Contents
•
Crib Sheet
•
Physics says the SIPs can’t
compete
•
How slow is the SIP?
•
The SIP is 99.9% identical
to direct feeds
•
SIP speed doesn’t affect
most trades
For questions or further
information on this report,
please contact Phil Mackintosh
at [email protected] or
201.963.2724
March 2016
The Need for Speed IV:
How Important is the
SIP?
by Phil Mackintosh and Ka Wo Chen
Crib Sheet
We talked in our Speed III report about why the SIP will always be slower,
regardless of what investments we make to speed it up. This is because SIP
messages have farther to travel, which takes more time. But just how much
slower, and how different, is the SIP?
•
•
Typically, the SIP is less than 0.8ms slower than direct feeds.
•
Data show that the SIP and direct feeds are identical almost all of the
time, indicating that quote flicker is actually rare.
Latency really only occurs when quotes change, otherwise the SIP and
direct feeds are identical.
For institutional investors, a slow SIP matters less than you’d think. While
passive posts are most likely at the NBBO regardless of SIP speed or usage,
taking liquidity relies more on fast routing.
The bigger problem is the value (and cost) of direct feeds—which is
ultimately passed on to investors.
KCG | The Need for Speed IV: How Important is the SIP? | March 2016 1
Physics says the SIPs can’t compete
In our recent report we discussed how data travels around the different
venues in the market. We showed that:
All data is delayed
Even at the speed of light, transmitting data and trades takes time, resulting
in latency between venues. This means all data is delayed—even direct
feeds and fills.
Speed depends on processing too
The SIP also has more processing to do—as it needs to compile the NBBO
and compute reference prices like LULD triggers as well as record TRF
trades.
Direct feeds need processing too—but if speed is important, you can just
subscribe to minimal price-change data.
Conversely, if your trading strategy requires full depth of book by venue,
fills, and individual cancels and amendments, you may prefer to receive more
information than the SIP provides.
A centralized SIP won’t stop race conditions
It’s not just about the distance your data travels or the amount of data you
consume. The type of hardware and software you use, or even the skill of
your programmers affects how quickly you can process data. Slower or
centralized data does not stop race conditions.
KCG | The Need for Speed IV: How Important is the SIP? | March 2016 2
Comparing our direct feeds to the SIP
Because of these facts and the fact that RegNMS prescribes the SIP as the
“official” NBBO, there are concerns about how slow the SIP is, and how
different direct feeds are from SIP prices.
In this report, we compare timestamps on synthetic NBBOs from one of our
trade desks to timestamps from SIP NBBOs arriving at the same data
center. The synthetic NBBOs are compiled from direct feeds from nine
exchanges. We compute:
•
Latency: SIP message arrival timestamps minus direct feeds message
•
Match Ratio: The percentage of time the SIP NBBO and synthetic
arrival timestamps, on average, per stock.
NBBO are in agreement.
Direct-feed BBO isn’t simple
One of the problems with direct feeds is the fact that updates are
sent on a change-by-change basis, as we discussed in our Speed III
report.
This means the receiver of direct feeds needs to create a “synthetic
NBBO.” If just one of those updates is “dropped” or even arrives out of order,
the BBO that is calculated may be wrong.
As a consequence, some of the differences between the SIP and
direct feeds might also be caused by errors in synthetic BBO
calculation.
What timestamps are important?
Note that we ignore SIP timestamps in favor of our own data arrival
timestamps—as we can’t act on new information until we actually see it
ourselves. But because we are using arrival timestamps:
•
The location of our databases in relation to each of the SIPs also affects
results, and will differ from direct feed studies based elsewhere, and will
be impacted by what venue trades and where the primary listing is (more
on this in our Speed III report).
•
The transmission time from the SIP, not just the difference in processing
times, is added to the latency we observe.
KCG | The Need for Speed IV: How Important is the SIP? | March 2016 3
How slow is the SIP?
There are a lot of conspiracy theories about SIP performance and the
benefits of direct feeds. What do the statistics really show?
The SIP isn’t that different from direct feeds
Latency of the SIP NBBO only occurs when the market ”ticks.” At all other
times the SIP NBBO and the direct feed (synthetic) NBBO are the same (
Exhibit 3). Quote changes are typically event driven, for example:
•
A trade takes all the passive liquidity, widening the spread or setting a
new level bid or offer.
•
•
A trader steps inside and narrows a 2-cent (or wider) spread.
Passive liquidity completely fades at a price level, perhaps triggered by
futures re-valuations, book depth signaling, or trades occurring at other
venues.
KCG | The Need for Speed IV: How Important is the SIP? | March 2016 4
High quote-to-trade doesn’t mean inefficient prices
The NBBO fading in the absence of (lit) trades is a common complaint about
our electronic markets. It is a phenomenon often measured using a quote-totrade ratio, which in turn is sometimes the basis of proposed transaction
taxes.
The data show that most stocks have relatively low quote-to-trade ratios.
However, a high quote-to-trade ratio often reflects a very efficient and
competitive market. In general, it reflects how sensitive bids and offers are
to valuation, and therefore how finely tuned price discovery has become. An
example of this can seen in ETFs (the light green circles in Exhibit 4 show
that ETFs often have much higher quote-to-trade counts, especially illiquid
ETFs).
KCG | The Need for Speed IV: How Important is the SIP? | March 2016 5
Ironically, despite high quote-to-trade ratios, ETFs are one of the biggest
beneficiaries of our automated and electronic markets. Automation has
brought cost efficiencies and certainty to hedging. As a result, many ETFs
trade with spreads well inside the underlying spread, often less than 1bp
wide.
The value of the ETF, however, can be very accurately calculated from
underlying securities prices (iNAV). Consequently, the ETF can (and should)
reprice to the “correct price” without a trade taking place.
High quote-to-trade ratios can also be seen in the SEC’s MIDAS data. In
addition to ETFs, exchanges with low market share also see high quote-totrade ratios. Yet market makers maintain “fair quotes” at those venues even
though trades rarely occur.
The SIP is approximately 780µs slower
If we look at just the times when the SIP differs from direct feeds, and
compute how long the difference lasts, we see that:
•
Latency varies for each stock and each trade. This is caused by a
•
Average latency across all stocks is 780µs. This is consistent with a
•
Latency seems to increase as trade activity increases, which
number of things—from the venue that trades happen on, to the primary
listing of the stock, to the network utilization at the time of the trade.
recent study that estimated the SIP was 500µs slower than direct
feeds, although that study was using exchange dissemination
timestamps, which are different from our data arrival computations.
makes sense as the SIP has more processing to do (Exhibit 5).
KCG | The Need for Speed IV: How Important is the SIP? | March 2016 6
The SIP is 99.9% identical to direct feeds
For all the industry focus on SIP latency, including millions of dollars being
spent to speed up the SIP, how much does it really matter? What we find
might surprise you.
How much of the day are SIPs different?
If we multiply the average latency for each ticker by the number of quote
changes that ticker has each day, we have an estimate for how long the SIP
is likely to be different to the direct feeds.
We estimate that the SIP is identical to the direct feeds almost all the time.
In fact:
•
Almost 5,000 NMS stocks match at least 99.99% of the day (direct
•
85% of stocks have SIP prices that match at least 99.97% of the day
•
97% of stocks have NBBOs that match at least 99.90% of the day
feeds differed for less than 3 seconds each day).
(direct feeds differed for 7 seconds each day).
(direct feeds differ 23 seconds each day).
KCG | The Need for Speed IV: How Important is the SIP? | March 2016 7
This would indicate that widespread quote flickering, often cited in the
media, is just not happening. It also means that posting or processing orders
using the SIP results in no difference in price almost all the time.
Trading a lot makes direct feeds more different
More liquid stocks trade more often, and usually through more price levels,
as they tend to have higher prices. We also see in Exhibit 5 that their
latency tends to be higher. These factors should combine to make the direct
feeds more important as liquidity increases.
Not surprisingly, we see that large cap stocks dominate the results below
the 99.98% matched level (Exhibit 6). Looking at each stock separately (
Exhibit 7), we see a fairly linear relationship between trade activity and
matched time.
KCG | The Need for Speed IV: How Important is the SIP? | March 2016 8
SIP speed doesn’t affect most trades
Don’t get us wrong, being fast is important for all traders, no matter their
time horizon. But we’ve found this requires use of direct feeds and constant
investment in trading hardware and software.
Posting faster and smarter is important
In our report, Speed I: Speed is Important for Spread Capture, we found
that fast routing was important to get good queue priority for passive orders.
Taking liquidity on the NBBO is easy if you’re fast
In our next report, Speed II: Beating Fade is Easy if You're Fast, we showed
that taking liquidity and avoiding fade was easy (Exhibit 8), but this requires
direct feeds and dedicated links to exchanges.
KCG | The Need for Speed IV: How Important is the SIP? | March 2016 9
The SIP can never be as fast as Direct Feeds
In our last report, Speed III: Physics and Trigonometry, we showed that even
direct feeds are delayed, but because SIP messages have further to travel,
and updates sometimes come from remote exchanges, the SIP will always
be slower, and sometimes out of sync.
The SIP is less different than you think
Finally, in this report, we show that quotes don’t flicker nearly as much as
people seem to think, and that the SIP is the same as direct feeds almost all
of the time.
This makes the SIP a perfectly good tool for your Bloomberg or
TCA—especially if you use mark-outs of more than 1ms. But speeding up
the SIP will not increase its accuracy.
Solve for data, not the SIP
Direct feeds are vital to knowing where the market was most recently and to
taking liquidity.
As we said before, a better data solution would be for aggregators to colocate at each exchange, and compete based on pricing with different levels
of speed to suit different traders—all of which could still meet the SEC
definition of NBBO (currently up to 1 second of latency) for best-ex
computations.
A larger problem is the value of direct feed data. Exchanges are one of the
few areas of finance seeing increasing fees despite decreasing market
share.
KCG | The Need for Speed IV: How Important is the SIP? | March 2016 10
Philosophically, it’s all our data. If the NBBO is going to be protected, then
perhaps the data to compute it should be free. This would also shift the
incentive to exchanges from selling data to competing on transactional
efficiency.
The change might help reduce fragmentation as well as lower transaction
costs.
Disclaimer
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KCG | The Need for Speed IV: How Important is the SIP? | March 2016 11