The SIP data feed has once again become fodder for the financial news cycle, as a group of capital market participants petitioned the SEC on September 17, 2019 as part of their efforts to require the SIP operators to disclose more granular information on revenues, costs and investments associated with the dissemination of the consolidated tape by the securities information processors (SIP).[1]

The SEC petition is seeking greater insight into SIP revenues, with greater clarity requested by type of end-users and revenues resulting from audit recoveries. But the key intent of the petition seems to be targeted at gaining a better understanding of the internal SIP operational financials, including payments to operators and administrators of the plans, as well as more detailed information on the costs of operating and enhancing the SIP.

Tape Revenues Still Flatlining

The petition comes at a time when the SIP revenues have essentially flat lined, with SIP revenue totaling $195.7 million in the first half of 2019, a 0.6% increase from the first half of 2018 and on pace to reach just over $391.0 for all of 2019, representing an increase of 0.7% over 2018. And growth of the last 10 years has been non-existent, with revenues declining by a 0.9% CAGR over the past decade.

It is also important to note that the industry SIP revenue totals for the first half of 2019 include $32.0 million in revenue from transaction reporting facilities (TRFs) operated by Nasdaq and NYSE. However, both operators have transaction credit programs in place whereby they incent participation through revenue sharing provisions for their trading participants. Although the magnitude of the rebates returned to participants are not disclosed by either TRF, both have publicly stated that a vast majority of SIP revenues they earn are returned to TRF trading participants.

NYSE was the leader in terms of revenue, with its exchanges capturing the largest share of total SIP revenues in the first half of 2019 at $57.8 million in the period, 29.5% of the total. Nasdaq followed closely with its exchanges capturing 28.4% of total SIP revenue in the period. Cboe and IEX captured 22.7% and 3.0% of the SIP revenue share in H119. Nasdaq and NYSE TRFs generated $32.0 million during the first half of 2019.

Raising the Ante

Pressure from capital market participants and market data consumers seeking to get a better understanding of internal SIP operational characteristics continues to grow, especially as the equity market industry sees declining trading volumes and lower industry commission revenues.

And therein lies the rub. Many of the Petition’s signers are involved in multiple efforts to pressure exchanges to lower market data fees. Charles Schwab, Citadel, Fidelity Investments, Morgan Stanley, UBS, and Virtu are all participants in MEMX, a new equity exchange planning to launch that is seeking to bring competition to US equity markets, with one of the stated goals of increasing transparency and lowering fixed costs at existing equities exchanges. No surprise that one of the coalition’s targets is the SIP equity feed, as they seek to gain additional leverage on building out a potential competitive offering to the SIP tape.

ODD Lot Price Data on The Tape?

Although the SIP operating committee face significant industry pressure to enhance the financial transparency associated with their operating activities, they have not stood back quietly. In 2017 they began disseminating significantly enhanced data on revenues through quarterly reports on revenues by the operators, which provided the industry with its first look at SIP revenues and more importantly, detailed historical data on revenues by each exchange since 2008.

And more recently, the SIP operating committee announced they are collecting industry feedback on a proposal to include odd-lot transaction price data in the feeds, an important enhancement to the feed, especially given the increase in non-standard transaction sizes. As stock prices have increased and retail orders are increasingly being submitted in sizes less than 100 shares in size, investors are clearly missing an increasingly important segment of the market. The inclusion of the odd lots would significantly increase transparency for retail traders trading odd lots sizes, providing more clarity on pricing for smaller sized trading lots.

Quarterly Review of SIP Revenue for U.S. Securities Exchanges H119

Burton-Taylor International Consulting recently published its Quarterly Review of SIP Revenue for U.S. Securities Exchanges H119 report analyzing the SIP revenue sharing program for U.S. equity exchanges and transaction reporting facilities (TRFs). The report analyzes yearly quote and trade revenue and messaging data for Tape A, Tape B and Tape C equity securities. The report also provides historical annual revenue and messaging totals for the 2011 to 2018 period, as well as an analysis of each exchange holding company’s activity in the first half of 2018 and 2019. For more information on the report, please click here.

Andy Nybo is a Director at Burton-Taylor International Consulting, part of TP ICAP group, where he is responsible for its Exchange vertical, focusing on how competitive pressures are forcing shifts in business models and strategic initiatives of exchanges.

David Tabaka is an Analyst at Burton-Taylor International Consulting, part of TP ICAP group, where he is responsible for research, analysis and report generation covering Exchange Operators and Index Providers.

[1] The petition, signed by the Securities Industry and Financial Markets Association (“SIFMA”), Investment Company Institute (“ICI”), Managed Funds Association (“MFA”), Council of Institutional Investors (“CII”) and a group of capital market firm participants (Bloomberg LP, Capital Research and Management Company, The Charles Schwab Corporation, Citadel Securities, Citigroup Global Markets Inc., Fidelity Investments, Investors Exchange LLC (IEX), J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, RBC Capital Markets, T. Rowe Price Associates, Inc., UBS Securities LLC, The Vanguard Group, Inc., and Virtu Financial, Inc.) can be found here.

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