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Securities trade group urges hardware revamp after Nasdaq August halt

A man stands next to the Nasdaq MarketSite in New York, August 23, 2013. REUTERS/Brendan McDermid

By Herbert Lash

NEW YORK (Reuters) - A trade association for the securities industry called on Thursday for revamping the system governing the hardware behind the trading halt in Nasdaq stocks in August, a move that would likely reduce the control the two leading U.S. stock exchange operators have over that hardware.

The Securities Industry and Financial Markets Association (SIFMA) recommended a number of sweeping changes to the "securities information processors," or SIPs, which spit out the best quotations and last sale price of stocks traded in the U.S. stock market.

SIFMA said neither the association nor its members had reviewed any detailed proposal or analysis to make the SIPs more resilient after one of them got clogged with quotes on August 22, halting Nasdaq trading for three hours.

In a letter to the Securities and Exchange Commission, SIFMA said broker-dealers and asset managers should be included in the SEC's September order for the U.S. stock and options exchanges to draw up plans to buttress the SIPs.

The SEC's mandate to the exchanges, known as self-regulatory organizations, encompassed five broad issues, including proposed kill switches for the exchanges that do not have them.

SIFMA's letter suggests a stand-off between the exchanges and broker-dealers, who have long complained that while the trade data the SIPs process comes from their customer orders, they share little of the revenue enjoyed mostly by the exchanges, or SROs.

A source with knowledge of the talks over how to buttress the SIPs blasted SIFMA for not engaging with the exchanges in a productive manner, saying the association was whining and had lost credibility over the issue.

"In terms of seeing a plan, they're right, they haven't seen a complete plan, but they've seen alternatives," said the source, who is not part of the broker-dealer or exchange community. "They just hate the exchanges."

Nasdaq, a unit of Nasdaq OMX Group Inc, and the New York Stock Exchange, part of IntercontinentalExchange Group Inc, control the SIPs for the U.S. stock market and take the lion's share of their revenue.

The Nasdaq outage is a symptom of an outdated system designed more than 30 years ago, SIFMA said.

"The current system suffers from a lack of transparency and competition, questions of underfunding and insulated governance," the SIFMA letter to the SEC said.

"We believe the time is ripe for reconsidering how the SIPs are governed, controlled and operate under the Commission's oversight," it said.

SIFMA also said the SIPs represented conflicts of interest, and recommended the processors provide more quotations away from the "best bid and offer," a move that would eat into the highly profitable proprietary data the exchanges sell.

The SROs said in November that they had established a "pathway" for identifying contingency plans for critical infrastructure, the so-called "single points of failure" in the market, such as the SIPs, that make trading vulnerable to massive disruption.

But their communiqué indicated reaching a solution to fortify the SIPs was months away, if not longer.

(Editing by Dan Grebler and David Gregorio)