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Whether trading decisions are based on human judgment or a computer algorithm,
and whether trades occur once a minute or thousands of times each second, fair
and orderly markets require that the standard for robust, accessible, and
timely market data be set quite high. Although we do not believe significant
market data delays were the primary factor in causing the events of May 6,
our analyses of that day reveal the extent to which the actions of market
participants can be influenced by uncertainty about, or delays in, market data.
Accordingly, another area of focus going forward should be on the integrity and
reliability of market centers’ data processes, especially those that
involve the publication of trades and quotes to the consolidated market data
feeds. In addition, we will be working with the market centers in exploring
their members’ trading practices to identify any unintentional or
potentially abusive or manipulative conduct that may cause system delays that
inhibit the ability of market participants to engage in a fair and orderly
process of price discovery.
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Furthermore, 16 (out of over 15,000) trading accounts that were classified as
HFTs traded over 1,455,000 contracts on May 6, which comprised almost a third
of the total daily trading volume. Yet, net holdings of HFTs fluctuated around
zero so rapidly that they rarely held more than 3,000 contracts long or short
on that day. Moreover, compared to the three days prior to May 6, there was an
unusually high level of “hot potato” trading volume – due to
repeated buying and selling of contracts – among the HFTs, especially
during the period between 2:41 p.m. and 2:45 p.m. Specifically, between
2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for
about 49 percent of the total trading volume, while buying only about 200
additional contracts net.
*This corresponds to our findings although what is not mentioned is the
excessively high amount of quotes accompanying this trading, causing the NYSE
to delay at approx: 2:42:45.
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Most of the firms we interviewed that are concerned with data latency in the
milliseconds (such as market makers, internalizers, and HFTs) subscribe
directly to the proprietary feeds offered by the exchanges. These firms do not
generally rely on the consolidated market data to make trading decisions and
thus their trading decisions would not have been directly affected by the delay
in data in this feed. However, some of these firms do use the consolidated
market data feeds for data-integrity checks, and delay-induced data
discrepancies certainly contributed to the general sense of unease experienced
that day.
Other firms that are not concerned with data latency in the milliseconds (such
as many asset managers and other lower-frequency traders) tend to rely on the
consolidated market data feeds for trading decisions. A number of those
interviewed reported pulling back from the market as general volatility
increased, and those seeing delays and price-discrepancies on the consolidated
market data feeds did report that was a contributing factor in their decision
to curtail or halt further trading. The source and potential implications of
data delays in the consolidated market data feeds will be explored further in
Section 3.
*In other words, traders/investors that receive date through direct
exchange feeds and trader/investors that recieve data through CQS/CTS were
impacted by the delays in CQS/CTS.
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Most market makers cited data integrity as a primary driver in their decision
as to whether to provide liquidity at all, and if so, the manner (size and
price) in which they would do so. On May 6, a number of market makers reported
that rapid price moves in the E-Mini and individual securities triggered
price-driven integrity pauses. Some, who also monitor the consolidated
market data feeds, reported feed-driven integrity pauses. We note that even
in instances where a market maker was not concerned (or even knowledgeable)
about external issues related to feed latencies, or declarations of self-help,
the very speed of price moves led some to question the accuracy of price
information and, thus, to automatically withdraw liquidity. According to a
number of market makers, their internal monitoring continuously triggered
visual and audio alarms as multiple securities breached a variety of risk
limits one after another.
Some market makers also experienced internal systems problems on May 6. Such
problems tended to stem from difficulties in processing
“overwhelming” external information wrought by the unique
conditions of the day. In some cases, market makers that would have otherwise
manually overridden their systems and continued providing liquidity were simply
incapable of doing so in a timely manner due to the tremendous pressure caused
by a flood of orders, executions, and market data that needed to be manually
checked. As the majority of market makers required some form of human
intervention to reenter the marketplace once automatic pauses were triggered,
the time needed by the various market participants to reenter the market ranged
from as short as a few seconds to as long as several hours.
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Of final note, several market makers indicated that they experienced some form
of data latency from one or more of the exchanges, most notably NYSE Arca.
However, though most ETFs are listed on NYSE Arca, only a few of the ETF market
makers we interviewed raised this latency, or the declaration of self-help by
other exchanges against NYSE Arca because of this latency, as an issue of
concern on May 6. We explore this topic in further detail at the end of this
section and in Section 3.
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Additionally, some firms reported that their algorithmic trading systems
attempted to execute against declining prices all the way down to stub quotes
– either because such trading was consistent with the parameters for that
system, or because the system did not necessarily recognize that it was hitting
stub quotes (just that it was hitting the NBBO). These reported practices are
consistent with the findings discussed below with respect to the types of
orders involved in the broken trades that day.
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Rule 603(b) of Regulation NMS requires equity exchanges and FINRA to act
jointly to disseminate consolidated information, including an NBBO, on
quotations for and transactions in NMS stocks. The consolidated information is
disseminated through securities information processors that collect, process,
and prepare for publication such information including the price, size, and
symbol of quotations and executions. In addition, many exchanges offer
proprietary data feeds directly to customers that include details of trades and
orders on that exchange only. These proprietary data feeds must be offered on
terms that are fair and reasonable, and cannot be sent to customers any sooner
than the data provided to the processors. However, because the proprietary data
feeds are not consolidated, such data feeds may reach the end user faster than
the consolidated feeds.
On the afternoon of May 6,*NYSE set quote traffic records and experienced
significant delays in its dissemination of certain execution and quotation
information. At the time, NYSE was in the middle of upgrading its systems
that publish information to the processors. NYSE explained that the sustained
high volume of market data delayed the dissemination of quotation and execution
information to the processors in 1,665 NYSE listed symbols (A – HEZ, KC
– MGZ) (the “1665 Symbols”) that were traded on NYSE servers
that had not been upgraded.
*Between 2:44:45 p.m. and 2:46:29 p.m. on May 6, NYSE quotes in the 1665
Symbols had average delays to the CQS of over 10 seconds. Between 2:45 p.m.
and 2:50 p.m., over 40 of the 1665 Symbols had an average delay to CQS of more
than 20 seconds, and the average delay for all of the 1665 Symbols was just
over 5 seconds. During the same five-minute period, however, NYSE disseminated
quotation information for the 1665 Symbols through one of its proprietary data
feeds with an average delay of just over 8 milliseconds, or 0.008 seconds.
*NYSE also experienced delays disseminating transaction information to the
consolidated feed and through at least one of its proprietary data feeds.
Between 2:45 p.m. and 2:50 p.m., NYSE transactions in the 1665 Symbols had
average delays to the CTS of over five seconds (with some delays lasting as
long as 35 seconds) and average delays through one of its proprietary data
products of over seven seconds. We are unaware of any other delays NYSE may
have experienced on other proprietary data products.
*While the NYSE was delayed, this delay in fact began at approx. 14:42:40
and corresponds to the beginning of the final plunge of the market that day. We
remind readers that until we uncovered this delay the NYSE had stated they
experienced NO problems that day. It was only after our initial report was
released that the NYSE admitted this delay existed at all.
SEC rules require that the exchanges and FINRA provide timely and accurate data
to the CTS and CQS systems to inform all participants of the trading and
quoting activities occurring in the market place. At the time of this report,
there has been considerable attention in the public media regarding these data
delays, and we agree that this is an important topic that should be addressed.
However, it is equally important that we explore the extent to which these
delays may have impacted trading on May 6.
The CTS and CQS systems represent a consolidated view of trading and
top-of-book quoting69 across all national exchanges and ECNs, and trading at
internalizers and dark pools. As such, the relative timing of trades and quotes
within these systems are subject to some aggregation delays, which generally
are less than 10 milliseconds. As discussed in Section 2, many large market
participants route orders directly to exchanges and subscribe to the
proprietary feeds from each exchange in order to minimize aggregation delays
and receive depth-of-book quotes. Accordingly, automated systems making trading
decisions based on these feeds should not have been directly affected by delays
in the CTS and CQS system. It is important to note that retail order flow is
generally handled by internalizers who are also among those participants that
use proprietary exchange feeds to make trading and routing decisions.
However, firms that use proprietary feeds to make trading decisions may still
have been impacted by delays on the CTS and CQS feeds. As discussed, concerns
about data integrity contributed to pauses or halts in many automated trading
systems, which in turn led to a reduction in general market liquidity. Most
firms reported to us that the primary drivers of their integrity-based halts
were observed, rapid changes in the E-Mini and observed, rapid changes in
individual securities. But data-integrity checks based on the CTS and CQS
feeds would have been directly affected by delays in the consolidated market
data, and firms using those integrity-checks reported that this influenced, and
to some extent supported, their decisions to pause or halt trading.
For firms employing trading strategies that are less time-sensitive, and
whose automated systems rely solely on data from the CQS and CTS, data delays
on these feeds could have directly triggered integrity-pauses. Some such
firms reported that delays on the CQS and CTS were a more significant part,
though not the sole reason, for their decision to curtail or halt trading on
the afternoon of May 6. We note, however, that while these types of firms are
not generally market makers or liquidity providers, they can be significant
fundamental buyers and sellers.
A number of other hypotheses regarding the causes and implications of these
data delays have been offered. One specific concern is that traders could take
advantage of the timing delay between data reported to the consolidated feed
and data reported on the proprietary feeds by buying securities at prices on
one feed and selling securities at prices on the other. It generally is not
possible to do this, however, since the consolidated feeds do not reflect a
separate trading market from the exchanges. One cannot “buy” or
“sell” at an exchange’s prices as shown on the consolidated data
feeds separately from the exchange’s prices as shown on its proprietary
data feed. All orders attempting to execute against an exchange quote in the
consolidated data feed must be routed to that exchange where they will be
matched in real-time based on then-available quotes at that exchange. These
real-time exchange matching system prices may be different from the quotes in
the consolidated data feeds if, as on May 6, the exchange is experiencing
latencies in transmitting its data to the consolidated data processors. The
exchange’s prices in the consolidated data feeds are quite literally
inaccurate – they do not in fact reflect prices that are currently
available to anyone at the exchange.
One potential exception would be a dark pool that executes trades based on
exchange prices, but uses the consolidated data feeds to reference those prices
rather than subscribing to the exchanges’ proprietary data feeds. In such
a case, it could be possible for a trader to route an order to the dark pool
hoping for an execution at a stale price and, if it received such an execution,
to then route an order to an exchange to capture the differential between the
current price and the stale price. We believe, however, that dark pools
representing the great majority of dark pool volume subscribe to the
proprietary data feeds so that the opportunity for this trading tactic is
limited.
Moreover, if there are latencies in transmitting exchange data to the
consolidated data processors, investors who make real-time decisions to buy or
sell based on observed prices in the consolidated feeds (as do most individual
investors) are likely to find that their orders are not filled in the manner
expected, and these investors will be at a disadvantage compared to those
making decisions based on proprietary feeds. This is one of the reasons data
delays on the consolidated feed should be kept to an absolute minimum.
Some market participants and firms in the market data business have analyzed
the CTS and CQS data delays of May 6, as well as the quoting patterns observed
on a variety of other days. It has been hypothesized that these delays are due
to a manipulative practice called “quote-stuffing” in which high
volumes of quotes are purposely sent to exchanges in order to create data
delays that would afford the firm sending these quotes a trading advantage.
*Our investigation to date reveals that the largest and most erratic price
moves observed on May 6 were caused by withdrawals of liquidity and the
subsequent execution of trades at stub quotes. We have interviewed many of
the participants who withdrew their liquidity, including those who were party
to significant numbers of buys and sells that occurred at stub quote prices. As
described throughout this report each market participant had many and varied
reasons for its specific actions and decisions on May 6. For the subset of
those liquidity providers who rely on CTS and CQS data for trading decisions or
data- integrity checks, delays in those feeds would have influenced their
actions. However, the evidence does not support the hypothesis that delays in
the CTS and CQS feeds triggered or otherwise caused the extreme volatility in
security prices observed that day.
Nevertheless, as discussed in the Executive Summary, the events of May 6
clearly demonstrate the importance of data in today’s world of
fully-automated trading strategies and systems. The SEC staff will therefore be
working closely with the market centers to help ensure the integrity and
reliability of their data processes, especially those that involve the
publication of trades and quotes to the consolidated tape. In addition, the SEC
staff will be working with the market centers in exploring their members’
trading practices to identify any unintentional or potentially abusive or
manipulative conduct that may cause such system delays that inhibit the ability
of market participants to engage in a fair and orderly process of price
discovery.
*Loss of liquidity really means buyers pulled out -- few buyers means
lower prices. So the reason the buyers pulled out? As evident by the SEC's own
statements above, one of the primary reasons was lack of confidence in data
integrity, and much of that was due to delays experienced on the NYSE.
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