Traders work at the new trading floor of Nasdaq PHLX, formerly called the Philadelphia Stock Exchange, earlier this year. PHOTO:CHARLES MOSTOLLER/BLOOMBERG NEWS By Alexander Osipovich Updated Nov. 9, 2017 12:29 p.m. ET 4 COMMENTS Some Wall Street heavyweights are crying foul over a proposal by Nasdaq Inc. NDAQ 1.36%that they say will expose hidden trading strategies—the latest clash between traders and exchanges over Big Data. A dispute has erupted over Nasdaq’s plan to launch an options-data service called the “Intellicator Analytic Tool.” Critics say that if approved by the Securities and Exchange Commission, the service could enable sophisticated algorithmic traders to exploit investors. “In the interest of fairness and the investing public, this initiative should be denied by the regulator,” Thomas Peterffy, the billionaire chairman and chief executive of Interactive Brokers Group Inc. and one of the pioneers of automated options trading, said in an email. Exchanges in recent years have sought to boost profits by selling data, often reaching into the torrent of electronic trading activity that rushes through their markets for data to package and sell. Growth Business Nasdaq’s exchange-data revenues have increased 27% in the past four years. million $500 400 300 200 100 0 2012 ’13 ’14 ’16 ’15 Source: the company Nasdaq PHLX is the second-biggest U.S. options exchange. Some 12 to 14 billion digital messages a day zip through its systems, representing trades and other information, according to Nasdaq. The Intellicator—a combination of the words “intelligent indicator”--would use that activity to gauge market sentiment. Every minute, it would spit out numbers corresponding to a part of the options market and show whether investors in that market segment were bullish or bearish. While it wouldn’t reveal the identities of investors, the Intellicator could reveal the “customer type” of buyers or sellers in thinly traded markets. For instance, it could show whether a trade was initiated by a small investor or big money manager, by identifying certain traders as “professional customers” who place larger volumes of orders each day. Nasdaq said in a September SEC filing that, in some cases, the Intellicator could be used to “reverse-engineer” the strategies of certain kinds of firms, yielding information “not otherwise available on the Exchange’s data feeds.” That could harm pension funds and other institutional investors, for whom it is critical to get big trades done quietly, said Peter Maragos, chief executive of Dash Financial Technologies, an equities and options brokerage. When such big investors want to buy or sell large quantities of options, their brokers will often break the order into chunks and execute them throughout the day. The idea is to avoid tipping off the market about the large investor’s intentions. But if the Intellicator reveals a small order was initiated by a big investor, others could infer that the investor is about to buy or sell many options, potentially affecting the price of the underlying stock. An algo trader could quickly buy or sell that stock, resulting in a worse price for the investor on the options, Mr. Maragos said. “We don’t see how this benefits investors in any way,” he said. Secrets Revealed How the Intellicator could reveal hidden trading strategies Someone buys 10 call options on Nasdaq’s PHLX exchange— a bet that shares of Company Inc. will rise in price. 1 Within a minute, the Intellicator reveals that the buyer of those call options was a big investor. 2 An algorithmic trader infers that the big investor bought the 10 options as part of a larger order. 3 The algo trader quickly buys shares of Company Inc., expecting them to rise in price. $ 4 That boosts the price of call options on Company Inc. stock. The big investor must pay a higher price on the rest of the order. 5 Source: scenario described by Dash Financial Technologies A major Wall Street lobby group urged the SEC to block the Intellicator proposal in a letter released Thursday. “If this data is made publicly available, customer trades could be adversely impacted if bad actors attempt to utilize this data to manipulate the market,” the group, Sifma, said in the letter, which was dated Wednesday. Jeff Kimsey, Nasdaq’s head of global data products, said in an emailed response: “We have developed these products with great care and consideration to ensure that they cannot be used in a manner that is detrimental to the market.” Nasdaq says it is actually trying to “democratize” options data, or level the playing field between high-tech traders and ordinary investors. The New York exchange operator consulted with dozens of its customers before unveiling the Intellicator and sought to minimize the risk of exposing anyone’s secrets, Mr. Kimsey said in an interview. Customer-type data is available elsewhere, and savvy traders already use it, he said, though he added that no other source releases such data as frequently as every 60 seconds, as the Intellicator would. Some market veterans say the Intellicator proposal won’t have as much impact as critics fear. “What Nasdaq is trying to do is add a little more transparency,” said Henry Schwartz, president of options data firm Trade Alert LLC. “But I don’t think they’re overdoing it.” The SEC has until Nov. 18 to respond to Nasdaq’s plan, though it could just decide to delay a decision for months. Nasdaq unveiled the Intellicator in an August SEC filing, but withdrew that filing less than two weeks later. When it filed an expanded version in September, it included the material about how the Intellicator could help reverse-engineer hidden trading strategies. Mr. Kimsey said Nasdaq added those sections after talking to the SEC. An SEC spokeswoman declined to comment. The clash comes as the arcane business of exchange data feeds has come under growing scrutiny, even drawing attention from the administration of President Donald Trump. Traders work at the new trading floor of Nasdaq PHLX, formerly called the Philadelphia Stock Exchange, earlier this year. PHOTO: CHARLES MOSTOLLER/BLOOMBERG NEWS Banks and trading firms complain Nasdaq and the New York Stock Exchange unfairly use their access to raw market data to sell ever-costlier “data products.” Nasdaq and the NYSE counter that their pricing is fair and that they are only responding to growing demand for data in today’s electronic markets. But on Oct. 6, the Treasury Department sided with the exchanges’ critics, stating in a report that “limited constraints on exchange pricing power [have] allowed exchanges to regularly raise prices.” Shares of Nasdaq dropped 4.8% that day, while shares of NYSE owner Intercontinental Exchange Inc. fell 2.7%. Nasdaq has also faced allegations that it gives some traders an unfair edge by selling data feeds that shed light on other firms’ trading activities. Last week, it stopped offering a package of data feeds called Nasdaq Market Analytics after customers complained that it revealed “too much information about the trading strategies of participants on the Exchange,” Nasdaq said in an Oct. 30 filing. Nasdaq said it didn’t think the complaints were justified, but terminated the package anyway, calling it “potentially controversial.” The stakes are higher than one new data feed, observers say. If the SEC backs the Intellicator, Nasdaq’s rivals will likely launch copycats, said Jim Toes, head of the Security Traders Association, a financial-services trade group. Data has grown increasingly important to exchanges, he added. “The exchanges are getting more creative in their business models,” Mr. Toes said. “It’s a new world.”
We need to route as much as possible away from the lit exchanges, esp. NQ/NY as they are clearly working with the big funds at the expense of the independent traders. OT: Most of those Nasdaq PHLX employees look like they just finished a shift at Walmart.
Nasdaq just backed away from a controversial data product FILE PHOTO: A view of the exterior of the Nasdaq market site in the Manhattan borough of New York City Thomson Reuters Nasdaq, the US exchange operator, filed to withdraw a controversial data product, according to a filing with the Securities and Exchange Commission. Nasdaq Pathfinders helps clients monitor the buying and selling behavior of market participants. The exchange also requested to withdraw three other data products. Nasdaq appears to be taking a step back in its foray into the world of big data. The US exchange operator filed to withdraw four data products, including controversial Nasdaq Pathfinders, according to a filing with the Securities and Exchange Commission. The exchange has come under fire for its data products including Nasdaq Pathfinders and another one yet to be approved called Intellicator. Nasdaq faced opposition from a number of market participants, including startup exchange IEX and the Securities Industry and Financial Markets Association, a large organization representing big trading firms. The objections are all basically around the idea that these products might give away information about large firms' trading strategies. Here's a description of Pathfinders by Nasdaq in its filing: "The product identifies bullish or bearish positions taken by three or more market participants over an extended period of time and captures the aggregate sentiment of this well-informed group by indicating the number of Pathfinders bullish versus bearish in a particular stock, as well as the ratio of shares bought versus sold." IEX called out Nasdaq Pathfinders, in a Medium post after Nasdaq proposed Intellicator. "To minimize market impact, investors do everything they can to disguise their intentions — including breaking up large orders into smaller ones so they aren’t obviously coming from a large investor," IEX said. "Pathfinders directly undermines those efforts." Nasdaq said in a filing that it requested to withdraw the products because of feedback from the marketplace and a number of other factors. Here's the exchange: "As a result of an ongoing review of its product offerings, the Exchange has elected to withdraw these products due to the evolution of the market, including the competitive forces of operating an Exchange, market feedback, and the advancement of market structure since the products were introduced." Data has quickly become an important area of profit for exchanges and a point of contention on Wall Street. Big traders have long accused Nasdaq and its rival, the New York Stock Exchange, for unfairly spiking the cost of their proprietary market data, which market-makers claim is essential to competing in the trading business. Revenues brought in from data have increased for Nasdaq from $337 million in 2012 to $427 million in 2016, according to the exchange. Nasdaq was putting more capital behind data products, its updated strategy said. Investors have responded positively to the move, with Nasdaq's stock up more than 18% this year.