NMS-II Depth Price Accounting

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IIn accordance with the new NMS-II rules which expanded the source data to include depth, the committee recently tabled a rate sheet proposal. Some industry participants have already complained that it’s not cheap enough.

But what new price is fair?

This is where SIP accounting, and what creates the most efficient market, gets complicated.

The current SIP tries to allocate data costs based on usage and value

Before we start, let’s review how SIP works now. SIP pulls data from all exchanges and consolidates it for customers who want to know market-wide prices.

Even when SIP was created, they realized that it wasn’t fair that the data was free. Instead, they put a system in place to:

  • Bill customers based (roughly) on usage.
  • Reward all locations for their contribution to the prize discovery.

The current SIP only provides the top-of-book for each site, but still charges professionals more than retail investors. It also charges algorithms, dark pools, and e-traders even more for the exact same data. Most people would (mostly) agree that it is fair and economically efficient, based on the fact that professionals trade more than retail, and computers can trade even more again. It is also true that professionals and computerized commerce also derive significant revenues from data.

Currently, SIPs only distribute the data necessary to comply with the trading rules in Reg NMS. In contrast, the new NMS-II plan has extended the master data to include data traditionally bought only by more professional traders, those who have enough trades to benefit from information on quotes outside the NBBO (depth) or traders. auction imbalances. However, since this data is not required for small transactions, the new NMS-II rules also made the purchase of this new data from SIP voluntary.

The interest of a competing consolidator is to consolidate competitively

In short, the SEC expected competing consolidators to provide two key benefits to investors:

  1. Streamline the delivery of data to all participants, creating a single source that would provide a ‘validated NBBO’ and additional data if each investor wanted to buy more, such as depth or auction data for their clients, based on of a single price sheet.
  2. Reduce geographic latency.

The industry has expressed many other concerns. As we predicted in 2020, there is a possibility that a faster consolidator will be able to extract more revenue for data than a slow group, which increases the costs of fast data, creating a multi-market. levels depending on what participants can afford. Additionally, investors may need a backup stream, each paying for more than one consolidator, also duplicating the infrastructure. They will also create numerous NBBOs, which can complicate markets and best-exes, among other unintended consequences.

SEC rule charges data revenue for all exchanges

By making it mandatory to create more master data for investors, the new rule recognizes the value of data for traders and investors. Economically, it also forces a deep data unbundling of exchanges – even exchanges that offer free data now.

However, our research shows that rewarding all sites for all data is ineffective. In the real world, the fixed costs for the industry to connect to each additional site are so large that many smaller exchanges cannot give their data for free, even to the most sophisticated traders.

There is more than 10 times more data

But back to the original question: which new price is the right one?

Should it be based on the amount of data itself? As we mentioned in May 2020, one method of calculating depth prices would be to compare the amount of data in a depth stream to the data at the top of the book.

Based on our estimates at the time, this could make a “fair” price for depth about 10 times the price of the top of the book.

High-end data now costs $ 75 per business user per month. Based on this, if competing consolidators were charging depth at 10 times the cost currently charged to business users for the top-of-book, the cost for depth for professionals would be $ 750.

Graph 1: Relative messages on SIP vs depth

While it’s also important to remember that even when depth becomes a “baseline”, buying is voluntary. Most retail traders, with their orders much smaller than the size of the NBBO and their fills inside the spread, have little need for depth.

This means that even at 10 times the cost, the revenue collected by the SIP would not be nearly 10 times the revenue from the SIP book.

How much is depth now?

In reality, very few investors need less than millisecond depth or latency. So, a rate sheet that allows investors to choose based on their usage is also important to ensure that small investors do not subsidize large professional traders.

As per this point, proprietary data feeds are currently optional for purchase as well. The data shows that customer choices drive the market to competitively resolve the price of proprietary data for each exchange.

In fact, we can see this in Chart 2 below, where we compare the cost of each proprietary data feed to the SIP weighted market share of each exchange. Importantly, the graph shows:

  • All of the exchange groups with mature data pricing models sit almost perfectly on the diagonal line, meaning that there is a consistent charge per unit of liquidity provided by this exchange (large bubbles).
  • We can use this charge per unit of liquidity to estimate the value that the exchanges of “free data” bring together in other services (orange lines)
  • We could also use it to claim that CboeOne Premium, a partial depth product, is also clearly offered at a lower price point compared to its full depth products in order to attract further revenue.
  • It also appears that while the prices of the exchange groups are at stake, separate sites are not dynamically changed for changes in market share within the group. Maybe the SEC’s process for filing and approving all proprietary data rate changes helps (little bubbles).

Graph 2: Cost of proprietary data vs market share

Cost of proprietary data versus market share

Using this unbundled market price from the depth data calculation, we can estimate what the market-based fair value of a consolidated depth feed should cost.

Some might say that it is unfair to unbundle like this. But note that the new NMS-II rules mean these exchanges are also likely to receive revenue for their in-depth data in the future, regardless of their current public stance on the data or the business model.

So what would it cost to consolidate props data?

Calculating the market-based fair value for all props data charges using this approach shows that the unbundled consolidated value of all props flows would be $ 455 per business user (Table 1 below). below).

Table 1: Estimated real and unbundled depth data costs

Estimated costs of real and unbundled depth data

But depth data only goes to five levels deep

Obviously, the new master data offering, which only adds five levels of depth (and odd lots) to the premium product, shouldn’t cost the same as a full product. But how much less should it cost?

One way to think about this is to look at how long investors actually need more than five extra levels of depth. Based on the current consumption of liquidity in the market, the answer would be that about 12% of trades require more than five cents deep (although we do note that most of the 10% comes from high priced stocks).

Chart 3: To what extent does each level of depth add to the total liquidity that the market needs through listing

How well does each level of depth add to the total liquidity that the market needs through listing?

Adding it all up

If competing consolidators simply passed market prices for the proprietary data costs currently charged to business users, the cost of depth would be $ 455.

If we rule this out because the new commodity only cuts at 5e depth level, 12%, gives a cost of $ 400 for professional users.

However, the new proposal also sets separate rates for auction and odd lot data, with auction data up to $ 30 per trader, and while odd lots are free once you buy the odd lot. depth. Removing that means the remaining SIP depth data would be $ 370.

This is much less than a fixed cost per message.

The proposed new fee for deep feeds is actually $ 297 for business users.

Adding the NBBO for $ 75 brings the total to $ 373, almost exactly the same as the fair costs for correct proprietary data now on all exchanges.

To be consistent, the same depth-to-top ratio of the book has been applied to retail investors – which is itself consistent with the ratio across many exchanges.

Retail investors get a much bigger discount on all data because they trade a lot less. They now pay at most $ 3 per user per month for high-end SIP. So, using the same 4x ratio ($ 75 high; $ 297 deep for professionals), the new retail depth charge is only $ 12 per user per month. Not bad for a retail customer doing a lot of free trades.

If you (really) want deep data, the economy has to back it up

Without a doubt, some say it is still not fair. But at least it’s closer to the market.

It’s also important to remember that if we want the market to produce public data, the public has to pay a price that allows exchanges to offer incentive programs that make publishing economically attractive to buyers and sellers. There are already a lot of dark orders out there.


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