Hey, it’s Rachel Carpenter, the CEO of Intrinio. Real time stock data is a critical product for anyone that is investing or building digital investment tools.
In this article, I am going to give you an overview of the creme de la creme of real time stock prices - the SIP.
No, we don’t mean SIP: systematic investing plan or SIP as in Wine.
We mean the Securities Information Processors (SIPs). The SIPs are important because, without them, there would be no way to know the current price of a security in the United States.
A SIP is an organization that collects trade data from multiple stock exchanges and consolidates it into a single source of information.
It's easy to understand why this is important if you consider an example stock - Tesla.
Tesla’s stock trades on most US stock exchanges simultaneously. During market hours, Tesla stock is bought and sold on the New York Stock Exchange, the NASDAQ exchange, the Investors Exchange, and a dozen others all at the same time.
The problem is that Tesla’s shares will trade at different prices on each exchange. Without a system to consolidate data from each trade, there is no way for buyers and sellers to know if the price of the stock they are buying is way higher, or way lower, than on other exchanges.
The SIPs solve this problem by collecting data from each exchange and consolidating it into a single data feed.
Regardless of the exchange where a stock trade happens, it is collected and disseminated by the SIPs. This allows for important data points to be collected and utilized by investors.
The National Best Bid and Offer, referred to as the NBBO, is the highest bid price offered by buyers as well as the lowest sale price offered by sellers for a particular stock across all US stock exchanges. The last sale value is the most recent price a stock traded at across all exchanges.
The last sale price from the SIPs is generally considered the stock price at any given moment even though the last sale price for a particular exchange might be higher or lower.
You might be wondering why I keep mentioning SIPs plural. This is because there are two SIPs in the US, the Consolidated Tape Association, or CTA, and the UTP, which stands for unlisted trading privileges.
Generally speaking, the CTA oversees NYSE listed securities while the UTP oversees NASDAQ listed securities. When the SIP’s data feeds are combined they are often referred to as the consolidated tape - meaning a ‘tape’, or stream, of all trades across all US exchanges with NBBOs, last sales, and other data such as volume or bids and asks.
Accessing this data is complicated and we will talk about it more in a minute, but it is important to realize that the consolidated tape comes in many varieties such as raw, filtered, or even feeds from just the UTP or the CTA.
The Securities Exchange Commission, also known as the SEC, created the SIP system as part of the Regulation National Market system more than 40 years ago. The driving force behind the regulation was to create a more level playing field for investors who aren’t able to monitor multiple stock exchanges.
There are hundreds of rules and regulations related to stock exchanges, and you can check out our Market Data 101 blog series to learn about more about them, but the most important one to understand is the vendor display rule.
This rule states that brokers must show the NBBO to their clients at the point of order entry. Effectively, this prevents brokers from executing trades at wildly different prices from the NBBO.
If the stock you want to buy has a NBBO of $100 at the time you placed the order and your broker executes it at $200 you know that your broker isn’t living up to its duty for ‘best execution’- as required by FINRA.
Because of SIP regulations, which are constantly updating, the NBBO can provide a layer of transparency for traders by increasing confidence that the prices their broker is quoting are at or near the best bids and offers from any exchange in the country.
Right now there are only two Security Information Processors - but there are discussions in the regulatory arena about changing this.
We’ll keep you updated on these changes, so be sure to keep up with our blog to stay on top of it.
So, who needs the SIP? If you are a broker, and execute trades on behalf of your client, you are legally responsible for showing SIP data to your clients.
Even if you aren’t a broker, the SIP can provide valuable information for hedge funds, quantitative research, and large financial institutions that are comparing prices across exchanges and executing very large trades.
Even retail traders can benefit from access to the SIP - it is, after all, considered to be the highest quality stock price data available.
It can, however, be very expensive and complicated to obtain SIP data, so the SIP is not for everyone.
If you operate a brokerage, the simple answer is yes- you must show SIP data to your clients.
If you need stock price data, you need to ask yourself: how important is it to have the NBBO and/or the most accurate last sale data from all exchanges?
If the answer is very important, because stock prices that are even slightly off are unacceptable, then you need the SIP.
If, however, some drift from the NBBO is acceptable for your use case, or you can’t afford SIP data, there are many SIP alternatives that are simpler and more affordable.
The SIP is typically overkill for most display use cases inside of digital investment platforms and other fintech apps.
The last sale and best bid as well as best ask on most individual stock exchanges tend to converge on the NBBO and last sale found on the SIP. This is because traders and brokerages executing orders on behalf of their clients seek out the best price to buy and sell stocks.
If the price gets too high on one exchange, buyers bid on other exchanges. If the price gets too low, sellers move their ‘asks’ to an exchange with higher prices. This means that, over time, prices tend to move in sync across exchanges. In general, the greater the volume of an exchange, the lower the drift that exchange will experience from the NBBO.
The SIP, with 100% market volume, has no drift. Very small exchanges, such as NYSE Chicago or NASDAQ BX, with roughly .32% and .46% market volume respectively, have quite a bit of drift, especially in securities with lower trading volumes.
Generally speaking, the lower the drift the higher the volume and the more it costs to obtain data from an exchange.
The SIPs, with 100% of market volume, are VERY expensive. NASDAQ Basic, CBOE One, and NYSE BQT are examples of indicative pricing feeds from the major exchanges with roughly 15% market volume.
These feeds are still expensive but they are much easier to access and more affordable than the SIP while offering very little drift from the NBBO. They achieve this by combining multiple exchanges without combining all exchanges.
Some exchanges, such as EdgeX and MEMX, offer a moderate amount of market volume, 8% and 4%, still at a lower price point with slightly easier access restrictions.
The problem with many of these higher level solutions is that they are typically subject to exchange fees and per user fees. These restrictions can become a massive administrative burden on data users, and create more costs and headaches than outweigh the benefits.
One notable exchange, IEX, has 2% market volume but little to no fees or restrictions. This can be a good solution if your use case can tolerate moderate drift from the NBBO.
Many exchanges dramatically reduce their costs and access restrictions if data is delayed. If you are charting or don’t mind delays, this can be a great solution.
Intrinio combines delayed data, with very high volumes, with real time data to create data feeds with lower fees and less drift that cost less and have almost no usage restrictions. If you’d like to learn more, make sure to explore our products and chat with one of our data experts.
As you can see, understanding the SIPs and SIP data feed is complex. If you sign a contract for the wrong product it can be devastating to your company, so be careful, and be sure to consult a friendly and competent data company like Intrinio to make sure you find what you are looking for.
This data can be powerful inside of investment platforms so we’d love to help, and we can’t wait to see what you build.