Data processor sparks governance row at U.S. exchanges
By Herbert Lash
NEW YORK (Reuters) - Outcries over a conflict of interest involving data processors central to securities trading could lead the New York Stock Exchange and Nasdaq to loosen their decades-long grip over a lucrative backwater of the U.S. stock market.
A lobby for the brokerage industry late Tuesday urged that the conflict, in which stock exchanges can both bid to operate a "securities information processor" (SIP) and vote for themselves, be resolved before a scheduled conference call on Wednesday.
Voting to select a SIP operator has stalemated after four votes, according to three sources with knowledge of the process. The bidding is between Nasdaq OMX Group Inc and Thesys Technologies LLC, a unit of proprietary trading firm Tradeworx.
A stalemate in the selection process was not resolved during the conference call, said Tom Jordan, chief executive of Jordan & Jordan, a securities industry consultancy that was retained to help in the bidding process. Jordan declined further comment.
A letter from the Securities Industry and Financial Markets Association (SIFMA) to the chairman of committees overseeing SIPs for all U.S. stock and options exchanges brought to the fore a dispute that has festered since a vote in July.
International Securities Exchange Holdings Inc (ISE) lost a bid to operate a SIP for the options market to NYSE, a unit of Intercontinental Exchange Inc, even though its bid was much lower.
The difference in cost between the NYSE and ISE bids in July after a "request for proposal" (RFP) from the Options Price Reporting Authority (OPRA) was almost $25 million a year, a source with knowledge of the July bidding told Reuters.
The vote annoyed ISE. The operator of two options exchanges has urged reform of the rules that govern the little-known data processors, which gained notoriety in August 2013 when a problem with the SIP sparked a halt in Nasdaq-listed stocks.
"We were disappointed in the outcome of the OPRA RFP and would support a review of SIP governance that brought both greater transparency to the process and the elimination of conflicts of interest in voting," said a spokeswoman for ISE, a unit of Deutsche Borse AG.
No rules were broken during the voting, as exchanges can both bid for a contract and exercise their right to vote.
Both Nasdaq and the NYSE declined to comment.
The SIPs disseminate quotations and last sale prices, a back-office function that generates almost $400 million a year in market data revenue from equity trading. How much is made from connectivity fees to data centres is not broken out in financial reports, but the charges are not cheap.
NYSE charged $16,000 a month for a 10 gigabyte connection to its data centre, or double ISE's bid, several sources told Reuters. NYSE also charged $9 million a year to operate the SIP, which ISE said it would do for free, said the sources.
The bidding laid bare governance of the SIPs that harks back to an era when the NYSE and Nasdaq dominated the market, before alternative trading venues started growing in the late 1990s.
Brett Redfearn, who oversees JP Morgan Securities' market structure strategy for the Americas, said the problem in some respects is a relic from when exchanges were mutualised and before they were publicly traded.
"A change in the governance model is probably warranted at this point in time," Redfearn told a Baruch College conference in New York on Tuesday.
The NYSE and Nasdaq controlled the most votes in the two committees for equity trading until the January merger of BATS Global Markets and Direct Edge. BATS now has four votes, one for each of its exchanges, while NYSE and Nasdaq have three each.
The July vote and current deadlocked bidding for the processor of Nasdaq-listed stocks suggests NYSE and Nasdaq are keen on maintaining their control of the SIPs.
How NYSE came from behind to win the July vote is unclear. But votes from arch-rival Nasdaq helped put NYSE over the top in voting that required nine of 12 votes to win, according to two sources with knowledge of the bidding.
NYSE and Nasdaq controlled five votes in the July voting, representing the options exchanges they own. Stripping out the two votes controlled by ISE, and one from an ally in the final round of voting, NYSE and Nasdaq as a bloc controlled the vote.
There are no public records of the voting and the exchanges do not discuss their closed-door meetings.
(Additional reporting by John McCrank in New York, reporting by Herbert Lash; editing by Andrew Hay)
