A few weeks ago, NASDAQ announced officially that it would “stop running a central part of the country’s trading infrastructure” — the Securities Information Processor (SIP), bringing this relatively obscure area of capital markets infrastructure once again into the spotlight. Though the NASDAQ will continue to operate this feed for two more years, this is a fairly historic turning point and will have repercussions in a number of areas.
We can prognosticate as to why the NASDAQ might be backing out of operating the SIP, but I think that’s an exercise in futility and not worth doing. The August 2013 three-hour outage probably made the relevant people realize there was little upside – and loads of downside – to managing the SIP and they probably chose to pawn it off on someone else. Can you really blame them?
It’s interesting to look at just how esoteric of an item the SIP truly is. Here’s one data point: If you look at the well-respected Waters Technology website and click on “SIP” as a topic, you find seven articles: one posted a few weeks ago, another posted last year, and then a massive gap of editorial coverage going all the way back to 2004! Wall Street & Technology has a similar metric; if you enter “SIP” into their search engine, a total of 45 references appear, yet only 10 of those 45 come from the seven years extending from 2003 through 2009 —whereas 17 appeared in a single year (2013) alone. These metrics are telling and indicate that this topic was barely discussed among industry cognoscenti for a long period of time and has only recently been perceived as a relatively important issue to understand and plan for.
But not everyone is looking to get out of SIP management. NYSE Euronext recently took the opportunity to announce that they ”would be happy to” take NASDAQ’s place running the SIP. Competition (and opportunism) aside, this may be a good thing, as it spreads the risk and (hopefully) makes for a more equitable distribution among the exchanges for if/when bad times return. I’ve discussed Business Continuity and Disaster Recovery scenarios before and conceptually, this falls within the same bucket.
The main issue both exchanges should be concerned with is ensuring resiliency and confidence in the ability of the market to operate. This is the same spirit that’s at the heart of RegSCI (“Regulation Systems Compliance and Integrity”) in the US market and the growing broader concern about basic risk management (IT-based in particular) around backup, disaster recovery, terror attacks, malware (see the CME hack, for instance), the Knight Trading and Facebook IPO concerns, Hurricane Sandy-like natural disaster scenarios, and other related natural and man-made acts. The SEC has put some real muscle behind its focus on RegSCI and this relatively unknown little corner of the capital markets underlying infrastructure has suddenly become a relatively mainstream topic, though not for the reasons it would like.
So no matter whom ends up operating the SIP, that organization should realize both the opportunity and the obligation this requires; the August 2013 outage was simply another reminder of this.