, then the pond may be polluted with too much bait and no fish. Reaching out to other clients to find a potential match when receiving an initial buying or selling interest is like throwing bait. Let those who want to throw bait in catching fish own up to the relevant costs.

Sending out a request for quotes or streaming market data technically costs little to almost nothing. Yet, one ought to pay for royalties in streaming copyrighted materials published by others. There are tremendous values in composing trades and publishing trade algorithms. Allowing it to stream freely at no cost is like a pirate copy of an MP3 song. We recommend using interactive versus non-interactive subscription services to differentiate between dark and lit venues. The following 3-pronged-approach is modeled after the music industry. We think market data transmissions should be classified according to whether they are:

  • Interactive services - transmit digital trade strategy recordings at a user’s request (dark pools, internalizers and other non-lit venues where members of such trading and investment communities may choose to interact with whose order flows through OMS, EMS, smart order router, and other order entry methods). These services are within the voluntary licensing tier; they do not qualify for the equivalent of §114 statutory license that is applicable to the capital markets.
  • Non-interactive subscription services - transmit electronic market data or trade strategy recordings through streaming the market data, but for a fee (Exchanges, ECNs, other market data aggregators/ consolidated tape distributors indicating BBO and NBBO distribution). These non-interactive, subscription transmissions are subject to a statutory (compulsory) licensing fee.
  • Non-interactive, non-subscription services - Market data transmissions often delivered via streaming that should be free to the consumer and the transmitting entity (e.g. traditional over-the-air radio and TV broadcasts and any bona fide news story; “on-hold” internal transmissions; and statutorily exempt performance).

As long as ATSs provide a catalog of choices of order flows their clients want to interact with, then certain discretions preserved by ATS operators would give non-lit venues sufficient nimbleness to reach market segments that would otherwise not be reachable by open Exchanges. Lit venues do not and should not have such catalogs because one size does not fit all. To address the issues of regulatory arbitrage or a particular type of trading venue at competitive disadvantage compared to other streaming platforms, all streaming platforms, including SROs, ATSs, SIs, and CPSs would have to bear royalties payments and earn appropriate subscription fees to cover their cost.

Under our recommended scheme, order flow would be like “songs” streaming on different platforms. Broker-dealers would earn royalties on top of their trading revenue. Additionally, algo wheels that are no longer in use may be able to earn a “second profit”. These royalties may be a small amount per “song”, but it will be substantial for a hit song that is played many times. More importantly, picture the cost structure of a broker-dealer where traders and algorithm developers usually attributed to a significant portion of all costs. What if some or all of these “featured artists” costs may be off-loaded and paid for directly by the copyright licensing royalty scheme?

In turn, the definition of “professional” versus “non-professional” would be better delineated as – those who are able to compose a full song versus those who play only a few single notes. For the “featured artists” wanting to earn the royalties, they will identify themselves and bear their fair share of responsibilities (profit/ liabilities). Imagine how much easier it would be to identify the bad actor if the composed trades end up causing market chaos/ manipulation.

Each streaming platform, regardless of “interactive” or “non-interactive” subscription services and including CPSs, would craft their own space according to segment(s) or niche(s) they served. Some broker-dealers may want their order flows to be exclusively played on an interactive platform. Others may want to trade cross-asset classes and/or cross-regions. Trading platforms would base on who they want to serve, how many subscriptions they are going to get and determine whether to carry a broader or narrower “catalog”.

The broader the “catalog”, the platform would pay a wider range of broker-dealers, featured traders, algo developers in royalties. Using Disney+ as an analogy for an established Bulge Bracket that also owns an ATS; they have their own Disney, Pixar, Marvel, Star Wars, and National Geographic contents for interactive streaming. Using Showtime as another analogy, they are a competitive interactive streaming platform. Their crafted niche is different compared to Disney+. Equity securities that are not NMS stocks, corporate bonds, or municipal securities may just need specialized streaming platform(s) like Showtime.

For a third analogy, there are the “non-interactive” platforms such as online radios or cable TVs, which we refer to them as the “Exchanges”. In contrast to Disney+ and Showtime which are interactive, they serve the broadest audience while not having a “catalog”. They may pay a substantial portion of all royalties, yet they represent the biggest liquidity pool in all markets. Participants would not see “cyberpunk” or any “obscene, indecent and profane” content given these non-interactive platforms are intensely regulated. Their contents include “timeless classics” rather than new first run blockbusters; they continue to be profitable.

Besides, Viacom CBS does have MTV, Comedy Central, Paramount Network and other interactive platforms under their group. This crossover of “non-interactive” with interactive” approach, or the earlier mentioned analogies have illustrated that existing vested interests, other encumbrances, and new entrants can all flourish under our recommended scheme. Viewers (investors) get more choices and better contents. This is a Pareto Improvements (someone better off without anybody worst off or win-win for all)!

Finally, to create a catalog, one does not need to reveal its trade strategies in full. Instead, it could use a high-level description of the algorithm (just like a movie trailer preview), or a brief sample where one tested out an algo-wheel. The enabling technology is Data Boiler’s patented invention to transform trades into music. Appropriate obfuscation to preserve confidentiality of trade strategies are ensured (Regulation ATS – Rule 301(b)(10)(i) compliance), while rights to claim ownership of data by broker-dealers can be asserted.

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