NASDAQ Wins Bid To Regain Control Of Tape C Market Data Feed

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Exchange operator NASDAQ OMX Group (NASDAQ:NDAQ) won the bid to manage infrastructure for one of the three Securities Information Processors (SIP), which are responsible for collecting and disseminating securities quotes across America’s eleven stock exchanges. NASDAQ intends to upgrade its SIP – or Tape C – by reducing latency for the live market data feed. Moreover, NASDAQ will form a limited liability company named Consolidated Tape C LLC, which will be registered with the SEC, to monitor and manage all unlisted trading privileges (UTP) for its listed securities. [1] This is a positive for the stock market operator after some technical issues that marred NASDAQ’s image and impacted investor confidence in the last couple of years.

See our full analysis for NASDAQ OMX

Backdrop Of Technical Glitches Leads To Improvement

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NASDAQ OMX is one of the most well-diversified global stock market operators, with trading products ranging from equities, derivatives, exchange traded funds and fixed income products. Its wide array of product offerings is one of the key reasons why NASDAQ remained cushioned against weakness in its core cash equity trading business over the last couple of years. Its stock price has risen by over 50% since the start of 2013 even though it has lost share in its U.S. cash trading business and faced criticism due to some technical glitches last year.

On August 22, 2013, trading halted for over three hours for thousands of stocks on NASDAQ’s platform due to a technical glitch in its platform – an event which came to be known as Flash Freeze. At the time, NASDAQ largely blamed NYSE Arca (now owned by IntercontinentalExchange Group) for overloading its Securities Information Processor (SIP) by multiple connect and/or disconnect sequences bearing down on the system. [2] Additionally, NASDAQ partially attributed the blame to its SIP for having a latency flaw in the software code. Consequently, the company agreed to make its platform more resilient to such occurrences by making design changes. In the aftermath of the outage, the SEC proposed changes to the existing technology. American stock exchanges agreed with regulatory authorities to implement kill switches to stop trading during times when information cannot be communicated properly. [3] Following the agreement, NASDAQ promptly introduced introduced a ‘kill switch’ on its trading platform in March this year to help identify trading errors and avoid liabilities due to technical errors.

NASDAQ Regains Control Of SIP

NASDAQ’s control and operation of the SIP came under scrutiny following the glitches in 2013. In January, NASDAQ decided to stop running the SIP, and the UTP SIP committee put out a bid for a new vendor to operate the system. During the course of this year, NASDAQ was competing with Thesys Technologies, MIAX Technologies and CenturyLink to operate the SIP. In a final vote, NASDAQ was granted control after vowing  to make technological improvements. [4]

Under the current system, Tape C processed market trades and quotes at an average time of 58-59 microseconds. NASDAQ intends to move the SIP on its INET technology platform and thereby reduce the lag time, or latency, to under 50 microseconds by 2016 and further to 25 microseconds by 2017. Although financial details of the contract aren’t publicly available, the contract is reportedly worth $5-10 million to NASDAQ. Moreover, Tape C reportedly generated $123 million in revenues in 2013. [5]

NASDAQ reported a 3% y-o-y decline in revenues from information services, including revenues generated by index licensing, servicing and market data products in the U.S. and Europe in its most recent quarterly earnings report. The revenues generated by the market data division declined in the U.S. by 6% over the prior year to $68 million, while revenues for European markets declined by 15% y-o-y to $17 million due to declines in subscription-based recurring revenues. NASDAQ could reverse the declining trend in its U.S. market data division by selling the SIP data to investors and other data providers. We currently forecast NASDAQ’s U.S. market data revenue stream to grow at about 4% annually in the next few years. We could have a 3-4% upside to our $44 price estimate for NASDAQ OMX if the rate of growth doubles in the market data division in the coming years.

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Notes:
  1. Nasdaq OMX Won Over SIP Committee With Latency Reductions & Tech Upgrades, Wall Street Tech, November 2014 []
  2. Nasdaq takes some responsibility for ‘flash freeze’, CNBC, August 2013 []
  3. US Exchanges To Create Kill Switch Following NASDAQ Outage, Reuters, September 2013 []
  4. Nasdaq OMX Group Wins Contract to Operate Securities Information Processor, Wall Street Journal, November 2014 []
  5. Nasdaq wins renewal of SIP management, vows increased speed, Fierce Finance IT, November 2014 []