(MENAFN- ValueWalk) When the Nasdaq exchange decided to close down its Market Velocity and Market Forces products on October 30, it ended an 11-year run for a data feed that had received limited customer traction but garnered much attention recently. The controversy that surrounded the product's end, news first reported by , raises questions about what exchange data should public and what should remain private. Stock claimed Nasdaq was 'selling out' to high frequency trading firms by monetizing confidential client information. In the increasingly important world of 'alternative data,' this product allowed very quick traders to gain access to information about large institutional orders and trade in front of those orders, IEX charged. With yet unproven claims and investor lawsuits having the potential to increase the issue's profile, what should market participants be watching?
The types of traders that enter markets
IEX takes issue with client data being sold to speedy traders
The data feed controversy recently when Nasdaq applied to launch a new product, Intellicator, which provides information on options trading activity. IEX, which only offers stock trading, claimed the product 'would leak sensitive trading information that investors assume would be private.'
IEX concerns stem from two primary stock products that were recently discontinued. In now deleted Nasdaq promotional material, the 'Market Velocity' and 'Market Forces' was sold as part of a 'Market Analytics Data Package.' Nasdaq advertised that these data products offered 'unique data that doesn't show up in a traditional quote feed' that was to 'detect surges in trading interest before trades occur.'
To supporters of Nasdaq, the data package was filed with the regulators and available to anyone that wanted it. To the IEX exchange, it was just another example of investor interests being disadvantaged, although no one has quantified exactly the alleged impact from the practice.
'Non-displayed orders are meant to be hidden from view. IOC orders, in particular, are designed to be executed immediately or canceled back to the sender without leaving a footprint behind," IEX's Chief Strategy Officer Eric Stockland wrote in a titled 'Enough is Enough.' 'Nasdaq violated those basic principles for a quick buck. For 11 years, Velocity and Forces exposed investors and brokers to potential electronic front-running.'
Market structure analyst of the Tabb Group thinks the issue is not entirely black and white but rather is dependent on the information origin. If the client information being sold is confidential or non-public, then "that is something that I am sure folks should not be comfortable with." If the data sold is a component of the public data feed, the situation is less tenuous.
The Market Velocity and Market Forces data feeds relied on order entry and trade information taken from the exchange's direct feed to provide a summary indication of the market direction of a stock, signaling to buy or sell. It was used by clients to identify trading volume and did not provide access to any order-specific information, according to a source familiar with the product.
For $2,500 per month, traders could purchase access to these market signals which were calculated using, among other formulas components, immediate-or-cancel (IOC) order types which are mostly used by institutional investors. This order type, sometimes called a "blind ping," can be used by an institution to determine if liquidity was available. IEX alleges that the market signals provided by the Market Velocity and Market Forces product might be used to infer the existence of blind ping orders, allowing speedy traders to buy or sell in the direction of that trade. This might generate a fraction of a penny profit on each share traded, but no determination of market impact has been made.
The extent to which this information came from a public source such as a direct data feed remains unclear. The impact of selling the blind ping data, which involved only transacting orders if the was available, can be most noticed on smaller capitalization stocks with less trade volume. Large institutional orders filling this channel can cause the stock price to change more so than large-cap stocks.
The now discontinued "Market Velocity" and "Market Forces" data feed sold market structure information to traders
The program generated less than $25,000 per month for Nasdaq, according to a source familiar with the matter, and roughly had the same number of customers throughout its 11-year history. It was created in 2006 in consultation with the exchange's customers at a time before high frequency trading was generally a recognized term and was offered to professional traders as well as certain retail traders, who could purchase the service through their broker. The product was discontinued as a result of concerns raised by customers and lackluster demand.
Sal Arnuk, co-founder and principal at Themis Trading and author of the book 'Broken Markets,' chalks up the order type controversy as another example of the exchange business model becoming more aggressive.
'At a time subsequent to the stock exchanges becoming 'for-profit' and going public, the exchanges stopped seeing themselves as efficient destinations for the fair secondary trading of corporate ownership – which aids in capital formation – and started seeing themselves as arms dealers,' he wrote in a. 'They make more money selling edge and catering to fast traders than they do matching trades.'
For IEX this is yet another broadside in a broader war to win the hearts and minds of institutional investors. They are fighting using what amounts to hand-to-hand combat in a battle over not just trading, but also for new issues of small-cap stocks that could either launch on the IEX or Nasdaq exchange. Nasdaq, for its part, has been compliant with regulations and takes seriously its fiduciary role as a Self Regulatory Organization (SRO).
Where does the story go from here? Watch to see if the data leakage is a violation of the exchange membership agreement, which might result in a lawsuit with an expectation of damages being assessed. If the issue fades away, the concept of providing this type of data feed to clients could spread to other exchanges.
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