Equal information dissemination is fundamental to ensuring fair and transparent markets for all.
Over the years, the time difference between private and public data feeds at exchanges has led to controversy and debate. This paper explains the data feed mechanism and reasons why it is implemented by exchanges. It also addresses common misconceptions and restates why Optiver has always advocated for electronic order books’ public information to not be received later than private information, on the basis of our principles on market integrity, equality and stability. Optiver’s position on information data feeds has been communicated to our exchange stakeholders at several occasions over the past few years.
PUBLIC VERSUS PRIVATE INFO EXPLAINED
When a trade occurs on an exchange’s electronic order book, the matching engine will send two types of data to market participants. First of all, the public market is informed of (a summary of) the transactions which contains total size traded and the prices at which they occurred. This is known as public execution information. Secondly, the exchange notifies all participants involved in the transaction of their trade so that they can update their positions. This is known as private execution information.
Due to the different technical nature of private and public execution information, the data is sent by two parallel processes, and the order at which market participants receive this information may vary. At some exchanges, the private execution data is almost always disseminated before the public trade data. In some cases, this is a consequence of the exchange’s system implementation, in others it occurs by design. There are also exchanges that strive to ensure the public data is available before private execution information.
Private execution data feeds are not private in the sense that they are only available to a selected group of exchange market participants. Any participant that is part of a transaction is treated equally. It is important to keep in mind that the term private refers to the fact that only those involved in the transaction are notified of their execution, which could be any market participant – including retail and institutional investors such as pension funds, as well as liquidity providers. It should not be misconstrued as a secretive bilateral deal between a small group of market participants and the exchange.
ARGUMENTS FOR PRIVATE BEFORE PUBLIC EXECUTION INFORMATION
Over the years, the time difference between private and public execution information has led to controversy and debate. The very fact that some exchanges deliberately design their systems to ensure that private execution information is disseminated before the trade is known to the public, means that there is an economic rationale behind it. While it seems easy to assume that a speed advantage only benefits the fastest traders who generally contribute the most to exchanges’ revenues, this is not necessarily the case and the reality is far more nuanced.
Many stocks are not only listed on a primary exchange but on multiple competing venues. While this competition keeps trading fees low, it adds risk for all participants with resting orders on multiple exchanges. Participants most at risk are not only liquidity providers but also brokers and institutional investors. Fragmented markets mean that orders need to be sent to multiple exchanges, not knowing up front at which exchange the trade will happen. If the incoming order flow is uninformed, it will go to a single exchange and the participant can opt to remove the same liquidity on competing venues depending on its risk appetite. Conversely, if the order is informed, the trading participant risks being adversely selected on all of its displayed liquidity.
Exchanges compete with each other for order flow and therefore try to attract as much liquidity as possible. Making private execution feeds available to participants with resting orders is one of the ways to entice a participant to post on an exchange rather than on another venue that does not have this functionality.
ARGUMENTS FOR PUBLIC BEFORE PRIVATE INFORMATION
As stated before, some exchanges deliberately design their systems to ensure public information is available before any private information. This is mostly done to ensure the principles of market transparency and equality between participants. Another argument is that public before private prevents the posting of ‘canary orders’. These are small-sized orders which are inserted mostly with the intention to ‘feel’ if a large trade is incoming and can be interpreted as unnecessary liquidity, which doesn’t contribute to price discovery and could potentially cause capacity issues at exchanges. A key purpose of financial markets is to bring together buying and selling interests and promote price transparency to the wider public. It is in line with this spirit that trade data should be made available to the public before any non-public data.
OPTIVER’S MARKET PRINCIPLES
Optiver strives to uphold and promote the following principles in the operation of financial markets:
- Integrity – operations in an open and ethical manner
- Equality – open access and a level playing field stimulate participation and competition
- Stability – simple, reliable and well-functioning market frameworks
At Optiver, we believe that markets that are designed and operated with these principles in mind will best serve the end-investor’s needs and therefore also have the best chance of long-term success.
In line with our market principles, we believe that information dissemination should be equal – meaning all participants should receive information at the same time – in other words private feeds should not come first. To avoid practices including latency arbitrage and front running, exchanges should strive to make public market data feeds available before private order feeds relating to the same event.
Not getting private information first is a fundamental requirement to ensure the market is fair and transparent for all participants. Where this is not the case it is incumbent on the market operator to inform the market and wider community of the reasons for that decision.
Optiver is a leading global electronic market maker with over 1000 employees working from offices in Amsterdam, Chicago, Sydney, Shanghai, Hong Kong, Taipei and London.
Through pricing, execution and risk management, we provide liquidity to financial markets using our own capital, at our own risk, trading a wide range of products: listed derivatives, cash equities, ETFs, bonds and foreign currencies. Our independence allows us to objectively improve the markets through pioneering trading strategies and sophisticated technology.
Optiver supports open discussion and debate on all market structure topics that would lead to an improvement of the market. To discuss this paper – or any other market structure topic – reach out to the Optiver Europe Corporate Strategy team.
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